ECONOMIC RULES DON'T MEASURE UP
by Mitch Albom | Apr 9, 2000 | Detroit Free Press | 0 comments
My first encounter with the "new" economics came a few years ago, when a radio show I was doing was up for renewal.
"Sorry," my boss said, "we have to cancel the show."
This came as a jolt. The show was successful in the ratings, and it also made money. When I pointed this out, my boss sighed sympathetically. "We love the show. It makes a profit. But on paper, it costs too much."
Costs too much, I said?
"The company wants our bottom line cost number reduced, so that our stock looks more attractive."
Wait a minute, I said. You're going to get rid of a show that makes money, in exchange for a show that may not make money, but costs less?
"Yeah," he said. "It's crazy, isn't it?"
No. It's ugly reality. With the proliferation of stock options and a lusty greed for instant wealth not seen since gold prospectors raced out west to stick pans in streams, we have created an economy where all the business values they always taught us — hard work, loyal customers, track record, even profit — don't matter as much as a single thing:
Stock price.
It's enough to make you go socialist.
A high-tech showdown
Last week, Wall Street bemoaned the legal woes of Microsoft, which prompted a one-day, 7-percent drop in the Nasdaq stock market. There were photos of beleaguered brokers wiping sweat from their brows. There were stories of over-caffeinated tech executives who broke into boardrooms and screamed, "The game is over!"
Well. It's a game all right. But unfortunately, it's not over.
Here's the problem. A company, to raise money, sells stock in itself. In the old days, investors bought that stock because they believed the company was solid. They thought: "Look at its track record. Look at how much money it has made. It has customers and good production. If I invest a dollar today, soon my dollar could be worth $2."
Makes sense, right?
Now fast forward to the new millennium. Today, companies issue stock in themselves before they exist. High-tech gold rushers come up with an idea — say, a Web site for pet foods — and they sell that idea to venture capitalists, who sell it to Wall Street. The company doesn't have any customers yet. It may not even have an office!
But instantly, people throw money into the pot — because they think they're getting in early, before the other dumb investors figure out that this pet food thing is hot, hot, hot.
"If I get in first," the thinking goes, "when everyone else catches on, the price will shoot up, and I'll be able to sell my shares for a huge profit."
The problem with this approach is 1) the only motivation is a greed for quick profit, and 2) the whole thing depends on perception.
You see, with no real customers, and no track record, the only thing this stock has going for it is the belief that it will be worth more in the future. When this pet food Web site proves to be a dumb idea, people dump the stock like week-old popcorn.
Stock options mania
Now, take this problem, and add the fact that many CEOs now make the bulk of their money in stock options. The head honchos at AOL and Yahoo last year earned more than $1 billion in compensation — most of it in stock.
Such money is, of course, absurd. But remember: These guys know where their bread is buttered. The higher the stock price, the more they make.
The problem is, to get the stock price higher, they may have to do things that, in the old days (you know 20 years ago) were considered dumb business moves. Like getting rid of profitable divisions. Firing loyal employees. Canceling successful shows to look leaner in an annual report.
Then again, a lot of these CEOs don't plan on being around that long. Keep Wall Street impressed, and soon they can cash out and buy an island.
So what you get with all this is an economy that is chasing fickle money, that is as loyal to a company as a gambler is to a roulette square. It's a world where greed rules, patience is a flaw, and people think the next guy might know something they don't.
So when the Nasdaq market crashes one day, soars the next, then crashes, soars and crashes again, we shouldn't be surprised.
After all, how long does it take a nervous person to change his mind?
Contact MITCH ALBOM at 313-223-4581 or albom@freepress.com.