The Investor is Always Right

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by Benjamin Olshin

Despite our vast majority, many members of the 99 Percent have missed a sea change in American business and political circles that has been decades in the making: we don’t count for much anymore.
 
For all of our complaints about the unfairness of business and politics, many of us still don’t understand business and politics — or at least not how they’ve mutated in response to the concentration of wealth in the hands of the 1%. That ignorance makes it very difficult to facilitate change.
 
Forget the Wall Street investment houses and the hedge funds for the moment — it’s the regular retail businesses that sell you phone and Internet access, airline tickets, and banking services that matter most to consumers in the 99 Percent. And most of us either don’t grasp what’s happening or don’t want to acknowledge our own marginalization.
 
This huge change is as simple as it is distressing: retail companies are no longer in the business of pleasing customers. They exist first and foremost to serve investors.
 
A similar transformation has occurred in politics, where elected officials now exist to serve lobbyists rather than voters.
 
Most Americans are still blind to these changes, which is why we all keep hearing the same laments over and over from relatives and friends:
 
-“I called my Internet service provider and was kept on hold for over half an hour!”
-“I can never get through to my Senator!”
-“I can hardly fly anywhere with my ‘free miles’!”
-My elected representative just doesn’t seem to care about decent, everyday people anymore.”
-“My bank charges more and more fees! It’s outrageous!”
 
These are the wrong complaints because they’re predicated on the outdated notion that businesses and politicians care about the 99 Percent. That we count. We don’t – at least not to them – and the evidence is staring us in the face at every turn.
 
Indeed, many businesses are not necessarily interested in providing quality products and services today, because their attention is on investors, who have supplanted customers in today’s stock-driven business world.
 
The same is true of federal lawmakers, who fought the creation of the new U.S. Consumer Financial Protection Bureau tooth and nail, and have been trying to neuter it since it began operations in July of 2011. Clearly, most members of Congress don’t exist to serve the 99%. Half of them are millionaires, and they exist to serve themselves and their corporate paymasters.
 
In the traditional business model, a company had a board of directors which oversaw a wide range of activities. They established company policies, selected and reviewed CEOs, scrutinized budgets, and so on.
 
Most importantly, boards of directors were responsible to their stakeholders. This meant that the board had to be on top of the company’s performance at all times.
 
In that model, a company’s performance was based on its efficacy selling their products or services. Even when a company went public and began trading on Wall Street, the traditional model still held.
 
Certainly, everyone wanted the stock price to go up, but there was also a strong interest in promoting stable, mature companies that cranked out the best products and services possible, and treated their employees fairly. This led to the maturation of young companies into stable businesses that served as economic engines and provided healthy workplaces for many decades.
 
In fact, some of the oldest publicly-held companies date back centuries: Cigna begun in the 1790’s as the Insurance Company of North America and DuPont was established in 1802.
 
In that traditional business model, customers were preeminent. A company had to treat their customers well, because that was their business — serving customers.  They lived and died by the business mantra that “the customer is always right.”
 
It wasn’t always peaches and cream. Monopolies and collusion have always been a problem, but for most of the 20th century they’ve been the exception, rather than the rule. Now, entire industries are functioning as de facto monopolies and regulating themselves through our pay-to-play system of government in Washington, D.C., — a system that allows them to dictate government policy through political donations many Americans view as little more than legalized bribes.

Lily Tomlin famously satirized AT&T’s old telephone monopoly in 1976 when she played a telephone switchboard operator who responded to customer complaints by saying “we don’t care, we don’t have to — we’re the phone company.” Today, the same arrogance is embraced by huge segments of the banking, financial services, and health care sectors, as well as for-profit colleges, pharmaceutical companies, cable TV providers, and many others.
 
You are no longer a customer to these monopolistic industries; you are a consumer — interchangeable, forgettable and even to some degree dispensable. If you want to change things for the better that’s the painful reality you have to embrace as your starting point.
 
A company’s societal worth is now measured almost entirely by their stock valuation, which may vary independently of the quality of its actual goods and services.
 
This change reflects the movement of Wall Street away from buy-and-hold investors like Warren Buffett (left) toward high-frequency traders who are in an out of stocks several times a day. High-frequency traders have less interest in the long-term future of a company, just as renters have less incentive in improving the condition of their dwellings than homeowners.
 
Like renters, high-frequency traders are just passing through. They don’t expect to be around when the roof caves in or the pipes burst, or when the Securities and Exchange Commission orders a massive restating of a company’s cooked books.
 
In the world of high frequency trading, the tactics used to lift share price are irrelevant, so long as they work in the short term. Layoffs drive the stock price of a company up, regardless of whether they undermine that company’s future. Collusion is a wonderful thing. Outright thievery? Sure, bring it on.
 
It’s worth remembering that Enron’s market cap – the value of all its shares – soared as the Houston-based company strangled the California economy with a fake energy crisis in 2001. Many investors knew something wasn’t kosher and piled in anyway, just as they’re piling into oil futures right now.
 
Why? Because they’re just passing through.
 
Boards have also changed — a board’s fiduciary duty these days is to advocate zealously for the short-term benefit of shareholders. Stock price is everything.
 
Indeed, there are even some companies with incredible stock valuations that leave one wondering what do they actually do?
 
Facebook is a wonderful example. What would Thomas Edison think of a company that is poised to go public in May with an initial public offering of more than $100 billion on annual profit of just $1 billion and annual revenue of just $3.71 billion?
 
How does that make sense?
 
It doesn’t make much sense to a buy-and-hold investor who’s worried about Facebook users abandoning the social networking giant, which reached a federal settlement in November for sharing users’ private information. But it makes all the sense in the world for a high-frequency trader given the opportunity to buy IPO shares early at an advantageous price not available to the general public.
 
The Internet boom was filled with similar examples of companies that amassed huge amounts of investment with little or no track record of proportional profitability. Pets.com, which took in $300 million from investors in just 268 days as a publicly traded company, is the flagship example of this “pump and dump” mentality. Pets.com closed its doors Nov. 6, 2000, without ever turning a penny of profit.
 
With all this pursuit of high stock valuation, it doesn’t matter whether customers are satisfied. They’re just consumers now, faceless lemmings to be exploited by a new trickle-down economic model in which whatever goods and services are offered by a de facto monopoly must be accepted. Such businesses are no longer in the business of pleasing the public.

Think of all the time you’ve spent in doctors’ waiting rooms and all the days you’ve taken off to accommodate cable installers who never kept their appointments.
 
To reiterate: customers don’t matter — investors matter. And the political parallel is that voters don’t matter — lobbyists matter.
 
Sure this sounds dramatic, but it’s a natural result of certain kinds of financial forces. A group of investors can hold powerful sway. Stock price is king, and stock price doesn’t necessarily depend on a happy public.
 
Ever since the dot-com boom, building a business by making it attractive to investors has been standard operating procedure. Any number of businesses from that era never showed a profit, but ended up being acquired for exorbitant prices. Rather than building a business by generating profits through a faithful customer base, the corporate philosophy is  now “brand the business and sell it, fast!”
 
The 99% needs to stop acting as if the old business model still exists. It’s gone. That train left the station years ago.
 
Before we can change the world, we really need to understand how it works, especially when we disagree with it. That means accepting the business and political worlds as they really are today, and the diminished clout of the 99% within them. Until we can do that, all this talk of change is useless.
 
Benjamin B. Olshin, Ph.D. has worked as a designer, professor of philosophy, and business consultant. He has written and presented on a wide range of subjects, including ancient history, Eastern and Western philosophy, the sociology of technology, and design and culture, and has studied, carried out research, and worked in East Asia, Europe, Africa, Latin America, Canada, and the U.S.  His most recent books are available on Amazon.com. He can be contacted at: olshin@verizon.net.