Tapping The Wealth of Corporations

Adam Smith, the founder of modern Economics and author of The Wealth of Nations, was famously skeptical about the future of corporations, where managers and owners are separate.  Was he right or wrong when he said:

 “The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own .... Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company?”

Today listed corporations drive the economic activity.  Most of the products we enjoy come from corporations.  And our personal wealth would be less secure without the benefit of the stock market diversification.  So there, Smith was wrong…

Alas!  There is no hiding it – negligence and profusion are corporate mainstays.  For every proverbial Enron, there are dozens of corporations that just muddle on.  Extraordinary loss of value due to bad incentives is the norm.  In most public companies shareholder votes are meaningless, while managers use a well-known set of tricks to entrench, control pocket boards and obscenely pay themselves up to 100-fold of what normal people make.  So Adam Smith was... right?

The reality is that listed corporations are tittering between the extraordinary capacity to do great things and the extraordinary propensity for squander and indolence.   Every economic recession had been blamed on corporate mischiefs.  Governments stepped-in to address this through regulations.  The US Government created the Securities and Exchange in the aftermath of the great depression.  Congress passed the Sarbanes Oxley bill after the Enron collapse.  Outcome: today instead of the vigilance for shareholder wealth, government regulations drive the managerial incentives and behavior.

Meanwhile, we witnessed the dramatic fall of the Soviet Union under the weight of government control and the lack of incentives.  As a result of negligence and profusion at home, we also saw the partial nationalization of the American industry and financial system.  Thankfully, our freedoms helped replace what was lost in the board rooms with what was created in dorm rooms.  After all, the anxious vigilance really resides in dormitories, garages and basements where businesses are driven by entrepreneurs and not by functionaries.

Some say that this is just the free market at work.  However, the free market would work much better if instead of more Government, just a little bit of that “anxious vigilance” entered the board rooms.  Imagine how much wealth this would create!  Perhaps corporations cannot be as motivated as bright entrepreneurs.  However, they should be motivated more by shareholders than by the whip of the State!  The value creation would be immense.

Lemonjuice.biz is dedicated to identifying, cultivating and squeezing this value from the corporate lemons that abound.  Please join us in this quest.  Proper motivation and shareholder vigilance create much more wealth than the next quarter’s earnings.