Excellent piece on the purpose vs consequence framing. The Henry Ford quote really encapsulates the productio-first mindset that created actual value before financialization took over. What strikes me is how the "scale economics shared" model you mention with Costco/Amazon directly contradicts short-term EPS engineering because sharing gains with customers inherently compresses margins. I worked at a company that shifted from customer-centric metrics to TSR-based exec comp and watching that transition was instructive, decision velocity slowed becuz everything got filtered through "does this move the stock".
As Munger used to say, "show me the incentives, and I'll tell you the outcome"
Using the wrong targets yields the wrong results
Most executive comp targets are poorly designed
Also, the average tenure of a US public company CEO is 4.2 years, so they don't care what the company will be doing in 5 or 10 years from now. They'll be gone. So the focus is all short term
The lesson is to use that as a filter when finding good investments
the goal of a "for profit" organization is... to make profit.
if that organization ownership is split to many pieces - it still needs to do the same thing. make profit. I think Friedman's "maximize shareholder return" is basically the same only from a different angle.
there are non-profit organizations - but very few really bring more value than their for-profit competitors (e.g. linux operating system).
as the sum of all those "for profit" organizations is basically the private sector, and private sector has been the main driver of prosperity in the mach of the developed world, i would not go and toss it over just yet :)
In my view, the core problem is not profit-seeking itself, but short-termism.
The short term mindset is probably more likely caused by management (who usually have shorter term outlook) than by shareholders.
what economists call "agency problem".
(chatgpt claims it was first introduced by Jensen, Michael C., and William H. Meckling (1976)
“Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”)
I tend to subscribe to the view that management is typically short-sighted, unless they have a big stake in the business.
the bigger the management long term personal well-being is tied to the firm's long-term success the better the decisions tend to be.
It's not an insurance policy by any means, but if a dilema pops up, management is far more likely to take the right decision if it is not biased towards short-term stock price goal.
Forget not for profit. That's a different model entirely.
For other companies profit comes from service. So service needs to be the focus. If service is executed well, profit will follow. Profit is not the objective, it is the result of achieving the objective.
It's all about incentives. Focus on profit first and the incentives are wrong. Behaviour will be wrong.
Example. Costco has a no quible returns policy. That doesn't maximise short team profits because returns are a drag on performance. But this policy ensures customer retention and an extension if the lifetime value of each customer. Short term pain for long term gain.
Service is the focus at Costco. It is immensely profitable. Cause and effect.
If you are aiming at customer delight as you've proved that it is a cause for maximizing profit for the long haul, you're still maximizing profit for the long haul :)
let's assume that a company has 2 options:
benefit society a lot and eventually go bankrupt
or
benefit society slightly and stay alive forever.
I think we both agree that it would be better for the company to stay alive and slightly help many.
all i'm saying is that you can't ignore all financial metrics as they are evil and cause management to lose track.
I think we also agree on the fact that it is all about incentives.
if a manager is getting paid on how well the stock did during his/her tenure, s/he will make plans to maximize his/her cut and leave for better pastures once there's nothing more to drain.
if you make the manager financial well being tied to the success of the company even after he/ she leaves - he/ she will not only try to make decisions more aligned with long term - but also try to raise next generation that will take good care of stock when he/she's not around.
Excellent piece on the purpose vs consequence framing. The Henry Ford quote really encapsulates the productio-first mindset that created actual value before financialization took over. What strikes me is how the "scale economics shared" model you mention with Costco/Amazon directly contradicts short-term EPS engineering because sharing gains with customers inherently compresses margins. I worked at a company that shifted from customer-centric metrics to TSR-based exec comp and watching that transition was instructive, decision velocity slowed becuz everything got filtered through "does this move the stock".
As Munger used to say, "show me the incentives, and I'll tell you the outcome"
Using the wrong targets yields the wrong results
Most executive comp targets are poorly designed
Also, the average tenure of a US public company CEO is 4.2 years, so they don't care what the company will be doing in 5 or 10 years from now. They'll be gone. So the focus is all short term
The lesson is to use that as a filter when finding good investments
the goal of a "for profit" organization is... to make profit.
if that organization ownership is split to many pieces - it still needs to do the same thing. make profit. I think Friedman's "maximize shareholder return" is basically the same only from a different angle.
there are non-profit organizations - but very few really bring more value than their for-profit competitors (e.g. linux operating system).
as the sum of all those "for profit" organizations is basically the private sector, and private sector has been the main driver of prosperity in the mach of the developed world, i would not go and toss it over just yet :)
In my view, the core problem is not profit-seeking itself, but short-termism.
The short term mindset is probably more likely caused by management (who usually have shorter term outlook) than by shareholders.
what economists call "agency problem".
(chatgpt claims it was first introduced by Jensen, Michael C., and William H. Meckling (1976)
“Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”)
I tend to subscribe to the view that management is typically short-sighted, unless they have a big stake in the business.
the bigger the management long term personal well-being is tied to the firm's long-term success the better the decisions tend to be.
It's not an insurance policy by any means, but if a dilema pops up, management is far more likely to take the right decision if it is not biased towards short-term stock price goal.
Forget not for profit. That's a different model entirely.
For other companies profit comes from service. So service needs to be the focus. If service is executed well, profit will follow. Profit is not the objective, it is the result of achieving the objective.
It's all about incentives. Focus on profit first and the incentives are wrong. Behaviour will be wrong.
Example. Costco has a no quible returns policy. That doesn't maximise short team profits because returns are a drag on performance. But this policy ensures customer retention and an extension if the lifetime value of each customer. Short term pain for long term gain.
Service is the focus at Costco. It is immensely profitable. Cause and effect.
If you are aiming at customer delight as you've proved that it is a cause for maximizing profit for the long haul, you're still maximizing profit for the long haul :)
let's assume that a company has 2 options:
benefit society a lot and eventually go bankrupt
or
benefit society slightly and stay alive forever.
I think we both agree that it would be better for the company to stay alive and slightly help many.
all i'm saying is that you can't ignore all financial metrics as they are evil and cause management to lose track.
I think we also agree on the fact that it is all about incentives.
if a manager is getting paid on how well the stock did during his/her tenure, s/he will make plans to maximize his/her cut and leave for better pastures once there's nothing more to drain.
if you make the manager financial well being tied to the success of the company even after he/ she leaves - he/ she will not only try to make decisions more aligned with long term - but also try to raise next generation that will take good care of stock when he/she's not around.