Greg de la Cruz works at NCR Corp's R&D center in the Philippines. He is interested in economic history and current world financial affairs.
Corporate Evil and the Obsession With Quarterly Earnings
Corporations, especially multinational conglomerates, get a bad rap in pop culture. But here’s my best effort to not generalize the perceived evil that capitalist machines unleash upon the world. Because instead of cherry-picking news articles and statistics online—unearthing layoffs upon layoffs, environmental damage, etc.—I decided to examine the 30-page essay of David Millon of the Washington & Lee University School of Law.
Millon’s widely-cited essay, which came out in 2002 at the height of the Enron scandal, is appropriately titled “Why is Corporate Management Obsessed with Quarterly Earnings and What Should be Done About It?” The essay’s title speaks for itself, and it reveals all sorts of corporate financial maneuvering done in an effort to maximize the company’s stock price.
And all of the maneuvering, manipulating, law-breaking (as in the case of Enron), and perception-managing at the cost of long-term instability among those in the workforce, and of course – job cuts.
As the essay’s title implies, Millon dives into corporate short-termism. His description of this corporate short-termism may already be two decades old, but a 2017 McKinsey article captures exactly the same phenomenon:
“Pressured by Wall Street analysts and investors poised to exit at the drop of a disappointing quarterly number, CEOs inflate short-term results to the detriment of long-term performance.”
Executives are well-aware that the market is sensitive, almost to the same degree as it is unpredictable. Being investors themselves, they’re keen enough to know that a fluctuation here-and-there, say, a slight drop in earnings from one quarter to the next could easily be a cause for analysts to pounce and for investors to sell.
This article could easily have been titled “Five Ways Corporations Do Evil Things,” but that would sound way too conspiracy-theory-esque, and you probably won’t bother hearing me out.
This article was written for the purpose of bringing some awareness to the ordinary employee (corporate or not) of the things companies do, which are completely out of the control of workers. Here are five reasons to not get too worked up about your job.
1. Stock Price Matters Most
The ethic of Stock Price Maximization (SPM) is something David Millon dives deep into his essay, describing how companies prioritize shareholder interests over non-shareholders:
“The real heart of the matter is the way today’s corporate managers translate that principle (SPM) into practice. They do so by focusing single-mindedly on short-term results, which translates into an obsession with quarter-to-quarter earnings so as to maximize current share prices. This, in turn, leads to undue emphasis on current cash and noncash revenue and reduction of immediate expenses wherever possible…”
Let me re-emphasize the last phrase of that quote—reduction of immediate expenses wherever possible. This reduction can come in the form of layoffs, plant closings, alienated workers, unsafe products, and a polluted environment. And it can lead to an underinvestment in worker training and research and development.
Take some time to absorb this message when you can. As an ordinary worker who is usually not a shareholder (I’m conflicted on whether employee stock options, which are marginal, even count), you are an immediate expense.
You also belong to the non-shareholders, who always take a backseat over actual shareholders (those who count, those who put millions or billions—not the chump change from employee stock purchase schemes). Ordinary workers are liabilities, and when liabilities are reduced, investors are happy. And when investors are happy, the stock price goes up.
2. No Matter How Well You Perform, You’ll Be Let Go if Needed
Let’s say you’re a rising star in your company. You pass your probationary period with flying colors, get promoted faster than anyone you’ve ever known—and now, upper management is talking about making you a manager, which is just a few rungs down from being considered a company exec.
Your peers become envious of your success, of course, so they might start stirring up some conflict or controversy to impede your ascent. But it doesn’t matter because your boss and the people high up see your value and are well aware of your performance.
They finally decide to make you a manager of one of the company’s departments, and you’re even tasked to hire subordinates for this new “team,” which you then spend a few months to staff up and organize.
But just when things start to get comfortable, you hear the news from higher up that they are dissolving your department, among others. Last quarter’s earnings did not live up to expectations (although the company probably still earned good income), and the top executives decided that the best way forward was to streamline operations and cut costs.
Layoffs ensue, and the HR department sends you a link to an exclusive Zoom call that provides instructions on how you’ll get your severance and all the other mandatory government stuff.
Does this narrative sound familiar? If it does, that’s because it has happened time and again. You can be a top performer and be let go anytime if it suits the company. Yes, you may have been a rising star—you may have been promoted faster than anyone else has; they may have asked you to staff up a whole department—but all of it can disappear in a flash. And all it takes is one decision in some conference room somewhere.
3. You’ll Be Overworked Because They Decided to Cut Labor Costs
The other side of the equation of cutting labor costs is the remaining workforce who will be forced to do more work than they used to. Shareholder primacy, or the idea that corporate management’s primary duty is to maximize shareholder wealth, is one of the main reasons why a big company doesn’t care if you get overworked because of the jobs that suddenly went missing.
Sometimes, even after layoffs, the amount of work that goes around stays the same—leaving the rest of the surviving workforce to scramble and divide up the excess work among themselves. And this leaves too much work to do for too few people.
But due to the principle of shareholder primacy, the company won’t care too much for the employees, who are normally non-shareholders. Regarding this, Millon’s essay cited the classic opinion in Dodge v. Ford Motor Co.:
“A business corporation is organized and carried on primarily for the benefit of the stockholders… The discretion of the directors is to be exercised in the choice of means to attain that end…”
In other words, whatever it takes to keep the investors happy the execs will do—even if it means overworking the entire workforce.
4. Your "Going the Extra Mile" Will Be Swept Under "Earnings Management"
The earnings management department or business unit of any large company is usually one staffed with finance majors, McKinsey-ish types, or one that contracts work out to management consulting firms.
In Millon's essay, he describes the tactics employed by companies such as "going to great lengths to create the appearance of regular, consistent earnings growth," and the rationale for doing so is because the stock market rewards these companies for their efforts with a predictability premium. What exactly do companies do when it comes to earnings management? Below are some examples:
- If earnings in one quarter are too high, continued growth may demand that the company reach an unattainable target in the next quarter—and in this case, reported results are reduced.
- To avoid a decline in comparison to a prior period or to meet targets, accounting data is manipulated in order to show performance that is better than it really is.
- Suppressing sharp spikes or dips in order to reduce volatility, to produce an even, upward curve.
What does this all mean for you, the lowly worker? It means that however well you may save your company some money or how much income you generate (by selling more products or subscriptions, for example), your performance can easily be swept under the rug whenever your company wants to provide the appearance that it performed "okay" as opposed to being "exceptional."
Sure, you probably will get some congratulations and perhaps a pay-bump, but the earnings management side of it will show that you were just a tool.
5. Time and Again, Culpable Leaders Leave With a Massive Paycheck
Finally—the saddest and most gut-wrenching reason why you shouldn’t get too worked up about your job—is because the bad guys on top will often get away with all their evildoing and get a massive paycheck as they leave the company.
An example of this is how Adam Neumann got away with $578 million during his inglorious exit from WeWork (which includes $198 million in cash) while two-thirds or more than 2,000 WeWork employees got laid off.
Looking further back, we saw how in the Great Recession and as described in the film “The Big Short,” only one high-profile exec went to jail while most execs of the top investment banks got their bonuses.
When a big company designates a fall guy, the usual deal that goes on behind closed doors is a generous separation package. Most of the time, it isn’t just one guy that committed the wrongdoing.
Often, it’s the system created and being promoted by the company that eventually results in something illegal—and designating one or two people to take the fall is the easy way out.
It’s Okay to Be Just "Okay" at Your Job
Corporate work-life doesn’t have to suck so much, but as described in this article it can be a bit discouraging just because of all the things that happen beyond an ordinary worker’s control. That’s why it’s totally fine to be just ‘okay’ at your job. If you happen to be working one that you don’t particularly enjoy, you don’t have to force yourself to enjoy it.
Many experts on organizational psychology, such as Adam Grant and Angela Duckworth, suggest that workers should devote themselves to something worth their while. Angela Duckworth, author of Grit, was a management consultant on one of the dream places to work at—but she gave it all up to focus on educating kids and doing what was meaningful to her.
Perhaps this is the proposition I make at the end of this article—be okay at the job that’s making you miserable until you find a job where it’s really worth it for you to go above and beyond.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.