Who "gets it"? - Employment, investing and IBM

"IBM authorizes another $5Billion for share buybacks" is the Marketwatch.com headline.  This brings the amount available for buying the stock to $9.2billion - or enough to buy about 73.6million shares.  But it begs the question, what value will this bring anyone?

"The U.S. Workplace: A Horror Story" is the CIOZone.com headline. A survey by Monster.com and The Human Capital Institute of more than 700 companies (over 5,000 workers) discovered that by and large, employees are mad at their employers.  They don't trust business leaders, and think those leaders are exploiting the recession for their own purposes (and gains).  79% of workers would like to find a better employer - to switch - but only 20% of employers have a clue how many workers have become disillusioned.

Simultaneously, "Many vanished jobs might be gone for good" is the Courier-Journal.com headline.  Historically, increases in manufacturing (usually led by autos) and construction (primarily housing) caused recessions to diminish.  But nobody expects either of those sectors to do well any time soon.  Manufacturing is showing no signs of improving, in any sector, as we realize that all the outsourcing and offshoring has permanently reduced demand for American labor.  And quite simply, very few investments are being made by business leaders that will create any new jobs.

"ALL BUSINESS:  Innovation Needed Even in a Recession" is the Washington Post headline.  The article points out that almost all recent improvement in profitability - boosting the stock market - has been through cost cutting.  But that has done nothing to help companies improve revenues, or improve competitiveness.  It's done nothing to bring new solutions to market that will increase demand.  Quoting the former Intel CEO Gordon Moore - "you can't save your way out of a recession" - the article cites several consultants who point out that companies which earn superior rates of return use recessions to invest in new technologies and innovations that create new demand.  And eventually new jobs.  But today's CEOs aren't making those investments.  Instead, they are taking short-term actions that dress up the bottom line while doing nothing about the top line.

Which brings me back to IBM.  Who benefits from $9.2billion being spent by IBM on its own stock?  Only the top managers who have bonuses and options linked to the stock price.  The shareholders will benefit more if IBM invests in new products and services that will increase revenues and drive up long-term equity.  Employees and vendors will benefit from creating new solutions that generate demand for workers and components.  Almost nobody benefits from a stock buyback - except a small percentage of leaders that have most of their compensation tied to short-term stock price.

What new innovations and revenues could be developed if IBM put that $9.2billion to work (a) at its own R&D, product development labs or innovation centers, or (b) at some young companies with new ideas that desperately need capital in this market where no bank will make a loan, or (c) with vendors that have new product ideas that could meet shifting markets? 

That's the beauty of an open market system, it supposedly funnels resources to the highest rate of return opportunities.  But this doesn't work if managers only cut costs, then use the money to prop up stock prices short term.  It's a management admission of failure when it buys its own stock.  An admission that there is nothing management can find worth investing in, so it will use the money to artificially manipulate the short-term stock price.  For capitalism to work resources need to go to those new business opportunities that generate new sales.  Money needs to flow toward new health care products and new technologies - not toward keeping open money-losing auto companies and failed banks that won't make loans.

If we want to get out of this recession, we have to invest in new solutions that will increase demand.  We have to seek out innovations and fund them.  We cannot simply try to Defend & Extend Success Formulas that are demonstrating their inability to create more revenues and profits. Laid off workers do not buy more stuff.  We must put the money to work in White Space projects where we can learn what customers need, and fulfill that need. That in turn will generate jobs.  And only by investing in new opportunity development will workers begin to trust employers again.    IBM, and most of the other corporate leaders, need to "get it."

Comments

[twitter.com/cowboyesfan]

Don't forget the executive that was indicted for insider trading and the other executives that have yet to be indicted. They are the main beneficiaries.

[Rodney Johnson]

Adam, there have been numerous studies showing there is virtually no correlation (long term especially)between stock price and buy-backs. What does occur short-term however is the mere announcement has a small impact. The the actual purchase of those shares - zero impact. Makes one wonder doesn't it.

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