[Someone1234]

How do you maintain "Principle 1" while being a publicly traded company?

The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits.

For example look at the field of Customer Retentions. It used to be focused on satisfaction & delight which are both long term success strategies (both to grow and to retain), but in the last twenty years Customer Switching (i.e. making it harder/more costly/more time consuming/more stressful/etc to switch) has become the norm, this is a short term strategy since it improves short term retention metrics at the cost of long term returning customers and poor word of mouth (i.e. nobody returns or joins after they leave, if you made the switching process hellish). It is a great way to keep your quarterly and yearly churn low, but a poor way to run a business.

It used to only be businesses with artificial monopolies that would do this (e.g. Verizon, Comcast, etc). But recently we've seen companies in fairly competitive spaces adopted a similar short term "suicide strategy" like LogMeIn (Remote Support Software), The New York Times (News Publication), SiriusXM (streaming audio), etc. All of which are likely chasing quarterly performance metrics tied to executive compensation.

[rb808]

> The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits.

That's a myth. Yes CNBC loves short term stuff as it makes good TV. In the real world see Black Rock (biggest asset manager) CEO public urging long term focus https://www.blackrock.com/corporate/investor-relations/larry... . See also Amazon and all the other profitless companies just listed as good examples that long term has value.

[Someone1234]

You call it a "myth" then use one example, that disproves the point (why urge to act against a "myth") and another that's a single data point, while ignoring the rest of the market.

That's a pretty poorly explored position.

[rb808]

I would have though that the CEO of the world's largest investment company would count more than "one single data point". I know there are a few examples of short term investors ruining a company - but have you any examples of companies punished for choosing long term over short term?

[Someone1234]

> I would have though that the CEO of the world's largest investment company would count more than "one single data point".

I said that CEO undercuts your point. You claimed short-term-ism was a "myth," then quoted a CEO saying that a lot of people focus on short term investing, rather than long term investing. Therefore making it not a myth, according to your own source.

[rb808]

Maybe you should actually read it. He said companies might be tempted by maximizing short-term returns because we are late in the economic cycle.

[Someone1234]

Therefore making it not a myth that people do so. Did you read it?

[bluGill]

While that is a common statement, it isn't really true. Most stock holders have figured out that long term profits are important as well. Companies that only focus short term go out of business quickly and so are worth less than companies who will be around longer.

Most shareholders (37%) are retirement accounts which have long term goals.

[radcon]

> While that is a common statement, it isn't really true.

"Companies exist to maximize shareholder value" is the myth that just won't die.

[TeMPOraL]

> Most stock holders have figured out that long term profits are important as well. Companies that only focus short term go out of business quickly and so are worth less than companies who will be around longer.

Doesn't matter if the stock holders who pushed for the decisions managed to flip their stocks when they were still rising in value. Aren't most stock holders playing this game to flip stocks, without caring much about the particular company they're making money off?

[icxa]

Aren't most stocks are held in index funds and ETFs?

[mrep]

Yep, they recently crossed the 50% mark [0]. Discussion [1]

[0]: https://qz.com/1623418/index-funds-now-account-for-half-the-...

[1]: https://news.ycombinator.com/item?id=20020997

[TeMPOraL]

I don't know. Could someone who knows this for sure chime in here?

[nradov]

Yahoo Finance will show you the top holders for any publicly traded company.

https://finance.yahoo.com/quote/TM/holders?p=TM

[TeMPOraL]

After reading countless stories about companies big and small, I came to conclusion that if you want to build a company that has a mission and/or a moral compass, under no circumstances you should ever give any degree of control to people who are not in on the mission or do not share the same moral direction. From this follow at least two rules:

1) Never ever go public.

2) Never ever accept VC money.

Problem is, you'll likely get outcompeted by companies that do either or both of these things.

[tim333]

There are public companies that are run for the long term. Berkshire Hathaway springs to mind and I'm sure there are many others. It's down to the CEO whether they do that or try to game the quarterly earnings.

[rectang]

> Many companies have been ruined and continue to be ruined

You say "ruined", I say "fulfilled their ultimate purpose as disposable wealth-extraction machines enriching executives".

I totally agree that the stock market's design encourages short-termism. But this is entirely appropriate in service of the idea that heroic individuals are chiefly responsible for company outcomes.

[tim333]

Though of course in traditional theory the company should be run for the shareholders rather than the executives. It's a bit of a flaw in the system if they can extract large bonuses while tanking the stock. Maybe the government could write some laws that bonuses have to be held in escrow for a while to check the company survives.

(And in more modern views maybe you should worry about the other stakeholders too.)

[nradov]

Shareholders are free to impose deferred compensation schemes on executives. In fact many companies have done so. No new laws are needed.

[mcguire]

Which companies?

Most shares in most companies I've seen have been owned or controlled by executives or by institutional investors (mutual funds, insurance cos., pensions) that tend to vote with executives' recommendations. Without high-level executive support, shareholders are free to do whatever they want, but the important ones typically don't want.

[rectang]

I disagree that it's a "flaw". It is the natural consequence of an ideology, where we ascribe proportionate value to the contributions of executives and marginal value to the contributions of everyone else.

Since we believe that executives are the ones creating the wealth, it is just that the wealth flows out of the company and towards them. Executives giveth and executives taketh away.

[tim333]

>Since we believe that executives are the ones creating the wealth

I wonder how many people actually believe that.

[marcosdumay]

Active shareholders are happy to see their stock value rise to unsustainable levels and then selling them to the next suckers.

Passive shareholders, well, don't participate on decision making.

Expect this feature to get worse with increased share of index funds. But not by much, because most people never were active anyway.

[icebraining]

> Passive shareholders, well, don't participate on decision making.

That's not true, fund managers vote on behalf of those shareholders, and not always go along with the board's position. See for example Vanguard's voting record: https://about.vanguard.com/investment-stewardship/how-our-fu...

[mcguire]

"Expect this feature to get worse with increased share of index funds."

How so? Index funds buy when the shares are high and sell when they're low.

[eries]

This is literally the thought process that led to the creation of the LTSE. I was actually reading The Toyota Way while writing the draft manuscript for The Lean Startup

[nabla9]

Good ownership structure and corporate governance.

Toyota group is keiretsu where Toyouta Motor Corp. has owners like Toyota Indutries, Denso and some big Japanese banks and insurance companies.

[rhino369]

>The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits.

Short term stock prices aren't entirely controlled by short term results. Just look at PE ratios for growth companies. Short term results often change the price a lot because its an indicator for future results. Stuff like one time write offs don't really affect the price.

[EvanWinget]

There's definitely a big problem with short termism and focus on quarterly performance over long-term value. Luckily there are a variety of solutions to this.

One is to have dual class share structures where minority owners have majority of the voting shares (e.g. Facebook, Google). Another is to create a new type of stock exchange that incentivizes long-term ownership (e.g. LTSE long-term stock exchange).

[Ambele]

It's hard to say how Toyota is governed unless you know more about how the Tokyo Stock Exchange functions. Toyota shares are only available here in the form of ADRs (American Depository Receipts). Each ADR share represents two shares of common stock on the Tokyo Stock Exchange.

Toyota might not have chase short term profits like many American companies choose to do. After two hours of googling it (and reading english web pages only, not japanese webpages), the only notable thing I discovered was that Toyota pays out 30% of its profits in the form of dividends and spends 20% of its profits on share buybacks for a total shareholder return of roughly 50% of earnings each year. This indicates that Toyota is shareholder friendly but it's not clear if this is an obligation or a choice.

Instead of chasing short-term profits, I've observed that Toyota spends fair budget on advertising and showboating futuristic looking hype technology that is never intended to be released or used. Some investors primarily look at the daily news and are satisfied with this strategy. The technology Toyota intends on using isn't hyped up; it's kept a secret until it's actually released to drivers.

Finally 90% of Toyota Corporate Employees in the Plano, TX US Headquarters are contractors from other companies. Those ones sure as hell aren't getting any quarterly performance bonuses or any executive compensation. At best, the executives bonuses are getting to keep your air-conditioned job for another 3 years.

[opencl]

Japanese corporate governance does not work quite like in the US, either legally or culturally. Shareholders actually generally have more decision making power than in the US but tend not to exercise it very often and basically trust the existing leadership.

Toyota has been publicly traded for 70 years and their shareholders (which are primarily other large Japanese conglomerates) have never even tried to make these kinds of short-term-over-long-term pushes and keep electing Toyoda family members into the top leadership positions.

[Ambele]

Finally someone that understands the difference.

[gnode]

I don't think the fundamental problem is being publicly traded, it's a question of how distributed the control of a company is. Some publicly traded companies are controlled by few people.

When ownership is concentrated, decisions can be made based on long-term ideology. When ownership is highly distributed, and especially when indirect via indices, decisions are made in favour of widely accepted and broadly applicable metrics of performance, which tend to have only short term confidence.

[magduf]

>How do you maintain "Principle 1" while being a publicly traded company? >The way the stock market is designed... means they're going to put short term profits over long term viability.

It's simple: be Japanese and not American. Japanese companies don't have this kind of problem, precisely because they aren't American and their society doesn't value enriching executives over all else, and instead values a stable and harmonious society.

[davidrm]

https://en.wikipedia.org/wiki/List_of_public_corporations_by...

Not a single Japanese company, while the lists are dominated by the US ones. What you're saying is nothing other than the ancient TV trope about the difference between Japanese and the Americans (east vs west).

disclaimer: I have 0 ties whatsoever to the US.

[supergauntlet]

Perhaps it's a culture thing? IIRC, you don't actually legally have to bring more value to shareholders every quarter at the cost of everything else. Maybe Toyota's execs and shareholders have some sort of "gentlemen's agreement" where they just agree to not prioritize the short term at all costs?

Maybe that's naive and they're just saying one thing and doing another.

[zebrafish]

All publicly trade companies have a fiduciary responsibility to shareholders. That means different things to different companies and is not a hard and fast rule. Amazon did not prioritize short term profits for a long long time and Bezos famously told investors they were too shortsighted. Many large manufacturing companies adopt the Toyota principles here in the US as well. Principle 1 is up to interpretation about what brings the most long-term value to the company.

No company ever tries to go out of business, ergo they optimize to exist forever or get acquired. Whether the board & management understands how best to achieve that long-term sustainability is another matter and one that shareholders get to vote on.

[supergauntlet]

Sure, I just meant the fiduciary responsibility doesn't necessarily always mean "short term profits at all costs."

Why does it seem to always be that way, though? Most every company I see appears very shortsighted with no thought to the long game.

[rmah]

It doesn't always appear that way -- it's really a glass half full/half empty thing. If I may be so bold, you are see what you want to see. Generally speaking, public companies do not prioritize the next quarter above all else. Why not? Because they are, generally speaking, not run by idiots. Of course, some do in certain situations. Because it makes sense in those situations.

Owners (shareholders) and boards are not full of idiots either. They realize the temptation of short term pumps. Thus, executive compensation is typically shaped to encourage longer-term thinking (e.g. stock that does not fully vest for years, bonuses based on future company performance years out, etc). And if they do reward short-term metrics, it's for a specific reason.

That said, japanese companies tend to have longer time horizons than american companies (decades vs years) and perhaps that's better. But then again, the further out you go, the less your planning will work out. So who knows for sure?

[mindcrime]

Sure, I just meant the fiduciary responsibility doesn't necessarily always mean "short term profits at all costs."

Yep. Arguably an over-fixation on "short term profits at all costs" would be a gross violation of one's fiduciary duty if it puts the long-term viability of the enterprise at risk.

[bumby]

My current personal theory is that it's related to a cognitive bias. People tend to be biased towards the short-term. I.e. the short-term pain on my doorstep seems much worse than the (potentially larger) pain on the horizon.

[thomasjudge]

A lot of times (speaking generally, not specifically about Toyota) CEO compensation is tied to share price targets, which aligns CEO & management behavior to whatever will make the Wall Street analysts happy, which is often quarterly earnings

[chasd00]

many other things are tied to share price too. Enron would still be around if the share price hadn't dipped and started the domino fall ending in the scandal that killed the whole company.

[peterwwillis]

It's just a different kind of business. Car companies have multi-year release cycles, deal with complex logistics chains, and sell expensive products, so they have to plan for the long term. If your company lives and dies on the release of your next car, you're screwed.

[radcon]

> How do you maintain "Principle 1" while being a publicly traded company?

> The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability.

Easy: Don't do that. Either 1.) Don't be a publicly traded company, or 2.) Don't let short-sighted shareholders dictate your management decisions.