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New Year – New President – Mr. President –

One Thing to Fix

January 2, 2009 We’re starting into a new year. Most of us in business would like to forget the last year as the economy spun out of control and left us with one bad message after another with very little we could do about it except attempt to secure what assets we had remaining.

But we did do something. We elected a new president and as we move towards the inauguration day, we are pinning more hopes on him than the donkey at a kid’s large birthday party. Most of the time, the tail is going to miss the donkey and I believe most of our hopes and “tales” will also go amiss unless we can convince congress to repair some of the systemic flaws in our bureaucracies.

Since the economy seems to be the number one focus in the next term, let’s look at some of the cause issues that most certainly lead to the economic tumble we have experienced during the last year. The causes run much deeper and have been around much longer than a year or two. Just as volcanoes take years to build up pressure before they explode, many of our policies, rules and behaviors conspired to create the pressures that led to our economic turmoil.

Let’s take a look at one of the sacred cows of conservative economics, “The Trickle Down Theory.” Trickle Down, in theory provides great stimulus to our economy. As wealth is invested the investment process creates a flow of money and earnings that support both taxes and the infrastructure needed for economic growth and well being. The theory works well when the excess earning actually do trickle down. During the last decade however, less moneys have trickled down into our economy. Instead we diverted massive amounts to other economies and non-leveraged excesses.

Watchdog groups have been warning us for some time that things were getting out of kilter. These warning shots were mostly ignored, much like a 22 caliber shot at a battle ship. Things like CEO pay and off-shoring of manufacturing (our national infrastructure) are just some of the indicators of what was going on in our economic environment.

So, you can ask, what is the cause? In my opinion, the cause started with just how we have measured success in our companies during the past two decades. The success and the rewards for the success have come mostly from the public market value of our stocks. Don’t get me wrong, there is nothing wrong with obtaining a better value for your investments dollars, but watch out for what you’re asking for. The market value is established on the perceived value by the buyers and sellers of the company stock. The perceptions are driven by short-term earnings and the analysts overviews of the companies earning outlook. As a CEO, if I wish to enhance my earning ability and market reputation, then I must take care of the short-term no mater what the longer range outcome may be. How do I do this? I reduce costs. Labor costs, investment costs, selling costs and overhead. I develop a lean machine. I consume my reserves and squander my company’s ability to differentiate and in the longer term, compete. It takes years for this behavior to manifest it’s results into a losing spiral, but that is the inevitable result.

So, if there was only one major regulation our government bureaucracy (read SEC) could enact this year, what would have the most effect. With all of the scandals, cheating and unethical behavior, I’ll bet we’d love to plug a hole or two but, that is not where I’m looking. Here’s what I propose. As a public company, compensation plans offered to the executives can only be based on the positive change in asset value of that company. In other words, in order to receive bonuses and options, the company executives would need to “invest” in the capabilities of their company. I’d go further and establish guidelines as to executive compensation values vs. balance sheet asset value and or growth.

If we are to remember the fundamentals of economics, then it becomes apparent that the only new source of capital is through manufacturing. That is, the conversion of raw materials (Land) with labor into alternative goods that constitutes a higher value as a result of that conversion. I also believe that our major source of inventiveness is derived from our experience in building a product in the first place. If we off-shore (out-source) our manufacturing then eventually, we lose our ability to conceive and improve products that provide our future. Wall street does not measure these intangibles, but instead rewards us for ignoring such fundamental mechanics of a going concern.

In conclusion, investing in infrastructure causes the “Trickle Down” effect to become a working theory. Without the investment in capital equipment, plant and labor the wealth simply gets redistributed to alternate entities that have no long-term stake in our company’s well being.

Dick Jensen Principal – Strategic Outlooks

May 23, 2004 Center for American Progress John Burton & Christian Weller • In 2004, the average CEO received 240 times more than the compensation earned by the average worker. In 2002, the ratio was 145 to 1. • CEO pay in other industrialized countries is only about one third of what American CEO’s receive. • After-tax profits are booming and corporate America can easily afford to offer fair wages and benefits to rank and file employees. Unfortunately, while CEOs have enriched themselves, middle-class families have taken hard hits to their paychecks, their health coverage, and their pension plans.

"Only 19% of US businesses have an offshore outsourcing strategy, a study by Ventoro found. However, the percentage skyrockets to 95% if only Fortune 1000 companies are considered." ZDNet Research

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