But shareholders are people who actually own the place. And if you own something, you are in charge: even if you own something collectively, and hire a manager to make immediate decisions, you have the power to [collectively] tell that manager what do you want him to do.
Abstract "business inetersts" only serve to earn money to business's owners in the end. Being a market leader is only a means to an end of making money for the owners. If the people who own the place decide, for whatever reason, that they don't need long-term development and want quick money now instead, let them be: it's their decision to make.
Now, it is possible that shareholders don't act in their true interests, and they should be thinking about long-term value instead, because that way they'll earn more money in the end. But it's them who you need to convince of that, and the argument should be structured completely differently. Blaming CEO of the company forthe fact that he does exactly what his collective bosses tell him to do, instead of thinking of abstract "business interests" (that exist just to earn money to his bosses) and employees (to whom his company is responsible only in the extents of their employment agreements) is ridiculous.
Except in practice shareholders are not a cohesive organisation capable of effectively directing the strategy of the company. That's why companies have managers. Nobody is saying that improving shareholder value is a bad thing, just that it should be sustainable and be based on genuine business fundamentals and not short termism. Think of it as consumer protection. If share values are driven up by short term financial tricks, new shareholders are being ripped off. The role of regulation here is to make sure that apropriate controls and disclosure is in place to make sure that those prospective new shareholders have the information they need to apropriately value what they are buying. Yes the onus on them is to research and understand their investment decisions, but equaly the onus is on the business and regulators to make sure it's possible for them to do obtain that information in clear and transparent way and that management incentives and corporate governanace rules are fit for purpose.
> are not a cohesive organisation capable of effectively directing the strategy of the company
They don't need to be: they just need to communicate their priorities to that manager. In this case, they communicated that they value short-term goals over long-term.
> it should be sustainable and be based on genuine business fundamentals and not short termism
Probably. I actually agree on that. My point is, that's shareholder's decision. And if you want to argue about that, you should talk to shareholders and explain that they decision hurt themselves. Don't talk to the manager and say that he's in the wrong, because that's not his level of responsibility.
> If share values are driven up by short term financial tricks, new shareholders are being ripped off.
Shareholders, by buying and selling the share values, dictate them. So, they are ripping off themselves. Again, I agree with that: but you should talk to them, not CEOs.
> The role of regulation here is to make sure that apropriate controls and disclosure is in place to make sure that those prospective new shareholders have the information they need to apropriately value what they are buying. Yes the onus on them is to research and understand their investment decisions, but equaly the onus is on the business and regulators to make sure it's possible for them to do obtain that information in clear and transparent way and that management incentives and corporate governanace rules are fit for purpose.
I must admit, I read the article on my phone, so I may have missed it, but did this discussion involve regulations?
I don't totally agree that shareholders are doing what they want here — a few big institutional shareholders can push the agenda alone, and boards are already conditioned to think short-term. But a long-term investor can choose companies that are proven to think the same. Off the top of my head, Apple, Amazon, Tesla and Netflix all have disdain for quarterly earnings or have laid out and stuck to multi-year plans.
Public shareholders value "short term goals" over everything else including ethics, legality, fairness, product quality, long-term viability, R&D, worker compensation, work-life balance, etc.
OK, that's their fair right to do so. It's not their responsibility to worry about these things, thank g-d. If you think that they don't serve their own self-interest, plead to them. If you think that they right to manage their property should be limited for public good, develop straight and clear guidelines about that.
It's possible that not all shareholders are aligned. As with employees with stock: people who want to cash out quickly will want short-term gains, screw the future. People who want to keep their stock for a while will want long-term gains, even at the expense of the short-term gains.
Those folks who want long term gains are free to sell their shares at inflated prices (remember, share buybacks are happening) and spend the money on a position in a semiconductor company focused on the long haul.
It's very true that in any group of multiple people with multiple goals, some folks won't be able to get their way. Similarly, if Qualcomm decided to make long term investments, the short termers couldn't get what they wanted.
That's one of the beautiful things about shareholder democracy in liquid, public markets - exit is always an easy option. (Compare and contrast to, e.g., political democracy, where exit is highly costly and sometimes impossible.)
Well, shareholder exits can be costly too. But this discussion and the one with golergka inspired the following idea (probably because the idea of political democracy came up in both threads).
Stay with me here. It's not fully fleshed out- just kind of a spark: What if, in some fair way I don't know yet, the employees of a public company had some (40%? 51%? I don't know but significant) power to force a shareholder to sell his or her share of the company in a short time frame (30 days?).
This would bring the analogy to political democracy a little closer because the "subjects" would have the direct power to throw out their "governors." We could argue that they have the indirect power now (especially in small companies), but this would make it explicit.
That is pretty crazy. Similarly, imagine if X% of your SAAS vendors could vote to buy your shares - if Google and Amazon like your business, and if you use gmail + AWS, they can vote to buy you out and you've got no say in the matter.
Employees aren't "subjects" and their boss isn't their governor. Shareholders are owners, that's why they get a vote. Employees, SAAS vendors, janitorial service companies, etc, are just people selling stuff.
I would argue that employees have a larger stake than contractors and vendors. They would also want to do the right thing by the company. The whole idea is to broaden the idea of governance to more stakeholders than just the owners. It would certainly give guys like Carl Icahn pause. On the other hand, perhaps sometimes what he does needs to be done, and this would make it harder. That's why the employees should only have a partial say, but enough of one so that they are a legitimate threat if an activist investor can't muster very much support on the board.
Employees have no reason to do the right thing by the company - the best thing an employee can do for himself is get paid all the money. It's hard to see why their stake is higher than a vendor. In both cases, they have rendered a service in return for money and have no further stake in the company.
Overall, employee involvement in decisionmaking creates significant principal/agent problems. Consider this article, which suggests many employees care so little about shareholder value that they will sacrifice the latter for petty revenge against third parties (their boss): http://www.nytimes.com/2015/06/21/opinion/sunday/is-your-bos...
You're right about the vendor thing. I have a hunch that changing a job under duress is more stressful than finding a new customer (vendor), and thus employees would be somewhat more inclined to have long term stability, but I certainly can't prove it and I'm not entirely convinced of it.
As to the idea that employees will sacrifice shareholder value (of which they have, roughly, zero) in order to feel better about working (revenge feels good, after all), perhaps that is not unexpected. In my scenario, the employees would have another outlet: they could make it clear to the board that they won't tolerate toxic managers. As things stand, a smart board (I would argue) understands this today, but things get awfully muddy in the real world.
What the proposal does is broaden the conversation from just considering shareholders to another group of stakeholders.
they just need to communicate their priorities to that manager
Nobody said they should be, silly. But writing like this implies that the writer thinks so. Otherwise ("they communicated their varied and opposing priorities to their manager who was more confused than ever") the point is lost.
No, it doesn't. Don't you know that groups of people can have different opinions and still clearly communicate these opinions, proportionally to how they are distributed in the group? That's one of the basic building blocks of modern societies, starting with the whole concept of democracy.
So the manager proportionally invests in short-term or long-term value? Or sticks to his/her original vision for the company, in some proportion? I'm struggling to make sense of that.
As with our political leaders, the manager made a decision. In his case it was based on his board interaction. He can certainly be judged based on his decision. Just allowing him to wash his hands of it and simply say "I'm doing what I'm told" is way too straightforward in a situation in which there is nuance. [I'm referencing here your comment in which you expressed gratitude to a deity that managers didn't have to worry about things like (quoted from comment you responded to) "ethics, legality, fairness, product quality...".]
Perhaps ethics and fairness shouldn't be lumped with legality and product quality. I don't know how to measure ethics and fairness; I don't really know how to hold a manager accountable for those unless it's written in SOPs or bylaws somewhere (B-Corp?).
FWIW, I find the article entertaining in the same way I find pre-game sports analyses entertaining. Time may tell us whether this decision was a short-term or long-term decision. I'm not convinced that Qualcomm actually 'succumb[ed] to the cult....'" But I find the idea that activist investors can come along and screw up a good thing for their personal short-term benefit and the other stakeholders are for all practical purposes powerless against it frightening. But, hey, it's a scary world.
>> are not a cohesive organisation capable of effectively directing the strategy of the company
> They don't need to be: they just need to communicate their priorities to that manager. In this case, they communicated that they value short-term goals over long-term.
Consider copyright: extending copyright helps the owners of copyright, reducing it provides a smaller benefit to every member of the public. Because the copyright holders are better organised as a class they are better equipped to lobby congress and influence politics, leading to the indefinite extension of copyright.
I think the parent was arguing something similar. It's not at all clear that the shareholders at large prefer short term goals. Instead, an influential minority appears to have coordinated on this issue for their own benefit. The disadvantages are spread over a much larger group of passive shareholders, employees, customers, etc.
The role of regulation here is to make sure that apropriate controls and disclosure is in place to make sure that those prospective new shareholders have the information they need to apropriately value what they are buying.
The regulators already ensure this in various ways:
It would be insider trading if Jana were told anything that was not told to everyone.
b) Folks who own significant shares of a public company (I think 5%), i.e. activists, are obligated to disclose it.
c) Activists generally publish their activism. For example, here is a higher up at Jana talking to CNBC about Qualcomm: http://www.cnbc.com/2015/04/13/qualcomm-should-consider-brea... The reason they do this is in order to encourage other shareholders to vote the same way they do.
No one is being ripped off. Share values are being driven up because the market believes Qualcomm's prospects for long term cash are lower than the prospects for short term cash. If you disagree with this claim, feel free to get rich with a short position.
The cult of shareholder value is all about EARNING MONEY THIS QUARTER NO MATTER WHAT AT THE EXPENSE OF ALL ELSE (including ethics, legality - at least in terms of expense for fines/lawyers, fairness, product quality, etc). In the long run, it's a destructive force of the market, but it's the way nearly all publicly-held companies go eventually. At least those that are majority owned by the public.
This came from the separation of ownership from control, that happened in many American public companies in 1960s. In 2008 for example Ford did not receive bailouts, and it still has significant Ford family ownership, unlike GM (but like Toyota incidentally).
It is also a good application of single responsibility principle, which is widely regarded as a good thing in software development, because it helps build systems that are easy to worry about.
You want some other values to be upholded to certain values? Create mechanisms that will translate these values to the value this component of the system is interested in. Actually, it's already done quite succesfully with regulation and fines.
If you want one component of the system to care about a lot of different variables, on the other hand, that's an easy way to create an awful, bloated system where every component is supposed to take care about everything, and in the end, nothing works.
There was an article recently on the BBC that shareholders there are only holding shares for an average of 6 months. Their motivations then become extremely short term. The Bank of England's chief economist has warned that this is slowing growth.
There are many ways to set up a company in a way that reduces the influence of activist investors and short-term holders. One is reducing liquidity (such as Berkshire). Another is setting up classes of shares (such as Google).
Still, they only make sense when the company is profitable and paying nice dividends (or growing fast).
When you IPO you're going to the market asking for money and offering growth or dividends in return. If you don't want to be subject to the conditions investors place on the capital, don't raise any and keep the company private.
You can't have the cake (receive money from investors) and eat it too (not be subject to their demands).
Going public is not always about raising money. Many startups are forced to go public because they have employees who want to cash in their stock. Once they become established companies, being able to offer stock options to employees is a considerable advantage.
In those cases, going public is a way to raise money to pay those employees. The company could easily buy back their shares if it had the cash available.
In other words, they planned from the beginning to go public in the future as a way to pay for their current employees.
Sure, it's true when you own something you get to decide what to do with it.
But I see the problem being a lack of optimism. You don't see what the company might do in the future, it all seems so risky. So instead of investing in new tech, you try to take what you have off the table. This has benefits to the managers: you can count dollars up front, and your business school education is basically about bean counting. Nobody will ever know that you could have made the next breakthrough. How many firms could have marketed the iPhone? Probably quite a few. (One of the best things about Steve Jobs is he didn't give up or sell Apple when they looked like they were in deep poop.) You can always claim it would have been risky because of such-and-such competitor, regulation, status quo, etc.
Look at the corporate world now. They are all sitting on huge piles of cash, not knowing what to do with it. That's what a buyback is for, when you give up on thinking of new things to do, but you're happy to take credit for previous successful management's decisions.
Fair enough that some businesses really are at the end of the line for whatever they do. But they can't all be. And we'll never know how much growth is slowed by bean counting: the trading of what you could have had for what you are afraid to lose.
Investors are quite happy to be optimistic and trust some companies to invest in the future. For example, Amazon and Facebook's share prices are not remotely justified by their cash flow.
Qualcomm is just not one of the companies that investors are optimistic about.
I'm curious though; if you thought Qualcomm was such a great buy before, did you buy shares? If you (and everyone else) had, that would have pushed prices up and everyone would have ignored Jana.
Shareholders only work when they both:
Know what it is they own.
Care about the long-term health of the company.
The 401k could probably be blamed for the majority of the issues in the US. You have a chunk of your money removed from every paycheck, it goes to a magical place, and you make money that you will not see again until retirement. That's how it works for 99% of the public based on my experiences talking with friends/colleagues etc. The "magical place" is a blowhard whose sole goal is to maximize HIS profit, which means short-term gains that he can charge exorbitant fees for.
The average American doesn't seem to know/care/want to know/care about where that money is going, as long as they see a positive return every quarter. And that's just bad for everyone.
Teeth gnashing about short termism among investors aside, there may be a practical reason for this move. Apple and Samsung are both moving to their own micro-architectures. Apple has been using an in-house design since the A6, and Samsung's 64-bit ARM core will likely drop in the next year or two (the M1).
Doing your own CPU architectures is a phenomenally capital intensive business, and Qualcomm may not feel positioned to keep up. Even ARM is getting left behind. The A57 is a power-hungry design that has faced major problems with thermal throttling in many designs. The amount of cash Apple and now Samaung can throw at their custom designs may be overwhelming.
That's nonsense. First off, ARM is able to "keep up" with only tens of millions in profit a year. Second, Qualcomm is one of the richest chip makers. Third, Samsung hasn't been using custom CPUs and GPUS - at all.
It's debatable whether ARM can keep up with custom cores. Both the A15 and A57 designs have been underwhelming from a performance per watt point of view. The A57-based Snapdragon 810 has suffered from thermal issues: http://arstechnica.com/gadgets/2015/04/in-depth-with-the-sna....
Qualcomm is big, but Intel, Apple, and Samsung are all targeting custom cores in this space, and they may reasonably feel like doubling-down on their LTE technology and not trying to compete in that space.
Qualcomm's Krait and Apple's Swift/Cyclone are ARM compatible cores designed in-house from the ground-up. Exynos uses IP cores designed licensed from ARM.
Not exclusively anymore - Samsung is starting to use it's own in-house chips for modems (some versions of S6 use them right now). Mediatek is doing the same I think. Intel has its own that the ZenFone 2 is using for example. Not sure about Apple.
Depends on what you mean by 'chips'— Qualcomm sells both discrete modems, which many cell manufacturers use, and systems-on-a-chip including modems, which they had recently been doing very well with, but just had a bad round of.
So they're going to cut their CPU R&D and become a generic ARM IP integrator, plus their GPU and radio-frequency circuits (Adreno GPU, GSM, WiFi, GPS). Next moves could be discarding their own GPU for the ARM generic ones (Mali) and using 3rd party IP for the radio. Scary.
Which is funny because the reason Qualcomm screwed up recently (besides all the anti-competitive/antitrust issues) is because it didn't come out with its own next-generation custom CPU core sooner, and had to use stock ARM IP which I guess it didn't have much experience in handling.
The shareholders' "solution" is what will destroy the company. Qualcomm would've been fine in the next 2 quarters, once it passed the Snapdragon 810 generation.
I don't know why they freaked out so badly after just one bad quarter (and after Qualcomm has constantly grown for the past 5 years) to the point where they want to split the company. That seems rather crazy. I wonder if there's something else besides next-quarter-profit thinking behind this motivation.
If you believe the article (I'm not sure whether or not I do), the shareholders didn't freak out because of the bad quarter - it was just an opportunity to push their pre-existing agenda of prioritizing returning capital to shareholders instead of investing in the business. If that happens to destroy the company in the long run, these shareholders might not care - nothing stops them from selling their shares well before the long run arrives.
It may not be a bad idea after all. Unlike Intel, Qualcomm hasn't been able to demonstrate a price-performance advantage with in house engineering. MediaTek's far cheaper ARMv8 processors are competitive performance-wise.
Um, what? Yes, the ARMv8 transition was a problem, but until then, Qualcomm had been consistently delivering the best combination of power and performance all the way back to the Snapdragon S4. It's not like Samsung was putting Qualcomm chips in their flagships because they wanted to - they had to in order to keep them competitive.
Yes, they had to pay Qualcomm for their LTE patents, but that didn't mean they had to use Qualcomm SoCs.
Other devices (e.g. Galaxy Nexus, Droid Bionic, HTC One X+) married Qualcomm LTE radios with non-Qualcomm SoCs. Even Samsung did this for a few devices (e.g. Galaxy Note and Note 2 LTE, a few S2 and S3 variants), but, until this year, that was a small and shrinking portion of their lineup.
Qualcomm's past engineering success was a big part of the reason why. Samsung/ARM's engineering failures (e.g. big.LITTLE and cache coherency issues with the original Exynos Octa) were the another part of the reason, but I don't think that changes the overall picture.
I call this BS sorry. I do not know the exact reason why samsung had to release the previous phones using qualcomm's cpus but it was not because snapdragon 805 was a better chip. Quite the opposite if you check the benchmarks for snapdragon vs exynos. Exynos wins not by a higher margin but still wins.
This is actually about Qualcomm not being g a provider of CPUs to either apple and Samsung who basically is. The cellphone market if you are not in those phones you are fighting for scraps. This was a necessary move.
Or perhaps "owner" would do. It might not be what you would like but they own the place so it's their right to do what they like with it.
Of course when they ruin it, it just opens up competition for more enlightened compaies so it's not all bad,
"Owner" is usually an overstatement. Yes, an activist investor has to own some chunk of the company (and it has to be a big enough chunk that management will pay attention to them), but they don't own the whole thing - or even a controlling interest. If they did, they wouldn't need to be activist, they'd just fire the existing board and management and hire people that would do what they want.
Instead, activist investors own a small, but large enough chunk, advocate for what they want and rely on other investors being passive (e.g. because a lot of the company is owned by tiny slivers of much larger portfolios) even if what they're advocating isn't in other investors' interests.
Do you have a 401K or IRA? Do you pick your funds based on long term company fundamentals or how much the fund is returning year after year? Does your HR department hear from employees that the companies they picked to run their accounts are not performing each year?
Abstract "business inetersts" only serve to earn money to business's owners in the end. Being a market leader is only a means to an end of making money for the owners. If the people who own the place decide, for whatever reason, that they don't need long-term development and want quick money now instead, let them be: it's their decision to make.
Now, it is possible that shareholders don't act in their true interests, and they should be thinking about long-term value instead, because that way they'll earn more money in the end. But it's them who you need to convince of that, and the argument should be structured completely differently. Blaming CEO of the company forthe fact that he does exactly what his collective bosses tell him to do, instead of thinking of abstract "business interests" (that exist just to earn money to his bosses) and employees (to whom his company is responsible only in the extents of their employment agreements) is ridiculous.