I am an occasional reader of Megan McArdle over at Asymmetrical Information. Take from this what you will, remembering that I also read the Huffington Post occasionally. Ms. McArdle manages to attract quite a bit of ire. I haven't quite developed the "universal theory of McArdle ire" yet, but I suspect the variables "political leaning," "logic quotient" and "vocal volume," are among the key variables in any formulation. No surprise, then, that some of her readers might be annoyed should she have the temerity to suggest that unions might not contribute much to labor efficiency. Ms. McArdle replies:
"But the idea that companies maximize short term profits at the expense of long-term returns is, to put it mildly, unproven."
Ah, but she fell for the reader's ruse. Pity.
Throwing up the straw man of "the tyranny of the quarterlies" has nothing at all to do with the more central question the issue presents. The singular quandry when considering unions (or employees in general) is quite simple: What is the function of the corporation? The question of what public markets, and their rather obvious devotion to short term results, bring to the table is entirely divorced from the question of unions. Moreover, the answer to short-termism is far simpler than resort to a survey of the academic literature on the presence (or absence) of short-term incentive effects of public markets. This is because:
1. To the extent there is a disutility to short-term focus of public markets, market actors have a fairly low-transaction cost recourse to recover any lost utility. Namely, the "going private" transaction. It should be obvious to anyone that where predicted loss due to costs of the public markets (like short-term focus and the deterrent for long term investment) exceeds going-private transaction costs, it is efficient to conduct a go-private buyout. The imbalance is usually self correcting, provided the union doesn't resist the going-private transaction (ahem). I might add that any study worth the paper its written on reports significant efficiency gains for properly executed going-private transactions (i.e. those where leverage doesn't get out of hand). I suppose the argument here is that losses to the corporation are the increased cost of captial when stock price is depressed. I'm not sure why unions would be upset by stock price except in captial intensive firms that are regular Wall Street customers owning to their constant (and frequent) resort to the capital markets to fuel growth. In these cases, stock price could well cost employee jobs- but these are very forseeable effects.
2. While variations in short term results may cause short term fluctuations in stock price, only management that has been poorly incentivized to focus on long term growth (through appropriate restricted share, option and other performance based compensation) will much care about "today's stock price" as opposed to, say, the 180 day moving average of same, or year on year change in stock price. Then again, some stocks that don't look like they should be may well be very short term plays in capital markets. Those equity investors looking primarily for, say, long term dividend yield, will, paradoxically, be rather sensitive to the very next dividend. Drop one and these "long term investors" will exit immediately. It doesn't, however, take much math to see that in capital intesive R&D stocks you don't need a lot of growth expectation factored into share price before long-term growth prospects are the main driver of share prices, not this quarters earnings. (Pharma is a good example here).
3. The presence or absence of a "short-termism efficiency drag" has nothing to do with the question of unions, essentially a labor issue that exists no matter if the company is private or public. To present the alternative to unions as the "tyranny of the quarterlies" is absurd. This suggests to me that Ms. McArdle's commentator was really beneath her notice. But, that was already beyond obvious here:
"Any individual corporation would be best served by a return to servitude (company towns, anyone?). The system as a whole may well be better served by having a systematic counterweight to maximizing short-term profits."
And again here:
"As you think about that, remember that there are other values in this world than maximizing short-term productivity, like treating people with dignity."
I will set aside, for a moment, the results of "company town" experiments like Chicago's Pullman district (though I think history suggests a conclusion very much at odds with the reader's romantic notion of such arrangements). More important is the question of what the "other values" that it is appropriate for a corporation to adopt are. It will doubtless come as no surprise to regular Going Private readers that I am at odds with the reader over the central question, which he (she?) obscures with the tyranny of the quarterlies miasma. There is a very dangerous modern trend to hold the corporation (usually by tasking the Board of Directors) accountable to the "stakeholders" (which is code for "shareholders plus." Usually, this starts off as "shareholders plus employees" but often progresses to "shareholders plus employees plus community" and eventually to "shareholders plus employees plus general public." This ignores two key issues.
First, corporations are simply no good at philanthropy. Nor should we want them to be. The central point of the separation of ownership and control is specialization. Giving to charity (and having ones gifts actually generate utility) is hard, laborious work. Do we want management spending the time to do this work?
Second, assigning any responsbility to the corporation other than to make a profit for the shareholders (be that short term or long term) is very dangerous. By what standard do we measure this obligation? Is the corporation beholden to the employees to provide employment? To the community to provide tax revenue and gainful employment to its residents? If so, shouldn't we take all modern tools away from the employees and instead provide them with a dull spoon for all tasks? Oh, I'm sure you might think that inefficient, but there are other values than the efficient direction of labor for the benefit of the shareholders- my dear friend. Afterall, in order to maintain the production schedule its clients demand, the corporation would quickly be the largest employer in the state. Now that sort of good corporate citizenship is hard to shake a stick at!