Research Out of Motion

Posted on Aug 23, 2013 | 4 Comments

We’re not here to pick on BlackBerry.

Okay, we are.

Writing in the New York TimesFloyd Norris takes aim at the company formerly known as Research in Motion and finds fault with something not directly related to changing technology.  Norris writes that while BlackBerry had a high stock value and profits in 2008 and 2009, shareholders received no payout.

Instead, the company spent $3.5 billion on share buybacks.  Buybacks happen all the time, Norris notes, but BlackBerry stands out “in the way it abused the rules on executive stock options”  and  “gave the company’s executives good reasons to avoid dividends and concentrate on share buybacks.” If a stock price declines, options are worthless — whereas if you can goose the market with some massive buybacks, then option holders are happy.

All of this, he writes, “had a big effect on the resources available to the company for other purposes, like spending on research and development.” It also punished loyal shareholders. Norris suggests restricted stock grants might do a “better job of aligning executive interests with those of shareholders.”

Peter Drucker took a dim view of stock options in general. For one thing, he considered “golden handcuffs” to be bad policy, often causing employees who would prefer to leave to stay  — and feel demoralized. For another, as we’ve noted, Drucker felt stock options encouraged destructive short-term thinking.

Diagram-myopia

Diagram of a nearsighted/myopic eye.

He also would probably have agreed that some of BlackBerry’s billions could have been better spent on research, precisely because its inventions had such a hold on the market for a while. “The research budget must be higher after the innovation has successfully been accomplished than it was before,” Drucker wrote in Innovation and Entrepreneurship. “New uses have to be found; new customers must be identified, and persuaded to try the new materials.”

Drucker didn’t feel shareholders should be the sole stakeholders to be satisfied, either. As we’ve noted, he believed the objective of management should be to maximize the wealth-producing capacity of the enterprise. The question was how to get the rules and incentives in place to make that happen.  “The one thing that we in the United States have yet to work out is how to build the new definition of management accountability into an institutional structure,” Drucker wrote in Managing for the Future.

What do you think should be done to encourage better long-term thinking in management?

4 Comments

  1. MMG News
    August 23, 2013

    Drucker once said ‘Stock options enable executives to loot the corporation. Instead of focusing on performance, they ask ‘how are we doing today?’. Obviously the we refers to the price of stock.

    As far as the former RIM is concerned, apart from what is said in this excellent paper, the arrogance, complacency, ego, avarice and greed of the earlier management, played their roles in its downfall.

    Reply
  2. Mike Grayson
    August 24, 2013

    A smart manager of a publicly traded company is aware that stockholders expectations are always short term, even though they may say otherwise. It is easily seen in their actions by how quickly stocks are sold at the slightest hint of less than stellar short term results.

    Given that, a manager should be encouraged to strike a balance between the short term and long term, with special emphasis on innovation, but not at the sacrifice of the shareholders. That is a lesson that Steve Jobs learned the hard way because at one time he spent too much on R&D, and is a lesson that I think Blackberry has yet to learn because they’ve done too little.

    The balance sheet is the primary tool that can be used to strike that balance.

    Reply
  3. Maverick 18
    August 25, 2013

    The premise that management doesn’t engage in log-term thinking, or does so insufficiently is a fallacy. The real issue is how to get management to not optimize based on short run results. The problem lies with BoDs and shareholders who over reward top management based almost solely on annual statistics. Step 1: Top management compensation should be reasonable in relation to the entire management team. Step 2: The entire management team needs to be compensated based on the long term profitability of the enterprise. Step 3: Annual and special bonuses should be based on a mix of individual and team performance, adjusted to negate the effect of short term anomalies that really do no reflect performance.

    Most importantly, BoDs and top management need to engage in long term planning and review short term results with reference to a moving 5-year or longer plan. Both planning and compensation schemes remain more art than science. I am always amused by critics who have never managed an enterprise, given a performance review or explained the award or non-award of an annual bonus.

    Reply
  4. mitchell benjamin
    August 26, 2013

    Hmmmm, “encouraging better long term thinking” – implies common sense, or does it?

    Greed is a common characteristic of many BoD’s –

    Stock companies want to make money, for whom? Their stockholders or themselves? Most large corporations operates similarly to government entities…with little or no accountability… and with little emphasis on the majority of stockholders.

    When any large organization reaches the “no accountability” stage, the “little guys” (stockholders, customers, etc.,) eventually lose! Blackberry is no exception. In the long term, who benefited from the .com billionaire’s creations? Where are they now?

    Reply

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