WIIFM

By R. Lane Farmer, MBA, Founder of Bromley Business Consultants

Business Consultant R. Lane Farmer once had a distributor working for him that constantly disrupted meetings, created friction among teammates and alienated customers. For months Farmer struggled to understand the salesman’s motivation for being so single minded until one day, the antagonistic salesman asked Farmer to retrieve a lost password for him—“WIIFM.” “What’s In It For Me,” the salesman confessed to Farmer and a little light went off in Farmer’s head

It would be hard to imagine anyone in America who has not heard about the financial crisis or formed an opinion about the cause. I’ve studied this phenomenon since 2007, reading hundreds of papers, articles, books, and editorials about the real cause. Every one of these esteemed journalists got part of the problem right. The problem is that none of them really ran the rabbit to the hole; preferring instead to stop when a controversial issue was uncovered.

The list of egregious causes is long:

  •  Repeal of legislation like the Glass-Steagall Act (1933) that allowed commercial banks to enter into the world of investment banking
  •  Exorbitant executive bonuses that consumed the companies entire profit base
  •  Not enough regulation, too much regulation, and or ineffective regulation
  •  Corporate greed or “big business”
  •  Wall Street greed
  •  Government intrusion by the likes of Fannie Mae and Freddie Mac. Noble prize winning economist Harry Markowitz, flatly stated that had the government not interfered in the lending practices of these two organizations we would not have a mortgage crisis
  •  Bonuses that encouraged executives to take ridiculous risks. Remember AIG and the credit default swaps
  •  Too-big-to-fail policies. Why worry when you know the government won’t let you fail?

Certainly the responsibility is shared between these factors, but the real problem runs deeper. It’s all about greed, but not the type we care to acknowledge. It’s not corporate greed, Wall Street greed, or even political greed. It’s greed that starts at the breakfast tables of America and breeds on internet investing forums. It taunts us from highway billboards suggesting that the lottery is a reasonable investment. This type of greed has its genesis in the American ideal that we are indeed “the land of opportunity.”

 

A few generations back people considered opportunity to be the ability to own a home, or maybe start a small business to pass along to their children. Perhaps even send their kids to an Ivy League school and maybe one day get invited to the Tonight Show after they found the cure for some debilitating disease. Today the paradigm has shifted. Modern Americans consider opportunity the chance to buy a house too big for their needs, beyond their ability to sustain financially, and sell it in a few short months for a huge profit. Still others look to litigious opportunity, filing lawsuits for even minor grievances with the goal of realizing a financial windfall. Spilling a cup of criminally hot coffee or slipping on a local supermarket floor are the directional coordinates to Easy Street.

But what about those folks who put every dime into safe fixed investments like bonds or income opportunities like dividend paying stocks? What does such an investor do when that company’s quarterly returns go south for a period? Selling the poorly performing stock and replacing it with others that pay higher dividends is what investment advisors call “chasing the quarterly return.” That’s not greed, that’s just good business….or is it?

Most corporations today finance their expansion in two principal ways; through debt such as bonds and bank loans, or through selling stock (equity), or a combination of both. It’s cheaper in the long run to finance expansion using bonds, where a company simply issues a debt instrument and pays the bond holder a fixed annual return. The better the company’s bond rating, the lower the interest rate the company will have to pay bond holders. If they sell stock, they give away not only a piece of the company but a vote on how it is managed. To circumvent this, corporations sell preferred stock which typically has no voting rights but pays a quarterly dividend that holds preference over other stock holders.

Baby boomers, retirees and investors with a low tolerance for risk flock to preferred stock ownership. The net result is that investors can and do force companies to focus on quarterly returns as opposed to more stable, long-term strategies. If this pressure to produce short-term profits makes corporations obviously less sustainable, why do investors continue to demand ever-increasing returns? Simply put, we have become a nation focused on today; living under the idealistic belief that tomorrow will take care of itself.

How many Americans shop at Wal-Mart because of the ambience? It’s the allure of saving a few dollars that makes discount operators like Wal-Mart thrive. Where is the consideration for our neighbor’s small hardware store or the local pharmacy driven out of business by the very corporations American’s pretend to loathe? Our greed and fascination with low prices creates the beast that haunts our reality.

Foundational rhetoric aside, what can Americans do to subvert this dominate paradigm? We can start by investing in sustainable companies that practice environmental consciousness, adhere to ethical practices, and promote transparency and responsible behavior by corporate executives. Key to this is the understanding that Wall Street is nothing more than an engine that operates at the speed investor’s demand. Corporations respond to the demands of investors, so quit demanding only quarterly returns and reward strategic thinking. Encourage executives to build companies that survive many generations and avoid the deleterious effects of lawsuits. Purchase common stock that has voting rights and encourage corporate leadership to develop programs that hold executives financially responsible for the company’s failure by incorporating vesting schedules into bonuses.

Discourage risky behavior by executives and punish it. The notion that “profits remain privatized while losses are socialized” must be forever changed.

Remember the large institutional investors (mutual funds, pensions, and annuities) are nothing more than a collection of millions of smaller investors pooling their money. The fund managers will seek investments that fulfill the needs of their investors. The problem started at the kitchen tables of America and the solution should come from the same place. Relying on Washington to devise regulation that save us all is a little like allowing the foxes to decide the best way to guard the hen house.