Comment by margalabargala
2 years ago
Stock price gains.
Fire all the longest-tenured, highest-salaried employees. Now you have a company that appears to look similar but with millions of dollars fewer per year in headcount expenses.
Boeing's stock price went up 10x in the time frame covered by the article. The people responsible for gutting the company have cashed out.
>Boeing's stock price went up 10x in the time frame covered by the article. The people responsible for gutting the company have cashed out.
Why does the stock market reward idiot shit like this?
I've seen the same whit a a large US semiconductor company. In the 2008 crunch, the fired the most tenured employees and offshored the work abroad. Granted, the company didn't fail, their stock went up and now it's 5-7x that amount.
> Why does the stock market reward idiot shit like this?
Well at a first order, the answer is that the stock market as a system for promoting value creation is an imperfect approximation of an ideal value creator, and more and more we are beginning to see the myriad of ways this concept produces antisocial results. (See for example the state of hospitals and schools, and the rising rate of individuals with crippling medical and college debt.)
More directly there has been some criticism of the stock market for rewarding short term gain over long term value, which among other things has led to the creation of the Long Term Stock Exchange:
https://en.wikipedia.org/wiki/Long-Term_Stock_Exchange
I should add that our short term market-based approach to economic activity fails to produce appropriate housing outcomes, and that the approaches in Vienna or Singapore could end our homelessness crisis and make everyone happier. I recently read a doctor’s account of the homeless people who use the ER as a community space by complaining of minor illnesses, and it seems so clear to me it would be cheaper to give them small private subsidized housing (not the awful and alienating “shelters” that offer no privacy or storage and have strict rules, making the street more appealing). Fixing housing could be cheaper than them using the ER or paying for their prison space, and it would also make the streets of San Francisco smell a LOOOT better (and BART), but our short term market based system just chops up everything good, sells it for parts, and speculates on all the land and buildings.
https://www.shareable.net/public-housing-works-lessons-from-...
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Hospitals and schools don’t support this thesis: in the USA, the bulk of the operators in both segments are either governments or non-profits.
> the stock market as a system for promoting value creation is an imperfect approximation of an ideal value creator
yet
> See for example the state of hospitals and schools, and the rising rate of individuals with crippling medical and college debt.
Ummmm. State hospitals and schools are not traded on our stock exchanges. If there's a failure here, it's not with equities markets.
There's an obvious common denominator between the examples you give, and that these are the most highly-regulated industries in America. My first guess as to where to lay blame would be on those regulations - although we'd really need to dig into whatever the specific failures you're thinking of, if we want to be sure.
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Because the entire rewards system is built around short-medium term financial gains.
It is a very old story. People build a company with deep knowledge and caring about what actually makes great products. Financial managers get involved to manage the money aspects of the business. Financial types want a lot more control to make the company more profitable.
The financial management has no actual clue what makes the company valuable. They only know what makes more or less cash flow in this or that direction. But, credit where due, they DO know how to make that work.
They start financially 'engineering' the company for near-term profits and higher stock prices. This works. This works fantastically well. Everything looks leaner, teams of younger workers are sometimes orders of magnitude cheaper than the highly experienced teams, and no one can tell the difference from outside. Profits are higher, stock prices hit record high after record high. Cash is spent on stock buybacks and not R&D or retaining institutional knowledge. Warning flags start showing up in product and service quality indicators, but are ignored and even suppressed. The problems start multiplying at increasing rates, then exponentially increasing rates.
Eventually, it starts to get serious. But by then, the "financial geniuses" have long since cashed out and the core of the company's workforce, ethos, and institutional knowledge has been so gutted that there is no recovery. The death spiral starts in earnest.
The only questions are whether for Boeing, being a critical keystone in the US aerospace and defense industry can or will be allowed to fail, and, if not, if there will be an actual engineering-based turnaround, or if it will be a Soviet-like zombie company for how many years?
Forkin' MBAs, they'll kill it every time.
Because, depressingly, the stock market is correct.
Boeing is one of two manufacturers for planes of this size. The other is totally backlogged with orders. The stock market has assessed, correctly, that Boeing can withstand this loss of knowledge and keep generating profit. Does it result in shit equipment that literally kills people? Sure. But how many people are going to stop flying because of it? Not many. Throw in the lucrative military connections and you’ve got yourself a sure bet.
I think that many of the managers honestly didn’t understand where the quality and safety came from. They probably thought that they could just coast and the quality would continue.
As a counterpoint, I work at very large financial firm in technology and in general, the 20+ year veterans who’ve been here forever are terrible. They are hidebound in their actions, years behind in industry best practices and they maintain little fiefdoms simply because of their intimate knowledge of the banks arcane and idiosyncratic policies. The place would be better of without the bulk of them.
That is to say we are the complete opposite of what Boeing was. But the most charitable interpretation you could offer the Boeing management is that they thought they were in the situation of my company rather than the situation they actually had.
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People won't stop flying until they do - or at least stop flying on Boeing aircraft. And if airlines can't make a profit on a Boeing aircraft flight, there won't be any more Boeing aircraft flights.
I don't know whether the point where the market for Boeing aircraft travel is one disaster away or ten disasters away, but it is out there. When it comes, people won't stop flying, but they will fly less, and it will cost more. It can happen.
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I'm not getting on a Boeing plane again. More on principle than fear of my life. And yeah, I'm probably in a group that is not statistically important.
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Because if you look at it by the numbers, expenses went down whilst output remained. If you’re an investor that investigates annual reports on finances, this would pique your interest. There is no way to price the talent and knowledge of your workforce until after they have left.
I really like that last sentence. 'There is no way to price the talent and knowledge of your workforce until after they have left.' I think that captures so much in such a simple to understand way.
> Why does the stock market reward idiot shit like this?
Goodhart’s law, unfortunately. Whatever metric the stock market rewards gets gamed like there is no tomorrow (or next quarter, here.)
Yup. In the incentives align to motivate you to play the current game of the day. Another example I can think of. Google search has sucked for awhile now. Some people pin it directly on to Google, but I think its much broader than that. There is an entire cottage industry around around gaming whatever Google does to improve search. Its a cat and mouse game. Google tries to implement a new pattern that will punish people gaming SEO, the people gaming SEO learn the new pattern and adjust for it, and we are back where we are.
In both cases of the stock market and a popular search engine, I don't really know if there is a solution that prevents people from trying to game it.
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Because the market is barely better than a ponzi scheme.
There's ___just___ enough laws around it to keep people somewhat okay with it.
That’s nonsense.
Markets are the best way we’ve come up with to allocate capital. Committees and commissars do not do a better job.
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>Why does the stock market reward idiot shit like this?
Because Boeing is in an absolutely unique position where they are part of a duopoly in a market where demand for airplanes massively outstrips supply. Boeing's customers have no alternative and Boeing will be selling them planes and the market knows that.
Additionally the stock market can only look a tangible results. There is no measure of "engineering competency" which you could track year over year, which makes these mistakes hard to realize unless you are inside the system.
The stock market is all about near-term gains, and as a result it is often irrational and rewards destructive behavior.
Because the MBAs and financiers have taken everything over and are working their way through our government now.
> Why does the stock market reward idiot shit like this?
Wall St geniuses are not engineers.
That said, I bought Boeing stock and held over that time frame. I did so because I could see that humans were going to need more planes over the long term, and there are only two vendors. Also I visited the Everett plant with my family on vacation. It didn't occur to me that it would be worthwhile introducing KPI BS and McDonald's management style when constructing things worth 100 million and safety-critical.
Quite simply because investors are often chasing after money only (ie profitability), not necessarily a company's productivity or product quality. And the quicker the profits the better (meaning short term is valued over long term).
Additionally, not all investors are savvy on what's going on with companies, so they decide to invest in ETFs (which mind you, is now the lion's share of investment activity). Now not all ETFs are the same basket of stocks. Some may have 15 stocks, whereas others may consist of 50. This is done so people can "choose their risk tolerance", which is calculated based on various things such as how diversified the fund is (50 stocks is more diversified than 15), what the market caps of the companies are, etc. Anyhow, the point is, choosing to invest in said investment vehicles, has little to do with investing based upon fundamentals, or rewarding productive companies, and more to do with managing a person's personal investment risk. The result? Companies are detached from fundamentals because, quite literally, the majority of investors are not investing based on fundamentals, but based on risk.
> Why does the stock market reward idiot shit like this?
I don’t think the market rewards it, at least not by itself.
The problem is that the real money isn’t in the market, the institutional investors make most of their money on commissions. So while short term gains are a nice bonus, it’s only secondary to driving volatility and with it trade volume. So the incentive is to just stir shit up, because that’s what makes them money, both as stock prices go up and down.
Also institutional investors have disproportionate voting power that lets them put their own shit stirrers on the board and subsequently in the C-suite.
Few stock market investors bother to look beneath top line numbers like profits, revenue growth, etc. Number go up, so stock goes up.
They're exploiting the uninformed, which in this case are retail investors.
> Why does the stock market reward idiot shit like this?
Because Boeing boosted revenue from $60 to 101 billion during the time frame. And had just a single competitor.
The current stock price is less than half of its 2019 peak.
For the same reason that Ponzi schemes are so successful.
> Why does the stock market reward idiot shit like this?
Because as someone buying stock, I have no idea whether these kinds of things are right and necessary to reduce bloat and redundancies in the firm, or idiotic and self-destructive.
All I know is that I probably want to be buying stock in firms that are more profitable, as opposed to less profitable. Or, at least, firms that other people think are going to be more profitable.
I blame index funds. Pump the % gain, index funds buy it up because it looks like a better ROI. Abuse that by doing short term shit and ride the wave of self fulfilling prophecy by the index funds buying into it (amplifying noise into a signal) and leave retail/workers holding the bags.
I get that statistically DIY'ing your portfolio will almost always lead to worse returns but I really do wish I could exclude certain stocks from my index funds.
1) That's not how index funds work: they attempt to track a target market index. At most, it happens indirectly: get your company into the major indices by a short-sighted depletion of capital, and you can get some level of lift from index funds blindly purchasing your stock (though IIRC it's not a huge effect).
2) You can effectively remove certain companies from an index using derivatives in addition to the index fund. Alternatively, look into direct indexing, where you attempt to track an index by directly owning an appropriately weighted basket of stocks, though it tends to be more complicated, have greater tracking errors, and have higher fees.
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Index funds do not buy shares because shares “look like a better ROI”. Index funds buy because non index funds buy (and same with selling).
I don't think the timing adds up for this explanation. Friedman introduced the shareholder value doctrine in 1970, and Jack Welch's Pierre Hotel speech that kicked off the era of slash-and-burn management was in 1981. Meanwhile, index funds were a tiny fraction of assets under management until well into the 2000s.
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It seems like this is the same pattern that we've seen happen more broadly in the tech industry over the past year--the big tech companies think they can juice the bottom line by reducing headcount, and the increased profitability will outweigh any negative impact on their engineering performance. It's a perverse incentive that seems very difficult to turn around once it starts happening.
> millions of dollars fewer per year in headcount expenses.
I don't know how much they saved by forcing out highly-paid employees, but it was a tiny amount compared to the 40 billion in additional revenue earned between 2008 and 2018 (60 to 101 billion). The stock market rewarded the company primarily because of the revenue gains.
How about eliminate your employees to pump up the stock selling price or whatever and instead of removing the best subordinates, keep them, give them automation capabilities, and remove the unintelligent dross?
That's much better than basically destroying your own company because you don't know how to progress forward and upward. This privilege is reserved for the few who can I guess.
This is what Google is actively doing. The layoffs continue and they are culling the most senior employees.
The only thing that seems to work nowadays is name-and-shame (unless you run for president, apparently).
Who are these folks that deserve to be outted for gutting an American institution? I'm sure they're still around, practicing their strain of vulture capitalism.
UPDATE:
Looks like the article points out the following main culprits: * Jim McNerney * Dave Calhoun