Four of Keene’s innovative independents were purchased by large, publicly-held corporations in 1990, 1997, 2000 and in 2006, after which the innovative atmosphere inside started to lose steam. Why would new corporate ownership tend to change the pace of innovation? Our class read some William Lazonick’s discussion of distortions caused by incentives such as stock options and stock buybacks. For corporations which list their shares on the stock market, we considered the negative effects of the shareholder value paradigm. Here’s what the students had to say after doing this reading:
Financial engineering is simply making money off the company without having to make a product and really started in the late 1980s..Jesse labarre
Stock options are a form of payment made up of shares in the firm’s stock. It allows the firm executive to purchase a stock at a set price. If the set price is above the market price, then the option is not a good deal. But if the market price is above the option price, then the executive is purchasing the share for a reduced amount. This practice would easily incentivize an executive to concentrate on raising the share price and possibly neglect other areas of the company.–Virginia Van Zandt.
Timken focused on the short term success of the five year return on shareholder value and the employees got the short end of the stick when the share price wasn’t doing well. At the surface, financial engineering strategies seem as if they will generate large sums of money for the company, but when you look at what happened at Timken, you see that financial engineering destroyed the company from the inside out.—Lindsey Ljungberg
Having multiple products for multiple markets was a smart strategy adopted by Timken to not get affected by share price decline from one market. However, the strategy created disconnection between the headquarters and the different plants around the world. The 1997 financial crisis in Asia caused Timken to contract in Astia and EAstern Europe. With the US recession in 2001, Timken laid off at its plants in the US, and expanded in the global market. Despite the recession, the five year return to Timken shareholders fell only 10%. Yet most of the capital gains in the stock market did not finance US business activity, but financed instead households of those holding shares.Puja thapa