Rethinking Return on Investment
February 8, 2021 (1,274 words)
Any home-grown small business person knows how to stay in the game over the long haul. It starts with a hardy constitution impervious to minor ailments. It usually involves a steady-running ‘motor’ that can cruise through even the longest hours. Then there is that heightened attention to detail. And a willingness to own up to mistakes and quickly learn from them.
As for financing, these ambitious penny-pinchers know how to make a little go a long way. They are old hands at delaying discretionary spending indefinitely. And they boldly risk what they do have in ways others would find daunting. Such as using their home as collateral for a business loan or a commercial line of credit, a move which can be found on page one of their playbook.
They’ve been known to draw on retirement savings when the need arises, or tap into the kids’ college fund in case of emergency. Getting creative to meet payroll and fund payables when times are tough is second nature.
All of the above also applies to those who swim with the sharks in the world of big business, except the financing part. When one is looking to ‘scale’ a business and be a ’market disrupter,’ the odd loan of ten or twenty grand from an old college roommate will only take one so far.
If the dream involves, say, a national roll-out with extensive manufacturing and distribution capabilities that run into the hundreds of millions of dollars to establish, well that sort of thing calls for a serious infusion of cash from people not intimately associated with the launch. The conventional term used to describe these strangers is “investor.”
The large scale commercial undertaking will require a correspondingly huge chunk of working capital. More often than not this comes from an outside source. It goes without saying the enterprise accepting such outside capital should be held accountable for how these funds are being spent. The investors’ reasonable demand for a return on investment exerts a much-needed discipline on what can sometimes be cockeyed optimism on the part of entrepreneurial souls given to swinging for the fences.
This aspect of the ‘investor dynamic’ is vitally important. Not even the largest companies with the best reputations deserve a blank check with ‘no strings attached,’ regardless of past success, or how good a new idea might look on paper. The business landscape is littered with colossal failures, even if those flops are quickly forgotten by the general public soon after their unexpected demise.
The phrase “many are called but few are chosen” may have biblical origins, but it applies in this context as well. The resiliency demanded of the small business person in sorting out his or her relatively minor problems pales in comparison to the epic logistical contradictions faced by those who chase business success on a grand scale.
Investment firms and financial institutions offering working capital and other forms of assistance to the business community provide the life-blood these businesses need to grow, while simultaneously establishing a measure of oversight designed to prevent excess and waste. This activity may not fit the traditional definition of altruism, but it certainly qualifies as a much-needed public service.
On the other hand, investment firms and financial institutions that sell working capital and other forms of assistance to the business community have already amassed great wealth for themselves, and are now pre-occupied with getting even richer.
This is not necessarily as off-putting as it sounds. It many respects the ongoing accumulation of wealth via capitalism is simply a by-product of being good at one’s job. Shrewd investors are adept at green-lighting the most promising start-ups, expansions, and acquisitions, the ones with a sound business plan and a solid management team place. (And less exposure to competition, I might add.) Proverbial “market forces” take over from there.
The only thing missing from the present arrangement is a sense of proportion. It’s as if the wealthy have all turned into “one trick ponies.” Their only benchmark is ‘profit’ and ‘maximizing return on investment.’ While both are essential to the proper functioning of the system, once success is achieved beyond anyone’s wildest dreams, room should be made for other societal considerations. Chief among those considerations should be promoting the dignity and well-being of the rank-in-file employed by these huge conglomerates. That would start with increasing their compensation, not conducting “team building” exercises and posting “associate of the month” placards.
Our vast and complicated economic engine generates a ton of opportunity, and is a beautiful thing to behold. But those at the top can lose touch with the anonymous masses who report to work each day and put their shoulder to plow. It’s way too easy for the detached observer to evaluate a business solely in terms of its numbers, and forget the multitudes responsible for generating those eye-popping numbers in the first place. Unfortunately our investor class suffers from a bad case of “out of sight, out of mind.” From the perspective of the arm chair quarterback, why not try to maximize return? Why not try and turn that ‘5’ into an ‘8’ – or even into a ’10’?
The financial industry may well have its share of individuals who possess a sense of social responsibility. Unfortunately the pragmatic machinations of the ‘investor dynamic’ mitigate against such empathy ever rearing its ugly head during heated negotiations.
The social detachment that fuels the ‘maximize return on investment’ mentality expresses itself in many ways. One of the most obvious and readily accessible is the current debate over whether to raise the minimum wage.
The argument against raising the minimum wage centers on the negative impact such an edict would have on the business community, especially the small business community. We are told raising this “minimum” would result in a net jobs loss for entry level and low-wage workers, since employers who count on this segment of the workforce could not afford to pay the higher rate. Thus raising the minimum wage would actually hurt the very people proponents of the initiative are trying to help.
“Scholars” who earn hundreds of thousands of dollars a year while toiling at prestigious privately-funded “research foundations” routinely produce reams of statistics which they claim prove this point beyond a shadow of a doubt.
But what of our largest conglomerates, earning tens of millions in profit per quarter? It seems to me the management imperative that keeps our most successful corporations from increasing compensation for those on the lower rungs of the pay scale has to do with the potential negative impact such an increase would have on investor demands for the highest return possible.
Yes, I am familiar with how corporate profits help fund the pensions of all manner of not-so-wealthy working people who are invested in the market, and who are counting on their modest retirement accounts to grow in value annually, so as to avoid finding themselves destitute in their old age.
While this is certainly the case, it should also be noted inflation is the reason people of modest means have to fear for their retirement in the first place. Why is there inflation, and who benefits from it?
Since 1% of the population controls 50% of the stock market, there is no dodging the fact most of the ‘excess’ profit generated by keeping the lid on wages is going to those who already have more money than they know what to do with. Our best and brightest (and most financially blessed) should be rethinking their notion of return on investment, and trying to recalibrate this equation in the direction of “justice for all.”
Robert J. Cavanaugh, Jr
February 8, 2021