At The Margins

     “A corporation has neither a soul to be damned nor a body to be kicked.” – maxim cited by Isabel Paterson

     Via John Hinderaker comes this James Kunstler piece on “wokeism.” He opens with a blast against “corporate wokeists:”

     What were the execs of these mighty companies thinking — these knights of the boardroom, these capitalist geniuses, these moral nonpareils — when they cancelled Atlanta’s turn to host the midsummer All-star Game to “protest” Georgia’s passage of a law that requires voter ID? Surely that they were striking a righteous blow against systemic racism. And then, the rest of the world realized — almost immediately — that Major League Baseball requires online ticket buyers to show ID when they pick up their tickets at any stadium… and that Delta Airlines requires passengers to show ID (duh) before being allowed to fly in one of their airplanes… and that various other corporations snookered into this latest hustle such as Nike, Coca-Cola, and Calvin Klein support forced labor in the Asian nations that manufacture their products.

     I hope Mr. Kunstler doesn’t seriously think the corporations he cites are motivated by moral indignation or (God help us all) “social justice.” Corporations and their top managements are utterly uninterested in such things. Whatever their public posturing, their focus is always on “the bottom line” – and that’s where it belongs. Their problem isn’t a profit-oriented focus but the nearness of their time horizons.

     The publicly traded corporation has a curious control structure that renders it vulnerable to certain species of panics. “Within the company’s walls,” authority rises from the bottom, “grunt level” employees, who have practically no influence over business decisions, through steady increments up to the chief executive officer, who has practically unlimited authority. But that pyramidal structure is counterpoised to a short inverted pyramid: a Board of Directors that answers to the stockholders.

     It’s commonplace for a company’s Directors and those in its top layers of management to possess significant amounts of the company’s stock. That makes them sensitive to fluctuations in the stock price. In our time, adverse publicity, including slanders, moral castigations, threats of boycotts, and so forth can cause severe fluctuations in the price of a company’s stock. Even the most hardheaded of stockholders, entirely unaffected by such calumnies and threats, cannot fail to take note of changes in the company’s revenues and profits – and such changes occur at the margin of the company’s business.

     In our time, mutual funds are the most important stockholders of all. Huge amounts of corporate stock are held by mutual funds. The managers of those funds are continuously alert to changes in the revenues and profits of the corporations in their funds’ portfolios. They trade in huge quantities, which makes them multipliers and magnifiers of price fluctuations. It gives them influence over stock prices beyond anything that’s ever existed before.

     When a small but militant minority mounts an attack on a publicly traded company, and some small fraction of the company’s business appears threatened, the mutual funds sometimes “jump in” – in defense of their clients’ interests, of course – and make matters much worse. Corporate managements are aware of this. It’s among their greatest fears.

     As a result, companies whose managements elect to kowtow to the “woke” militants are often acting in what they believe to be the best interests of their stockholders…which group is likely to include themselves. By defending the vulnerable margin of their business – which is usually quite small, seldom larger than one or two percent – they’re attempting to avert the disproportionate fall of their stock price, and of their overall valuation, that would result should mutual fund managers get into the act.

     Yes, it’s short-term thinking…but today, so much stock market activity is driven by short-term considerations that it’s a natural reaction. Differences that occur at the margins of business drive everything else about the capital markets.

     Can it be fixed? I rather doubt it. Short-term decision-making has become widespread. Too many people are looking for a “quick killing.” It’s been that way since 1971, when Richard Nixon severed the last of the bindings between the dollar and gold. Given the spending proclivities of the federal government, those bindings are unlikely to be recreated any time soon.