It’s the year 2008, several major banks have fallen and Richard Fuld looks on as his mighty reign comes to a crushing end. The mighty Lehman brothers, the sixth largest investment bank has fallen. Ben Bernanke, an astute ivy league trained Economist together with Timothy Geithner, New York Fed president and secretary to the Treasury Hank Paulson are in panic mode. The American economy has a deadly flu and is crumbling down like a house of cards while the rest of the world is catching a cold. How did we get here must have been the question doing the rounds in the FED corridors of power. It’s a question we are still asking ten years on. Theories have abounded over the past couple of years, movies made and conspiracy theories propagated, still we have been left with more questions than answers.
In my view, whatever caused the 2008 crush and the resulting anaemic growth we have witnessed is not one single factor but rather a combination of toxic ingredients that made a deadly cocktail. One of those ingredient was the deadly obsession with the PAT. The profit after tax. Profit after tax is not a new phenomenon, it is a timeless principle that dates back to the first merchants who sold goods in distant places for a profit. At some moment, it could have been the PBT (profit before tax), however with the introduction of organised government, it simply became the PAT.
Investor’s obsession with the PAT has always been varied over the centuries, however with the dawn of the 21st century, this obsession has reached alarming levels. A trend that has since continued to this day supported by the speculative markets and activist investors looking for instant success in the market. A cancer-like trend that however is damaging our economies with its short-term centric approach. In our era, the moment an executive makes that crowning moment of becoming CEO, there are only five shareholder words to the CEO, “more money in our pockets”, or you are off the door. It’s a phenomenon that is indoctrinating the most decent of CEOs because the pressure to maximise that magical number in the shortest possible time is simply too much. Gone are the days when the majority of CEOs set the foundation stone for their companies by investing in their various constituencies of people, products and society and thereby setting the tone for the long term success of the business. In our era, instant success is demanded not only by the shareholders but the Market as well as the rewards system in terms of bonuses and other remunerations are tied to the PAT. Therefore all eyes are set on the PAT and everything else is overlooked.
CEOs in their bid to keep their status have adapted to this new law of the jungle. It has given rise to a whole new concept, Financial Engineering; playing around with the numbers. It doesn’t even matter if the numbers are modest, if the CEO can expertly play with them, he becomes the new star on the block. Meanwhile, that “Builder” CEO setting the pace for long-term success is shunned by the market and investors. In the end, the rise of star financial engineers is killing entire economies. Economic growth demands addition to it, you can never grow an economy by sucking from it in a vampire-like kind of style. Consequently, obsessive focus on maximising the PAT in the shortest possible time has led to considerable reduction in value to the aforementioned constituencies and is altogether factoring into the slow anaemic global growth we have witnessed the past decade. This has meant value is being created speculatively and the whole system can only be interpreted as a fugazi; a system that is creating fake economies without any real substance and ready to crumble at a moments notice. According to Jack Welch as reported by the Financial Times in 2009, the obsession with short-term profits and share price gains that has dominated the corporate world for over 20 years was “the dumbest idea in the world”. Journalists and analysts world over couldn’t resist a dig at the man they had always dubbed the “godfather” of financial engineering during his hugely successful time at General Electric. Needless to say, this revelation couldn’t have come from a better person.
In a nutshell, the deadly obsession with PAT and the consequent rise of star financial engineers is a cancer that is slowly killing our economies and its time we took note and find a lasting treatment. It’s a cancer that has penetrated the psyche of investors and the markets, however it’s not too late to get back to the basics. One of those basics is bringing the model CEO back in our college curriculum and most importantly, in the c-suites; the model CEO is not the best financial engineer who comes in to skilfully play around with numbers. The model CEO is the “Builder” CEO who sets the tone for the long term success of the business by investing in people, products and society. Ultimately, the Economy is injected with the much needed dose of value. Real Value.
The author is an Economist, Writer and a Corporate Executive. All views expressed in this article are solely mine and do not represent the views of my employer, church and any other organisation am affiliated to.