Many to Blame for Trouble in Stock Market
Increasing evidence of widespread misuse of inside information by major figures in the stock market has raised anew the issue of how the market has been operating and what impact it is having on corporate America.
Business leaders admit to a preoccupation with short-term profits. They blame that preoccupation on the market and those who dominate it. It is a valid complaint but one that overlooks the role that corporate leaders themselves have played in recent years in making Wall Street behave the way it does.
The business community argues that much of the stock of major corporations is now held by big institutional traders--especially pension funds--looking for quick gains in the market. Companies are forced to keep profits growing rapidly just so these investors won’t dump their stock. Add to that the activities of corporate raiders, looking around for undervalued stocks, and company executives find themselves under intense pressure to sacrifice future gains for what can be pumped into current earnings.
Dramatic Changes
What the community doesn’t say, however, is that corporate management has been among those influencing big investors to overemphasize short-term results. It is an activity that is self-defeating for companies and investors.
Wherever the blame lies, it is clear that the market has changed dramatically over the past 25 years. Some experts have expressed strong concerns about the fact that as much as three-fourths of stock-trading activity now is conducted by professional investors, vastly reducing the role of the general public. The fear has been that the professionals can unduly influence stock prices because decisions to buy and sell are being made by too few people.
The insider trading cases, while not yet an indictment of Wall Street generally, serve to spotlight how this undue influence can translate into real abuse.
The seeds of this change in the market were sown in the 1960s, when the expansion of corporate employee benefit programs began to create huge pools of pension fund money that had to be invested. Competition grew among banks, insurance companies, mutual fund organizations and others to manage these funds. Mutual funds also became popular with smaller investors.
Rapid Growth the Goal
This new competition sparked a major change in the way most managers of big funds saw their role as investors. Rather than buying blue-chip stocks and sitting on them, they began seeking ways to make their portfolios grow more rapidly. That meant taking more risks. It also meant buying and selling stocks on a day-to-day basis. Hence, where pension funds were turning over as little as 12% of their holdings annually in 1960, the figure now is well over 50%--and some big funds are doing it a lot more than that.
Out of this activity has grown the pressure on big companies to hype profits or be ignored by the big funds. It is also this concentration on “performance,” as it is called, that helps corporate raiders accumulate the shares of target companies so easily. Big funds are anxious to sell and make a quick profit when a target company’s stock is bid up.
It is disingenuous of corporate executives, however, to blame the pressure they feel on the stock market. They, too, have been caught up in the performance game, and it is they as much as anyone who are putting pressure on the managers of their own companies’ pension funds to make the portfolio grow as fast as possible.
They do it because the growth reduces pension costs. Stock market appreciation substitutes for some of the contribution the company would otherwise have to make each year to the pension fund. The savings go into current profits.
The fallacy of this performance stuff ought to be apparent. To the extent that companies are hyping profits at tomorrow’s expense, stock prices themselves are being hyped. That doesn’t bode well for the long-term growth of the pension funds. Hence, the beneficiaries of those funds, the employees of the companies, aren’t being served well at all.
