Analyst driven: Wall Street is the tail wagging the dog

If you study successful companies from other industrial nations, you'll find that they generally have been in business a long time. Their performance, when measured over a period of time, can be characterized as steady, gradual growth. Any updating of their mode of operation -- should it be necessary -- is carefully planned to create the least amount of upheaval.

Steady, gradual change, the least amount of upheaval, are words that don't seem to fit the recent actions of many American companies with their restructuring, buyouts, mergers, layoffs, and other financial manipulations. When you talk about long-term objectives, they don't exist with these companies. They seem to be driven by Wall Street gurus whose analysis are treated like sacrosanct documents. While these gurus may be outstanding scholars and super intellects, they lack any real business sense. Their knowledge of business is limited to manipulating numbers.

It seems that a new CEO coming into a company feels that it's absolutely essential that he make some sort of massive change -- in spite of the fact the company may be doing very well.. These actions are always supported by some profound, complex strategy that looks good on paper, but after a lot of wasted time and money, it's generally quietly discarded. We have an old saying in manufacturing, "You can draw a toilet on paper, but you can't flush it."

The costs of these escapades are declared as temporary, one-time transition costs, and consequently should be ignored when looking at profit-and-loss statements. These transitions could take a number of years, and in the meantime company attention is diverted from its actual business. Foreign companies are not burdened with all this monkey business and can concentrate on improving their efficiency, making productivity improvements and refining their product line.

It wasn't long ago that American companies operated the same way. What changed? For one thing, the stockholders became very dissatisfied with big executive bonuses while nothing much was happening to their stock prices.

Someone decided to tie executive bonuses to the price of the stock via stock options. If the executive thought his actions could make the price of stock go up, he could cash in at a considerable profit. This changed the whole ball game.

Add to this mix the stock analysts and their predictions. How many times have you seen company earnings come at 64 cents a share and the prediction was 65 cents? The stock price drops like a ton of bricks. Nobody seems to question the validity of these predictions.

Analysts also like the dramatic, such as restructuring or selling pieces of the company, laying off lots of people, expanding, downsizing, buying or merging with other companies.

The whole game has become almost predictable. A company decides to expand and buys one company after another. Even if it has to borrow the money, it keeps on expanding. The analysts eat this up, and stock prices go up.

After awhile, the company becomes so bloated that earnings drop, the analysts become disenchanted and stock prices drop. The company reverses its course and begins to downsize. Back to the core business, the analysts are again elated, and stock prices go up.

Nobody seems to care about the effects that this churning has on people within the company. How can they focus on the business when they're continually worrying where they are going to end up?

The current operating environment where management actions are so dominated by stock prices and analysts' predictions will in the long run undermine the viability of a company. Why do you need dramatic changes anyway? What's wrong with flat or gradual growth? Then you can concentrate on improving efficiency, productivity and refining your products.