Import export companies’ long-term growth is being jeopardized by impatient stockholders

09/02/2016

Import-export companies' long-term growth is being threatened by impatient stockholders

Import-export companies' long-term growth is being threatened by impatient stockholders

The short term investor rules the international stock market. Increasingly, outspoken activist shareholders on the lookout for dividends and higher stock earnings amongst a culture of instant gratification permeate today’s global boardrooms.

Forget the annual report: these days, shareholders’ decisions often hinge on financial analysts‘ quarterly financial expectations – and, with perks, jobs and bonuses at stake, more and more senior executives are unable to ignore them.

Twenty-six percent of CFOs said they’d make a moderate or large economic sacrifice—for example, cutting R&D or marketing below optimal levels—to meet Wall Street’s quarterly earnings expectations.

In the pursuit of greater quarterly earnings, publicly owned import export companies jeopardize their long-term future in two key ways: sacrificing talented, full-time employees for cheaper, part-time or flexible workers, and choosing unsustainable, unwise pricing and supplier agreements for the greatest immediate dividend.

The changing supply chain employment model

When a company or corporation focuses on engineering efficiency or technical efficiency, which is using the least number of inputs in manufacturing and supply chain management, this is known as “lean manufacturing” and “just-in-time delivery”.

The CEO is rewarded with a bonus and higher stock earnings.

Increasing efficiency is not in and of itself harmful, but is it still wise when it comes at the expense of your most experienced and knowledgeable supply chain employees?

The World employment and social outlook 2015: The changing nature of jobs reveals a shift away from the standard employment model, in which the workers earn wages and salaries in a dependent employment relationship vis-à-vis their employers, have stable jobs, and work full time.

In advanced economies, the standard employment model is less and less dominant. In emerging and developing economies, there has been some strengthening of employment contracts and relationships, but informal employment continues to be common in many countries.

At the bottom of global supply chains, very short-term contracts, irregular hours and casual, part-time, seasonal and contract workers are becoming more widespread.

This has greatly contributed to the “gig economy” – the one night stand where there are no permanent positions, no benefits, and workers are taking on two or three jobs to pay for their food, clothing, and shelter, plus the subset utilities and taxes.

Today, the trend is only exacerbated by media speculation and stockholder concerns. The media begins mentioning the massive corporate end-of-year layoffs as early as October. This often has a harmful effect on retail sales.

It is hard to meet projections when there is job uncertainty. The stores might be decorated for the holiday season, but there will be fewer people spending money on discretionary purchases, and thus fewer people keeping their full-time jobs come January.

The pressure has now increased to provoke even profitable companies to cut full-time jobs in an effort to please shareholders.

Telus will cut 1,500 jobs over the next few quarters to trim costs, yet their profits are up. The company announced they would raise their dividend payments by 5 percent beginning in January.

This a stark example of how a corporation will prioritize short term investors by increasing dividend payments and becoming “efficient” through major job cuts.

Supply chain disruptions lower company stock values

This trend is then further compounded by the inherent instability that lies in the supply chain industry for many companies. Supply chains are in constant flux because transportation costs can change suddenly due to a number of events: strikes or other man-made disruptions, unforeseen natural disasters, political unrest, etc.

How you plan for change within your supply chain will depend on what is affected, but could include: branch plant closures, layoffs, part-time workers, or outsourcing of workers.

Statistics show that when a company suffers supply chain disruptions, investors lower the price of the company’s stock.

There is a multiplier effect when large companies open, which creates more secondary jobs. This multiplier also applies to layoffs and plant closures.

When shareholder stock values go down with supply chain disruptions, there are negative cash flow effects on operating income, sales, and company profits.  The retailers start to lay off workers in January since they missed “The Street’s” magic number.

These full-time jobs, once gone rarely return, often replaced by part-time, casual or contract workers if the need arises.

Without the expertise that their full-time employees bring, companies risk causing irreparable harm to their entire supply chain plan which could hurt stockholder dividends far more seriously in the long-term than any short-term trend or disruption ever could.

Short term investing destroys long term value 

Wall Street also encourages U.S. multinational companies to get US$ profits from foreign operations up to the level it expects — and to do that right now.

It causes its targets to shrink their international businesses by pricing up, serving a smaller portion of their markets and becoming more competitively vulnerable by establishing price umbrellas, under which other non-US competitors can prosper. In most cases, this is a long-term value destroyer.

A prime example of this is the price differential between Canadian and American products, something that Target Canada suffered from upon entering Canada in 2013. Products in the Canadian locations were more expensive than Target USA. This was one of the major challenges Target failed to overcome, shuttering their Canadian locations in 2015.

Investor pressure can also lead companies to increase prices behind the scenes, straining relationships with other partners.

Vendors to Walmart stores were told of changes to supplier agreements, which seek to extend payment terms, in some cases introducing new fees to warehouse goods and placing products in new stores.

Walmart would increase their short-term profits from the new fees and placement costs, which is commonly referred to as “slotting fees.”

While this has not had negative repercussions for Walmart so far, most companies also lack the bargaining position that comes with being one of the world’s largest companies. Changing supplier agreements is a delicate process, and if something goes wrong, it could lead to the end of the relationship.

Once that happens, a Pandora’s box of legal troubles could emerge, not to mention the problems that come with finding and establishing a new partnership.

Governments must protect their citizens from the abuse that only benefits a few individuals: the short term investor and the multinational corporation.  The gig economy is here, but the federal, provincial/state, and municipal governments do not seem to be prepared for the new economy that agreements like the TPP will usher in.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Peter Milne

Author: Peter Milne

Peter is a global trade consultant with over four decades of experience in the supply chain industry. As founder of Peter Milne Consulting firm, he specializes in assisting small and medium-sized companies who are planning to import goods into Canada and the USA.

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