Dear Friends;
Here is the latest installment of Facts from the Fringe. Past editions can
be viewed at http://www.caw.ca/fringe/index.html.
Please note that I have relocated back to Toronto. For further information
or comments please call Jim Stanford at (416) 497-4110 or (cell) 416-230-2046.
Many thanks and best wishes.
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What is Value?
What is value? The question has puzzled and preoccupied philosophers and
economists for centuries.
For David Ricardo and Karl Marx, value reflected labour effort. For
free-market economists, it depends on supply and demand. For an
intellectual, value is knowledge; for an aesthete, it is beauty. For a
believer, value comes from knowing God. The answers are as numerous as they
are subjective.
These days, however, there seems to be a dominant consensus?in the
financial pages, anyway?around a more particular, and rather base, meaning
of the term.
Today "value" means nothing more than the stock market value of publicly
traded companies. And "creating value" means driving up the price of a
company's shares, thereby enriching both its shareholders and the
executives whose compensation is now tied directly to their company's
market worth.
Earlier this month, for example, the Financial Post featured a dramatic
cover photo of an imposing Jean Monty, chief executive of BCE, backlit by a
spotlight. The photo's blunt sub-heading read simply that Monty "has a
reputation for creating value." Boy, that sure sounds good?a lot better
than saying that Monty "has a reputation for driving up share prices and
thereby enriching shareholders and executives". Who could be opposed to the
creation of value?
And so today all kinds of nefarious deeds are described, and hence
justified, as part of the ageless quest to create value.
Gerry Schwartz wasn't planning to take over the airline industry; he was
striving to create value. And Air Canada's executives weren't scrabbling to
save their own hides; they were trying to create even more value.
Curiously, the Air Canada value plan depends in large part on the payment
to shareholders of $300 million of money they already own. Who'd have
thought that "creating value" could be as simple as taking cash out of one
pocket, and putting it back into another? I guess the Artful Dodger was
also a creator of value, in his own simple way. If he'd had a broker's
license, he might have ranked with the best of them.
No-one creates more value than Alan Greenspan. By shifting the policy bias
of the U.S. Fed to "neutral" from "tighter" in conjunction with the most
recent increase in U.S. interest rates, Greenspan boosted U.S. markets by 2
percent on Nov. 16, or some $400 billion (U.S.). Not bad for a day's
value-creation. Of course, what Greenspan giveth, Greenspan can also taketh
away. Recall, for example, the roughly trillion dollars of value he wiped
out (only temporarily, in retrospect) with his famous "irrational
exuberance" speech of December 1996.
In Canada, the folks at Nortel Networks (Monty's former employer) are the
kings of value-creation. The company's shares are up 150 percent since last
October, despite the issuance of billions of dollars in new shares to pay
for the acquisition of internet and other companies during this period.
Nortel has thus created something like $85 billion in value in less than 14
months, well over a million dollars for each of its employees. That's $200
million of value per day, $8.5 million per hour, or $140,000 per minute?a
veritable value-making machine.
Indeed, Nortel now accounts for about 14 percent of the value of the TSE
300?inspiring mixed emotions among paper-chasers anxious to cash in on this
runaway train, but leery about having so many eggs in one basket. About
half of the 40 percent gain in the TSE 300 since its 1998 low is due
exclusively to Nortel's stellar rise.
Nortel's stock market dominance seems to add credence to CEO John Roth's
repetitive threats to pack up and leave Canada unless the government cuts
taxes?especially income taxes on those earning over $100,000. When an
eighth of your market and half of your capital gain depends on a single
company, you'll sit up and listen whenever that company speaks to you.
Mind you, Canada already accounts for only 8 percent of Nortel's revenues,
15 percent of its assets, and 30 percent of its workers. Doing more favours
to help Nortel is kind of like closing the barn door after the arse has run
away. And the fact that Nortel receives federal R&D subsidies
conservatively worth a quarter-billion dollars per year should also help to
temper Roth's fear-mongering.
For those of us who do not inhabit the paper realm of Bay Street, Nortel's
reputation is not quite so luminous. With this month's mothballing of its
factory in Belleville, Ont., Nortel will have shed well over half of the
12,000 manufacturing workers it employed here just six years ago. Its total
Canadian workforce now accounts for less than 0.15 percent of total
national employment. In other words, although the Nortel jobs which remain
are needed and (dare I say) valuable, Nortel is one-hundred times more
important to Canadian financiers than it is to Canadian workers. This puts
Roth's threats into a bit of perspective.
And for those who may be just a bit too enthralled by Nortel's run of
value-creation, think back to September 29, 1998. That was the day the
company's CFO bungled a New York analysts' briefing, leaving the apparently
mistaken impression that revenues would fall below expectations. Panicked
markets knocked one-quarter off the company's market value in the next five
days. Where value is concerned, it seems, it's a case of easy come, easy go.
Indeed, what is value if it can disappear so abruptly and violently thanks
to a few mis-spoken words? I am thinking that perhaps the term "value"
should be promptly reclaimed, and used once again to describe things with
rather more lasting, worldly characteristics?-things like labour, beauty,
and knowledge.
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Jim Stanford is an economist with the Canadian Auto Workers, and author of
Paper Boom (published by James Lorimer & Co.).
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