Return on Equity

Since September 2006, i am lucky enough to work for the large US public company Symantec.
This software company produces anti virus softwares. At the beginning of January the company released its financial results of the last quarter of 2006 and thus the general results of 2006. Over the year, revenues increased by 6% to reach USD 4.1 billions.

A 6% growth over a year in a mature business would rejoice any laymen: 6% ain't that bad!... Just imagine your wage would follow such pattern!

However, the company issued a profit warning, since Wall Street expected better results.
Therefore Symantec decided to save money, amongst other cutting 5% of the workforce. Wall Street reacted positively boosting the price of the share on the market.

Such news is rather common nowadays: profits even substantial do not prevent companies to cut jobs and to save money. Why so?

Many people agree nowadays that the main problem in this global economy is not only the competition between companies - and eventually people- fueled by social dumping. The main issue is that companies are under the tight leadership of financial operators, through the stock exchange or even through the investment funds such as the unregulated hedge funds.

Such companies seek immediate and maximum benefits from their operations. They have no special interest in the business or the long term perspectives they invest in. They just want to maximize the Return on equity and assign managers to do so.

The return on equity is the ratio of net income divided by average stakeholders equity.

Decades ago this ratio was around 5%. Now managers are asked to reach at least 15% if they don't want to get fired. Therefore, there is a never ending quest to squeeze costs with layoff or gains of productivity while profits are to be maximized.

Such situation contributes to worsening employees conditions are increase the instability since even making profits does not secure people's job.

Employees are not the only victims in such a system: in some cases, investments can be also halted so that in the short term, shareholders can reach the climax with ROE reaching 40%.

I listened an interview not long ago of a French economist, Frédéric LORDON, who thought about creating a new instrument, called New Shareholder Limited Authorised Margin. The idea is simple and consists to limiting to 5 or 6% the ROE so that shareholders do not pump out all the assets of companies!

Liberals for decades told us that the market needed only a minimal State control since market auto regulation was the norm.

auto regulation means in fact that one can only trust that the market will work properly.

Well, believing in such statement which is contradicted in reality proves either a lack of plain common sense or even worse a clear masquerade!