15 years in the making

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Actually, it probably started a little earlier than that. In 1974 the US Securities and Exchange Commission introduced deregulation of brokerage commission costs. Prior to this, it would cost a broker or trader approximately $1 commission per traded share. Today that figure is somewhat like $0.01 per share. So one can readily see that trading in shares today is a far less expensive way to bolster ones finances than it was all those years ago.

So, what's been 15 years coming? It's the recession. A recession we had to have. But what has that got to do with the cost of share trading? And why did it have to happen?

Fifteen years ago the internet really took off. People could not only communicate instantly across the globe, but they could now also do most, if not all, financial transactions without leaving their desk (or home for that matter).

Combine the two facts – negligible commission costs on trading of shares and the ability to trade shares on line – and you suddenly have a new industry, share trading. Note; this is "share trading" not investing. Gone are the days when people made investments for something they believed in.

Prior to 1974, you needed a broker to buy or sell shares for you. Now everyone, you and I included, can trade shares. It's no longer people genuinely investing in companies for long-term benefit (their own and the company's. It's how much money we can make in the shortest possible time.

Given this, it's easy to see why CEOs have set targets that are at a minimum, double digit annual increase return on investment (ROI is one key indicator that influences share price).

So, why has this led to a recession?

Organisational development practitioner, Dennis Pratt, suggests that every organisation - public or private, large or small - has six key stakeholders: customers, suppliers, owners, staff, industry and the community. Whenever the needs of one or more of these stakeholder groups are consistently exceeded at the expense of the needs of the other stakeholders, the focus of the organisation changes and can ultimately lead to its downfall.

So, if that happens to a number of organisations within the one industry sector, say finance and banking, then the entire industry may crash. As finance and banking is such a pivotal industry in our economic community, its crash has led to crashes in other industries (such as housing and motor manufacturing to name just two). Ultimately we have a recession.

In the current recession, the two stakeholder groups whose needs have been met at the expense of others, are shareholders and staff.

Shareholders are no longer "shareholders" in the true sense of the word – people who have a genuine interest in the long term benefit of the company, i.e. "owners". Shareholders today for the most part, are made up of institutions (investment funds, pension funds etc – these are the large "traders") and the small traders, the people who are trading shares, often online.

While those who trade in shares may argue "Yes, but we also look closely at the fundamentals of the company as a guide to investing", they will also readily admit that they follow the market, industry sector and company trends to buy and sell irrespective of their genuine interest in a particular company. It's all about making money. Testament to this is the strategy of buying or selling short, which was recently banned in some countries for a period, as it is a genuine form of gambling.

Governments have now made some attempts to reign in the excesses of these two stakeholder groups But is it too little too late?

A recent article in the International Herald Tribune, (June 9th 2009) talked about the staff stakeholder excesses: "In the past, banks had free reign to determine the base salaries and bonuses they gave their employees. When the economy was riding high, bonuses for top Wall Street executives and traders soared to tens of millions of dollars. Critics say the bonuses often encouraged risk-taking, since star bankers could walk away with huge amounts of money, even if bets they took failed to take off." (Note the use of the word "bets")

The US government (like governments elsewhere) is proposing guidelines for executive pay. Where they also have a controlling interest in the company, the regulations recently passed by Congress will limit bonuses of the top 25 executives to no greater than a third of their salary. The problem is, these executives are not likely to be subject to a salary cap. The legislation will probably end up being meaningless. And as for guidelines - who is likely to follow them?

So what's the answer?

First, a new approach to executive compensation and fairness and equity for all those included in the staff stakeholder group, from the CEO to the newest hire, something I explained in some detail here. Implementing these would ensure that the staff stakeholder needs are met, not consistently exceeded.

Turning to the shareholder stakeholder group, they are now no longer owners, rather traders. We cannot return to the pre - 1970s. So, why not have two classes of shareholder? The first class would be those who trade shares over the short term. They would be ineligible to vote as shareholders. In the strictest definition of the term, these traders are not part of the shareholder group anyway, they are more like suppliers providing capital to the organisation.

The second class would be those who hold the shares for a minimum of two years. They would have full shareholder voting rights and be "owners" in the true sense of the word as they have shown a long term interest in the company. In this way, CEOs would have to answer to genuine owners, not fly-by-night gamblers.

As a result of the recession, the community stakeholder now has a voice that is being listened to more closely and more often. It's up to you and I as part of the community stakeholder, to suggest ways to our politicians that will ensure there is a balance between the needs of all organisational stakeholders.

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