Sheldon Weinig, a very successful American entrepreneur, also would have made a fine Japanese businessman.
Using his own scientific know-how, he founded a company, Materials Research Corp., based just outside of New York City, and over two decades built it into a $72 million-a-year business producing special metallic coatings for use on submarines, space vehicles and semiconductors. His company also gave the world platinum-and chrome-coated razor blades.
In many ways, Weinig has done the things that American business leaders are being criticized for not doing in the 1970s, when the nation's industrial leadership began to erode.
* His investment in research and development has averaged 10 percent of sales a year, two to three times the normal rate in the United States.
* Weinig offers the kind of lifetime employment common in large Japanese companies, refusing to lay off employes even when poor sales have pinched his budget painfully.
* His firm is building a factory in Japan despite the big hurdles of language, custom and cost, because Weinig believes he has to compete with the Japanese on their home ground. "Most American businessmen have been far too lazy to do that," Weinig said in an interview recently.
* Looking to the future, he is trying to perfect new coatings for the discs that store data for computers--a risky venture but one that could increase computer memory capacity many times and give his company a strong new market for its products.
But now, with his company's sales depressed by the deep slump in the U.S. semiconductor industry, Weinig may have to put on the brakes. Managers of one investment firm with a large holding in Weinig's stock are asking whether his investments in the future aren't an unacceptable drag on present profits, and these managers have pressed him to reconsider his no-layoff policy and his heavy commitment to research.
So far, Weinig has persuaded the investment group that his policies are wise, but his plight illustrates one of the most destructive pressures brought to bear on U.S. business managers in the 1970s, according to many corporate officials and analysts. The demands by the investment world for short-term successes and a steady profit stream, quarter after quarter, have prodded many U.S. business managers and boards of directors to serve the present and neglect the future whenever profits were low and cash was tight.
When sales and profits at Weinig's firm were growing rapidly, he had support from brokerage firms and financial institutions, support that helped maintain a healthy demand for the company's stock. That made it easier for Weinig to sell additional stock, raising money to invest in future growth.
But that competitive edge cuts both ways. The investment firm--which Weinig wouldn't name--holds more than 7 percent of Materials Research stock, enough to make a big difference in the price should that bloc be sold. "If they think my philosophy is too costly, they can call their brokers," Weinig said. "There's nobody out there right now waiting to buy if they decide to sell."
"Look what happened to the stock," said analyst Elliot Levine of First Manhattan Co., an brokerage firm. "It went from the mid-30s to 14 last year. That's a lot of pressure."
Without the support of investors, Weinig could have serious trouble raising investment funds. But the employes, the plant in Japan, and the research on computer storage are the foundations for the company's future. So far, he hasn't been forced to choose between investors' present desires and his company's future needs, said Levine. "He's done the right thing," he added.
Many companies have made that choice in the past decade, however, and bet the wrong way. Now they must fight with obsolete production processes or outmoded products against foreign competitors who bet more heavily on the future.
In addition to the outside pressure by investors, powerful internal pressures were at work in the bonus and incentive plans that tie the rewards of top executives to short-term profitability.
It is a rare plan that specifically rewards a business manager for a bold move that paid off four or five years later, said Jude Rich, a management adviser with McKinsey & Co., which counsels some 50 large firms on bonus plans. "The vast majority overemphasize the short term," Rich said.
American business must deal with both forces if it is to regain its competitive strength, corporate leaders and consultants say.
"I do think there is a legitimate complaint against the tyranny of Wall Street, with its myopic concentration on reported quarterly results," said Reginald H. Jones, retired chairman of General Electric Co.
"There has been a fundamental change in the ownership of American industry--a great decline in the investor and an increaase in the trader, who was also under great pressure for results," Jones said in a recent interview. The trader continuously pushes management to make each quarter better than the previous one.
Kenneth Mason, retired president of Quaker Oats Co., told a business school audience last year that the American business system "is being operated by managers who believe in a wide variety of economic theories that simply don't make sense.
"Most of America's top corporate executives will tell you, for instance, that an established business whose earnings increase smoothly at a rate of, say, 15 percent annually is a better-run business than one whose earnings increase on an irregular basis--say 30 percent, then 5 percent, then 10 percent annually," Mason said.
There is no economic justification for this belief, Mason contends, and yet top executives of many of America's best known corporations spend hundreds of hours a year "making sure not only that this year's annual earnings increase is consistent with last year's, but that this year's third quarter doesn't fall below last year's third quarter."
And most of the same executives believe their shareholders expect to see the steady rise in value of their stock as repayment for their investment, Mason said, rather than the payment of dividends based on the company's performance. This means that the only way an investor gets a full return on common stock is to sell it.
And that, in turn, shrinks the time horizons for the people who run American businesses as well as for those who invest in them. A "long-term" investment on Wall Street in today's uncertain environment is one that extends 18 months, Mason said, and a business executive who has to produce a payoff in that brief a time isn't going to be looking for daring new ventures.
The pressure from Wall Street for short-term financial success has grown dramatically over the past two decades, following the huge transfer of corporate stock and debt from the hands of individuals to large institutional investors. In 1960, institutions--as opposed to individual investors--held 17.2 percent of stocks sold on the New York Stock Exchange. By 1980, institutional holdings had risen to 35.4 percent.
These new traders are the managers of public and private pension funds, life insurance companies, and other nonbank deposit institutions, Benjamin M. Friedman, a Harvard University professor and expert on financial markets, noted in a study published last year.
In the early postwar years, the nonbank institutions held only slightly more corporate stock and debt than the commercial banks, but by the 1970s they held twice as much, said Friedman.
A.W. Clausen, former president of the Bank of America and now president of the World Bank, said in the same study that the relationship between banks and corporations was changing, too. As interest rates climbed in 1966, corporations began to bypass traditional loans, seeking better bargains by borrowing from themselves or from new money market funds. The value of commercial paper--unsecured notes issued by corporations--almost tripled between 1966 and 1969, from $13 billion to $32 billion.
Clausen said "bankers and corporate managements both soon learned that 'money for hire' has only one allegiance: It goes to the highest bidder offering the least risk." Lenders dealing in this "hot money" had little patience for a company that was trimming current profits to build a future product.
Lost in these transactions was the old relationship between business executive and lender that could tolerate temporary dips in profits.
"The problem here may well be that the institutional money managers who buy and sell our stocks are also under pressure for quarterly results," Jones said. "The long-range investor who is willing to support major investments for R&D and productivity at the sacrifice of current earnings is in the minority."
The pressure is not irresistible, however.
"A lot of businessmen express a sense of helplessness about their fate," said William Abernathy of the Harvard Business School. "I don't believe that. Chief executive officers are not as helpless in the face of financial pressures as they claim to be."
But business managers are influenced by the built-in operations of compensation plans, many of which are tied to the most short-term measure of all, the corporation's stock. It is universally regarded as a daily benchmark of management's competence, said Jones. "All management is very sensitive to the price of the stock," said Jones, who used to receive the daily Wall Street closing price for GE on his desk every afternoon.
Two of the greatest sources of wealth for most business leaders are the stock they own in their own companies and the options they have to purchase more at advantageous prices. "When the stock price is falling, the stock options are under water, and a great deal of disaffection sets in throughout management," said Jones.
Ninety percent of the companies on Fortune magazine's list of the 500 largest corporations have annual bonus plans that pay off according to results in the previous year, usually earnings per share of stock, or net income after taxes, or some other measure of short-term performance, said Rich.
The bonus plans invariably affect not only the top managers, but also those far down the line, many of whom have no responsibility for the company's overall performance, he added.
A manager often has long-term goals such as developing a stronger sales force or training a successor, but even if these goals are met there is no bonus if the company's overall profit goals aren't met. The result is a powerful, built-in bias toward short-term results, he said.
The payoff has customarily been tied to the size of the annual profit.
"Suppose I'm the head of a $300 million-a-year division of a major company," said Rich. The plan might say that if I achieve a $10 million net profit after taxes, the annual bonus is $40,000. But if I hit $13 million, the bonus goes to $100,000."
That kind of signal is hard to ignore, said Rich.
It also may be a false signal, luring a company into deep trouble, Rich added.
An example is Emery Air Freight, which found its volume of air cargo shipments dropping several years ago in the face of tough competition from others in the crowded air freight field and the cutback in air freight service by the scheduled airlines on which Emery relied because it lacked a large fleet of its own.
Emery's response was to push its prices up to maintain profits despite the drop in volume, while paying out large dividends to keep stockholders loyal.
While profits did look reasonable for several years, the company was sawing the limb it sat on by putting off major investments that would be essential to remaining in business in the future.
When Emery decided to rebuild through a reorganization of its sales force, a more costly advertising program and the purchase of several dozen 727 jet aircraft, it was clear these steps would hurt current profits.
With McKinsey's help, a new incentive plan was created to include progress toward long-term goals as the basis for bonuses on a year-to-year basis, by counting new accounts or cost-saving discounts with major suppliers, for instance.
Instead of aiming at yearly profit goals, the plan is designed to reward steps that will give Emery a competitive edge in the future such as winning new accounts or negotiating cost-saving discounts with major suppliers, said Rich.
The new long-term bonus plan has two parts, sais Joseph Tighe, Emery's vice president for personnel. One half is a typical option plan permitting managers to buy stock at favorable prices, creating an investment that will become very valuable if the company does well over a period of years. The second is a cash bonus tied to meeting strategic objectives based on growth of the company's wealth--the value of its assets as well as profits.
The typical Emery executive, making $45,000 to $60,000 a year as a base salary, now has an opportunity to double that if individual incentive goals are attained, said Tighe--a plan that if fully paid out would take only one percent of Emery's profits.
"We've had to come up with a completely different philosophy for managing the company," said Tighe. "A key to changing perceptions within the company is the compensation question," said Tighe.
Many business analysts see an even more fundamental need to be honest about what profits are. Peter F. Drucker, author of 41 books on management practices, says the word is grossly abused.
" 'Profit,' we are told, is a return on what has been invested in the past. Nothing could be further from the truth," Drucker said, writing in his latest book, "Managing in Turbulent Times."
"There are no profits; there are only the deferred costs of staying in business," Drucker said. The job of management is to see that the money is earned and the steps are taken to keep the company healthy in the future, Drucker said. Since most corporate executives hold office for a relatively few years, the profits they "earned" in a given year are apt to be the result of actions some years before by their predecessors, Drucker said.
Belatedly, companies and business analysts have come to recognize that in times of sharp inflation the profits reported by companies may be illusory because, after inflation is taken into account, the company hasn't made enough to buy the new materials and services it needs to remain competitive.
"Extra compensation based on profits should never be paid until the costs of staying in business have been covered by current earnings," Drucker said.
Failing to disclose that those costs have not been earned is "fraud," he said. "To pay oneself 'bonuses' based on a nonexistent profit is embezzlement."