Financing, Greed and Long-Term Growth
Businesses continually evolve due to technological, product and market changes. While corporate finance also changes, until recently this has been evolutionary. Computers, high-speed communications and the Internet have radically changed the world of corporate finance. These tools, combined with increasing governmental interventions in financial markets, revolutionized corporate finance. They have led to an increasing unfettered greed that damaged industries and even some countries.
Debt can be appropriate to help companies grow when used for productive purposes. Unfortunately, it is often used instead for: 1) the benefit of a small group of inside stakeholders, 2) the financial services industry, and/or 3) professional managers’ increased compensation. These actions are at the expense of other stakeholders including shareholders, employees and local communities.
In addition, the financial services industry obtains significant wealth promoting corporate debt. Where the best and brightest would not too long ago join companies that invent and produce products, they more recently work for the financial services industry in search of higher compensation packages funded by debt.
Allen Organ Company employed a different, but successful approach to finance. It shunned debt and became the largest manufacturer of organs in the world. At the same time these financial practices allowed the company to fund expansion, development of the world’s first digital musical instrument, and to successfully diversify into the data communications field. Finally, this approach allowed Allen to take the company private and thereby avoid the regulatory expense and burdens caused by Sarbanes-Oxley Act, again without resorting to debt.
The benefits of Allen’s financial management are exemplified by the fact that its manufacturing plant remains in the same community since 1953. It has employed thousands with 10 employees obtaining over 50 years of tenure. Finally, its public shareholders had a positive return on investment. While these positive results require long-term commitments by owners and management, it cannot be achieved if a company is highly leveraged.
Governments have also veered away from a healthy way of doing business. The 2008 financial crisis was one consequence. Similar to the poor practices used at the corporate level, governmental debt is often used inappropriately. For example, politicians often hand out benefits funded by debt to facilitate their reelection. Debt is also used to increase governmental employees’ compensation, while hiding the true cost to taxpayers. Without a change in direction, public sector employment will ultimately be gutted in a similar fashion as many American industries.
Good Debt, Bad Debt and a Better Way Forward outlines the policies and business philosophies that allowed Steven Markowitz to lead his company through the murky waters of corporate responsibility, fiduciary duty and the 2008 economic meltdown all while keeping Allen Organ Company production in the United States.