Constructive Concern and Making Decisions

Constructive Concern and Making DecisionsThe good performance of stock markets in recent years is partly explained by the economic recovery since 2009, but especially by what happens in the companies.

It is true that corporate profits have rebounded and yes, the financial climate has been much less depressing for five years. But what is the true dose of stimulant for investors is the public companies with their capital.

By and large, this is not the case of other socio-economic stakeholders, who have their own dynamics, and that is not entirely wrong. But when the companies on the stock exchange have enriching their shareholders as their number one priority that represents very harmonious music, enchanting for investors.

This is seen in the monstrous money sums spent to buy back shares, but especially in dividend payments. When we look at what is happening in firms, we find that investors have reason to be attracted by the Exchange. This is what one can conclude from a study published by Henderson Global Investors, a British manager with $124 billion under management.

The study named Henderson Global Dividend Study, published in the third quarter of 2014, shows that the stock companies worldwide have increased their declared dividends by 3.8% to $288.1 billion compared to 2013. If we exclude extraordinary statements and the impact of currency fluctuations, the growth can be estimated at 9.7%, which is exceptional.

It is the United States that shine and dominate with comparable growth of 11.4% to $87,4 billion while dividends rose in 29 of the 33 sectors. Canada has a disappointing result with an increase of only 5%.

“The US market remains the engine of dividend growth in the world,” says Alex Crooke, Head of Global Equities at Henderson. The United States set an example and many other markets follow. Indeed, emerging markets, helped by seasonal factors (the third quarter is usually the most important as half of the dividends are paid during this time of year) increased their payments by 11.0% to $58,4 billion.

Despite the gloom in Europe, dividend growth is also very strong, with an increase of 14.4% according to the research by Henderson. Finally, the Asia-Pacific region saw its dividend increase by 10.3%.

In a world in search of returns, these dividend increases are magnets for capital. And the trend is expected to continue. Henderson provides that dividends paid in the world will reach $1,100 billion in 2014, an increase of 9.6%. And for next year, their first forecast is a rise of 7.2%.

According to Henderson data, the dividends paid by US companies will have increased by over 42% between 2010 and 2014. This means that overall the shareholders received “salary” increases of 10% per year since 2010. There is not another large area that offers this much at this time and day.

But caution should nevertheless be exerted when choosing areas for investment.

It does not take much to set investors on panic. Some bad economic news, a few days of significant declines in stock market, or even a few negative comments from supposed gurus and the stress level increases significantly.

This is because investors, like most human beings, have a natural tendency to worry. When things are going well, it is feared that it will not last; when things go wrong, we say that it will get worse soon.

Indeed, many investors are concerned about insignificant items, which doubles the futility of their reaction. For example, if you are concerned about fluctuations in major stock indexes in general or your particular shares, you are wasting your time.

But what should feed your concern, then? Here are some ideas, which come from an interview with Fortune Global Director of McKinsey, Dominic Barton. The man who deals with 90% of companies forming the Fortune 100 as well as many governments, what prevailed in his discussions with business leaders. Mr Barton said that there are four major trends everyone returns to anywhere in the world.

First, there is the geopolitical concern about presidents, centered around what is happening in China and Russia. “The stability we have taken for granted for the last 20 years is not there,” said Barton.

Then there is technology. It represents both an excitation source because of its potential, but also of concern because of the challenges related to security. Companies must invest a lot of time and effort to try to protect their systems.

What makes cybersecurity challenge increasingly important, and promotes it to be yet another trend.

The last major trend builds around the fact that more than two billion people in Asia and Africa will enter the middle class and become consumers in the next 15 years. “CEOs constantly wonder if they have the right people [good leaders, good employees] to take advantage of these new markets.”

Finally, Dominic Barton was asked if things changed faster than before or if it was just an impression that all ages have had. His response was: “This is a huge issue because I too ask this.”

Indeed, if you come to think of it, ask yourself whether corporate business models in which you invest are immune to change. In fact, this needs an immediate correction, because the answer is no. It is fair to ask you how fast and how to change these patterns.

“If you were in the S&P 500 in 1935, average life as a large company was 90 years. In 2011, this life was 18 years if you were in the S&P 500,” says Barton.

That really has something to furnish your thoughts with and take some decisions accordingly.

Say you have that important decision to make in the context of your investment or work in general. A really important decision, if not strategic for your team or company. Decisions of such kind are normally so important that you need to take the advice of another key person to make sure not to make the wrong choice.

Consider three examples, where it is assumed that you are the CEO of the company. You have to decide the precise date the newly developed product by your company to be launched – a decision that requires you to make use of the ideas of all the leader of the team in charge of the project. Or, you must determine the best time to close one of your plant which is no longer profitable – a decision that needs to be decided with the director of the plant there. Or, you have to choose the day your business will make its official debut on the Stock Exchange – a decision for which, this time, you are required to have the advice of your banker.

What do these three cases have in common? Well, they all come back to the same thing: the person who has to make a crucial choice (you) must gather information from another person better informed than you, but has the disadvantage of being biased. Indeed, one can imagine that in the first case, the team leader will seek to postpone as long as possible the date of product launch, in order to refine it with the team.

In the second case, the plant manager can, too, have a vested interest in pushing close to the farthest possible date if only, for example, to allow employees to have more time to prepare to rebound.

And in the latter case, the banker himself has an interest in speeding up the process, as this will help him or her to pocket the premium without delay.

So, those who act as experts will tend to work in their own interest. This does not mean lying, but giving the CEO partial and biased information. And, just to guide the decision in the sense that they want the most.

Hence this serious existential question that all of us need from time to time to make vital decisions for our team, if not for our career: how to make the right choice despite bad input information? That is to say, more specifically, in spite of partial and biased information?

The way out is given in Timing decisions in organizations: Communication and authority in a dynamic environment, a study signed by three finance professors Steven Grenadier, Stanford (USA); Andrey Malenko, MIT Sloan (United States); and Nadya Malenko, the Carroll School of Management in Boston (United States). A study shows that there is a way to overcome this recurrent difficulty in our daily work.

Thus, the three researchers have devised a model of econometric calculations with potential to indicate the best strategy to follow in such cases as the above. But this formula has enabled them to identify the so-called equilibrium points, ie whenever the CEO manages to make the right choice despite the biased information available.

Returning to a concrete example to better explain, the CEO’s interests to close the plant in deficit faster, for financial reasons, but at the same time well aware that acting violently is not ideal, particularly in respect to the human impact of such a decision. The biased expert aware of the dilemma of the CEO seeks to take advantage: its strategy is to provide only the information that will lead the CEO to make the choice he or she wants. The calculation model suggested by Mr. Grenadier and Ms Malenko lies in the fact that it shows to what level of manipulation, if not of deceit, biased expert must go to make the CEO make an error.

Now let’s look at the results:

A good choice, but not the best. When the expert is biased, but not too much, and generally gives good information on which we can rely to make the right choice. However, the problem that then arises is that the date chosen by the CEO is often too late, that is to say, it is not optimal. The biased expert, force to delay, thus preventing the CEO to make the best choice.

A good choice impossible. When the expert is biased – like many – and tends that the date chosen by the CEO is close, it generally gives partial and biased information, the information on which it is difficult to rely on to make a good decision. If the CEO listens to the expert, then strongly risk of being wrong.

What to derive from this? The three researchers are adamant: “In any case, it is impossible to make the best choices based on the advice of a biased expert. In the best case, the expert is not too biased and aims for a distant date be retained, thereby making a good choice, but not the best ever,” it is said in the study.

What do you do then? This is where the three researchers had the idea to change the strategy of the CEO. The experts were curious to see what happens if the CEO, instead of sharing the responsibility, decides to delegate this responsibility to the expert. In other words, the plant managers have to decide themselves the date employees will be laid off or, in case with the team leader in charge of the new product of company, they must choose the optimal moment for it to be marketed.

Here’s what it changes:

Disadvantage of the delegation. When biased expert tends to want the farthest possible date, it is better for CEOs not to delegate responsibility to choose the date, because the bias of the expert, whether weak or strong, will prevent in all cases to make the best choice possible. Even misinformed, the CEO is better placed than him to make such a decision.

Advantage of the delegation. When the biased expert tends to want the earliest possible date, the CEO’s interest is to entrust the responsibility to choose the date. On one condition, however: it is necessary that the bias of the expert is not too strong. Why? Simply because the expert who is a little biased is then in the best position to make the best choice possible: they will decide taking into account the interests of all stakeholders and ensuring the timeliness of its withdrawal will not result in a bitter failure. Yes, they will intuitively do not confuse speed with haste.

Now, how to apply these findings in your daily work? In stages, as follows:

  1. Educate yourself before you have to decide. For example, see the previously written reports or surf the web looking for additional information.
  2. Get in touch with one of the key players of the case, asking them to give you additional information, to really be able to make the best decision possible.
  3. When you meet the key player – in other words, the expert necessarily biased – do not get too attached to what you said, but what shines from them. To what extent does their bias stretch?
  4. If you do not detect a great deal of bias, listen carefully to what they have to say. And make your decision based on the fact that unconsciously your opponent seeks to make you lose time.
  5. Alternatively, if no large bias is detected, surprise your expert by giving him the responsibility to make the decision, since they can do it better than you.
  6. If the expert is frankly biased, regardless of whether it is a close decision or remote in time, you need to quickly look for another partner. And if there is not, well, do not heed what you are told because you are misled. According to the authors of the study, this is an excellent method to make the right choice despite misinformation.
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