Research Out of Motion

We’re not here to pick on BlackBerry.

Okay, we are.

Writing in the New York TimesFloyd Norris takes aim at the company formerly known as Research in Motion and finds fault with something not directly related to changing technology.  Norris writes that while BlackBerry had a high stock value and profits in 2008 and 2009, shareholders received no payout.

Instead, the company spent $3.5 billion on share buybacks.  Buybacks happen all the time, Norris notes, but BlackBerry stands out “in the way it abused the rules on executive stock options”  and  “gave the company’s executives good reasons to avoid dividends and concentrate on share buybacks.” If a stock price declines, options are worthless — whereas if you can goose the market with some massive buybacks, then option holders are happy.

All of this, he writes, “had a big effect on the resources available to the company for other purposes, like spending on research and development.” It also punished loyal shareholders. Norris suggests restricted stock grants might do a “better job of aligning executive interests with those of shareholders.”

Peter Drucker took a dim view of stock options in general. For one thing, he considered “golden handcuffs” to be bad policy, often causing employees who would prefer to leave to stay  — and feel demoralized. For another, as we’ve noted, Drucker felt stock options encouraged destructive short-term thinking.

Diagram of a nearsighted/myopic eye.

He also would probably have agreed that some of BlackBerry’s billions could have been better spent on research, precisely because its inventions had such a hold on the market for a while. “The research budget must be higher after the innovation has successfully been accomplished than it was before,” Drucker wrote in Innovation and Entrepreneurship. “New uses have to be found; new customers must be identified, and persuaded to try the new materials.”

Drucker didn’t feel shareholders should be the sole stakeholders to be satisfied, either. As we’ve noted, he believed the objective of management should be to maximize the wealth-producing capacity of the enterprise. The question was how to get the rules and incentives in place to make that happen.  “The one thing that we in the United States have yet to work out is how to build the new definition of management accountability into an institutional structure,” Drucker wrote in Managing for the Future.

What do you think should be done to encourage better long-term thinking in management?