A Tale of Two Tweets

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It is the quarterly earnings season — when public companies trot out into the town square and bare their numbers for the world to see: revenue numbers, profit margins, growth rates, etc. Investors of all sizes and degrees of sophistication, competitors, and the financial media all break out their magnifying glasses microscopes to examine these numbers and percentages in all their minutiae glory, with the goal of gleaning from these financial entrails what the future will hold for a given company.

Employees aren’t a class of people often thought of as being keenly interested in the three-month cycle of financial disclosures and analyst obsession, but they should be. They, even more than the “shareholders,” are the ones most directly affected by all this. Case in point:

Twitter (TWTR) surprisingly announced three days ago that their earnings reveal would be moved up from the normally scheduled late afternoon time to 7:00 AM Eastern/4:00 AM Pacific today. What they rolled out early this morning was a litany of objectively positive news:

  • Quarterly revenue grew 2.3% over last quarter, and 8.3% over the same time last year;
  • Monthly Active Users grew 3% year over year;
  • the growth rate of Daily Active Users is accelerating, from 3% in Q1 to 5% in Q2 to now 7% in Q3;
  • 28% year over year growth in the quarterly Adjusted EBITDA operating profit margin.

Despite all this good financial and product performance news, Twitter’s pre-dawn announcement ended with this:

For context, here is the profit margins Twitter has been running every quarter since 2014:


Translation: in order to turn that 30% margin into 40-45%, roughly 300 people will soon be unemployed … after Twitter laid off 336 people this time last year.

Twitter isn’t alone: the tactic of laying off employees under the guise of “reducing headcount” and “restructuring FTE’s” in order to “gain efficiencies” that translate into better looking financial numbers for the “Shareholders” is so commonplace that to take notice of it is to self-identify oneself as an outsider at best … or an unsophisticated ignoramus at worst. Sadly. tossing the crew overboard in order to save the cargo is now as predictable as the sunrise.

But, there’s nothing written into the fabric of the universe that demands things operate this way. Contrary to popular myth, the concept of “shareholder supremacy” is NOT, in fact, the law as it relates to corporate governance. From the Harvard Business Review:

Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time. Shareholders seem to get this. They’ve tried to unseat directors through lawsuits just 24 times in large corporations over the past 20 years; they’ve succeeded only eight times. In short, directors are to a great extent autonomous.

There is no legal basis for the idea of shareholder supremacy.

And yet, in an important 2007 article in the Journal of Business Ethics, 31 of 34 directors surveyed (each of whom served on an average of six Fortune 200 boards) said … [w]hatever they could legally do to maximize shareholder wealth, they believed it was their duty to do.

This wasn’t always the case. As more than one author has noted, the use of employee layoffs as a financial tool to produce better financial numbers is a still relatively recent development, one that only gained widespread acceptance in the 1980’s.

For example, Simon Sinek, from his book Leaders Eat Last:

Layoffs had existed before the eighties, but usually as a last resort and not an early option. … Now, anyone could be laid off simply to help balance the books for that year. Careers ended to make the numbers work. Protecting the money, as economic theory, replaced protecting the people.

[It’s a point Sinek explains in further detail on his most recent conversation with Ryan Hawk on The Learning Leader Show (skip to ~21:00 mark).]

Or Duff McDonald, from his book The Firm: The Story of McKinsey and Its Secret Influence on American Business:

“Shareholders” is code for “Wall Street,” and starting in the late 1970’s, that’s where power began to be concentrated. … From the 1920’s through to the mid-1970’s, the giant American corporation had been the ne plus ultra of organizations. Then capitalism took an axe to itself, and the never-ending era of cost-cutting and rationalization was under way.

… and in Time magazine: 

I make the point in the book that McKinsey might be the single greatest legitimizer of mass layoffs in history—although that would be pretty much impossible to measure. Companies do need to lay off workers in tough times, that’s a simple fact. But the whole idea of corporate powerhouses laying off thousands of people during good timessimply to juice profits—and, naturally, executive compensation—is something that McKinsey has definitely had a hand in as well.

This misguided belief that anything that’s legal should be done to drive added value to the stock owned by shareholders doesn’t just swing the axe into employees’ job security; it also chops away at a company’s ability to generate truly valuable innovations. As Sinek notes:

In fact, the more financial analysts who cover a company, the less innovative the company. According to a 2013 study that appeared in the Journal of Financial Economics, companies covered by a larger number of analysts file fewer patents than companies covered by fewer analysts. And the patents those companies do generate tend to have lower impact. The evidence supports the idea that “analysts exert too much pressure on managers to meet short-term goals, impeding firms’ investment in long-term innovative projects.” Put simply, the more pressure the leaders of a public-company feel to meet the expectations of an outside constituency, the more likely they are to reduce their capacity for better products and services.

Not even the mighty and uber-profitable Google/Alphabet is immune to these dynamics. Here’s hoping that the optimistic vision of thousands of newly unemployed tech employees starting hundreds of new businesses of their own proves true.

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