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Monday, October 28, 2013

Strategic CSR - BlackBerry

What I think is interesting about the article in the url below is not that it notes the demise of a once-proud corporation (BlackBerry, previously Research in Motion), but that it makes a strong statement about past behaviors that most likely contributed to its demise. Even more interesting is that the article makes the case that, rather than a shift in technology and consumer tastes, it was the firm’s focus on short-term shareholder value that undermined its competitive position, while contributing little to the long-term wellbeing of the firm:
“BlackBerry’s corporate filings show that over the years it distributed $3.5 billion to shareholders. … That is an impressive amount, especially considering that the entire company is now worth only a little more than $5 billion.”
What is more important than the focus on short-term value to shareholders, however, is that these actions failed to reward those shareholders the firm should have valued the most—loyal ones:
“… loyal shareholders did not receive any of that money. To get the money, an investor had to sell. The money was spent on share buybacks, and most of those buybacks came in 2008 and 2009, when the company was flying high.”
In particular, the article makes the damning case that it was the firm’s policy on awarding senior executives stock options that resulted in the narrow focus on share price, which only benefits shareholders when they sell their shares:
“BlackBerry’s financial strategy was not particularly unusual, although it does stand out in the way it abused the rules on executive stock options. Perhaps it would never have paid dividends anyway, but those options gave the company’s executives good reasons to avoid dividends and concentrate on share buybacks. … One reason companies that issue a lot of options prefer stock buybacks to dividends is that while buybacks may raise the market value of the stock and thus increase the value of an outstanding option, dividends are less likely to do so. Option holders, unlike shareholders, do not benefit from dividends.”
As with many aspects of business so-called “received wisdom” (much of which gets parroted in business school classrooms), the reality does not hold up to the theory:
“The net effect: It took in $365 million from the exercise of options. It paid $3.5 billion to repurchase shares. Under accounting rules, that $3 billion difference had no effect on reported profits, but it had a big effect on the resources available to the company for other purposes, like spending on research and development.”
The article also has interesting things to say about the value of options versus restricted stock grants (Chapter 6, Case-study: Stock Options, p274):
“In practice, companies tend to prefer options when they think the share price will rise, and restricted stock when they are not so confident. That is the way it worked at BlackBerry. The last large option grants to senior executives were made in October 2007. A year later, the stock price had peaked — at $148 in June 2008 — and was down to about $70. No options were granted. Instead, restricted stock units were issued.”
All in all, the company behaved badly in relation to its stock option grants and, more importantly, in terms of its focus on valuing its most loyal shareholders:
“In 2006, when the backdating scandal broke in the United States, the company piously denied it had done anything of the sort. A few months later, it had to admit it had lied. In the end, top executives surrendered a large number of options, and other options were re-priced. The Securities and Exchange Commission determined that more than 1,400 individual grants had been backdated. … The executives certainly benefited from the purchases. Shareholders who believed in the company’s future did not.”
The reasons a company fails are many and varied, but clearly BlackBerry had issues beyond the quality of their products that extended into the executive suite. Creative destruction, commence!
Take care
David Chandler & Bill Werther
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How Blackberry Handled Past Wealth
By Floyd Norris
August 23, 2013
The New York Times
Late Edition – Final