I’m reading The Dao of Capital by Mark Spitznagel. The main idea of the book is that in order to win in the long term, you have to lose in the short term. You have to follow a “roundabout” path to success.
Spitznagel’s telling of the story of Robinson Crusoe
To demonstrate his point, Spitznagel uses the story of Robinson Crusoe. Crusoe was shipwrecked on an island. Here’s how Spitznagel describes Crusoe’s predicament:
Crusoe’s first priorities are the basics of life. To obtain food, he begins with the most primitive of approaches: He goes after what he needs with his hands…Standing in water, Crusoe tries to snatch fish as they swim by, but these slippery and fast-moving creatures are hard to catch. And so he upgrades his approach with a primitive tool (a first attempt at an intermediate good): a branch that he shapes into a spear. Although he misses frequently, he manages to catch five fish a day; but when the last bone is picked clean, he must rest up for another day of labor. Thus, Crusoe’s quandary is how to catch the same amount of fish in less time and with less labor, or a greater number of fish in the same amount of time. The answer is to become more roundabout.
If Crusoe wants to become more productive, he has to pay a price. He has to spend less time fishing today, so he can dedicate time to building a boat and making a net. He can then use the boat and net to catch many more fish tomorrow.
In the meantime, instead of catching five fish each day, he might only catch three. That’s where “roundabout” comes in. In order to win in the long term, Crusoe has to lose in the short term. He’s not catching the maximum number of fish possible. He’s paying in today’s hunger for tomorrow’s bounty.
What, then, is Crusoe’s problem? He has limited resources today: namely, time. He has too many attractive uses of these resources. He could spend them all fishing, to ensure he doesn’t go hungry. Or he could spend some of the resources building a boat and making a net. Then his payoff is future abundance of food.
Both routes are attractive in their own way. It’s a difficult predicament.
Big corporations today face exactly the opposite problem
What then is the opposite of Robinson Crusoe’s problems? You have too many resources, and too few attractive uses for them. And that’s the reality for a huge number of our largest corporations today.
Corporations are sitting on historically large piles of cash. It goes further than that. I’ve written about how large corporations are actually borrowing even more cash, just so they can turn around and give that cash to shareholders. It’s crazy.
Think about what that means. These companies could use cash in any number of ways. They could expand their manufacturing facilities. They could accelerate their research and development programs. They could enter new markets, or establish new joint ventures.
But they’re not doing these things. Whatever cash they are dedicating to these kinds of efforts is swamped by the amount that sits, unused, on the balance sheet. Through their actions, these companies are saying they don’t have enough attractive investment opportunities.
And today in particular, it gets even crazier. With the new U.S. administration in place, executives and investors are hoping for corporate tax cuts. Here’s Johnson & Johnson CEO Alex Gorsky publicly championing tax reform on his Q4 earnings call this week:
In addition to advocating for all these healthcare priorities as a US-based multinational company, we also are advocating for the modernization of the US tax codes. As both sides in the aisle in the Washington have noted, the US tax code for business is outdated and in many cases makes the US a more costly place to do business leaving US workers and the US economy at a disadvantage.
We are very encouraged by the proposals currently in discussion and we will support business tax policy that is competitive with most developed countries and encourages innovation and growth.
That’s the same Johnson & Johnson that had $16.5 billion in earnings in 2016. That’s the same Johnson & Johnson that had $40.4 billion in cash on their balance sheet, as of October 2, 2016.
Too much cash. Too few attractive investment opportunities. And there’s a chance that going forward, companies will end up with even more cash through a corporate tax cut. Quite the opposite of Robinson Crusoe’s predicament, indeed.
What’s the solution to today’s corporate problems? Ideas and courage
It’s easy to blame the US corporate tax code for less than stellar economic growth. It’s easy to blame burdensome regulation. It’s always easy to deflect.
What’s hard is owning the fact that corporations already the resources they need: people and money. What are they missing then? Ideas and courage. And that’s almost exclusively a failure of leadership.
Accountability is a common word in management philosophy. People need to be accountable for their contributions. We all need to be accountable to ourselves, and to our teams. Organizations get in trouble when people feel entitled, and fail to push past surmountable obstacles.
Well, executive leadership is in the same boat. It’s fun to daydream on conference calls about what the new administration might bring. What’s less fun is doing the hard work of coming up with good investment ideas. And what’s even less fun is having the courage to tell investors that they’re not going to receive gobs and gobs of cash. Some of that cash is for placing bets. Not all the bets will pan out. But the ones that do will be more than worth it.
I’m not arguing that we have an optimal tax code. I’m not arguing that our regulatory framework is ideal. What I am arguing is that those are excuses. Time we spend whining about things outside our control is time we don’t spend doing real work. And to have the most visible, most accomplished, highest paid people leading the charge on these distractions…it’s just disappointing.
Fortunately, you and I don’t have to wait for executives to lead us. We can come up with ideas ourselves. We can demonstrate the courage to pitch these ideas. We can contribute.
We might not always make the call on “go” versus “no go”. But we advocate. We’re on the field. It’s time we take charge, and offer the ideas, model the courage that our organizations deserve. No need waiting for others to make the contributions we’re more than capable of making ourselves.