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If my foresight were as clear as my hindsight, I should be better off by a damned sight.

J. L. Mott, President of the Iron and Steel Association, 1873

IBM's Twenty-First Century Corporate Practices

Published July 19, 2021
​Updated April 5, 2022
A construction worker holding a big sign with the tagline: Big Blue: Examining IBM Corporate Practices.
IBM's current leadership has focused on producing profits through (1) financial engineering: workforce reductions and (2) aggressive bookkeeping: divestitures, pension plan changes, 401(k) retirement plan changes, and severance pay reductions.

These policies have destroyed the corporation's sales productivity.
 IBM 21st Century Corporate Practices

Acquisitions
acquisitions: Red Hat
​Red Hat’s average net income over the last ten years of its independent existence was $164 million and last net income was $258 million (Red Hat’s 2018-19 Annual Report). IBM paid one hundred thirty-five times Red Hat’s highest yearly net income and more than two hundred times its ten-year average. 
Wouldn’t it be hard for a small business man or woman to justify a $500,000 business loan to purchase a competitor that had a yearly net income of less than $5,000 and a ten-year, average net income of half that number?

​Don't get lost in the big numbers!


acquisitions: since 2001
​SFAS No. 142 eliminated the amortization of goodwill, required annual impairment testing of goodwill, and introduced the concept of indefinite life intangible assets. It was adopted on January 1, 2002. The new rules also prohibited the amortization of goodwill associated with business combinations that close after June 30, 2001.
A man watching an airplane pulling a banner with the tagline:
IBM has been exploited this change. This is a list of IBM's yearly acquisitions as listed in each of its annual reports since 2001—207 acquisitions as of the end of 2021.

acquisitions: Goodwill Growth
An intangible asset is something that, if dropped on your toe, doesn’t leave a mark. Its value is open to personal interpretation, imagination, and creative thinking.

IBM is being very "creative."

A man watching an airplane pulling a banner with the tagline:
IBM has exploited a 2001 accounting change by adding $64 billion of goodwill to its balance sheet as of the end of 2021. This is a list of the acquisitions since 2001 and a summary of its year-over-year goodwill growth that is increasing ​shareholder risk.

Centralization
A Lost Federation
IBM at its strongest was a federation—an international federation of businesses held together by a belief system that encouraged a family spirit to cross international boundaries. In Watson Jr.’s day to say that your geography executive was hand-picked by Watson was to say your organization had the ear of the chief executive in matters of importance.
An image of the map of the world with the tagline:
To say today that your executive is hand-picked by the corner office is to say that you have a controller that will enforce corporate financial policy at the expense of reason, common sense, and service to the customer.

The Need to Decentralize
​IBM needs a new leader with the philosophy of an Alfred P. Sloan Jr. who orchestrated the founding organizational policies for General Motors. There are great similarities between Sloan’s management philosophy at GM and the policies implemented at IBM by Thomas J. Watson Jr. at the Williamsburg Conference in 1956.
An image of a dandelion letting its seeds fly into the wind with the tagline:
IBM needs a leader to bring back the substance and spirit of Alfred P. Sloan Jr.'s "coordinated decentralization."

Divestitures
Kyndryl: Analysis
The announcement of the breakup of IBM will only exacerbate the company’s current most-pressing problem, not cure it.

​The short-term spike in stock price is a “Wall Street” phenomenon, not a “Main Street” or “Stakeholder” affirmation of the decision.
Picture of an Elephant disintegrating in a sandstorm with the tagline:
A John Akers' déjà vu moment
​Reality will set in soon enough because when it comes to business fundamentals, Main Street and corporate stakeholders—customers, employees, long-term shareholders, and society have proven themselves better able to understand long-term business realities than Wall Street.

Kyndryl: Top Questions
IBM announced its latest spin-off strategy with this statement: “IBM and NewCo [Kyndryl] will have a strong strategic relationship.” Such a synergy was hard to achieve even when both organizations were in one, unified corporate structure, guided by a common strategy, and overseen by a single top dog.
IBM - Kyndryl (NewCo) Divestiture represented by a blue PacMan gobbling up the issues of productivity, goodwill, shareholder risk, share buybacks, and stakeholder engagement.
In all deference to the marketing organization, these two corporations will immediately start the parting of their ways after the spin-off. Neither chief executive will tie their success to the other—except in press releases.

Kyndryl: Martin Schroeter?
Martin Schroeter’s chief executive track record (CFO) is that of a financially-minded individual whose actions seem to indicate that he has little understanding of what it takes to build, maintain, and grow a sales organization. ​​Mr. Schroeter was IBM’s CFO from 2014 to 2017. 
A slide image showing the questioning of the IBM NewCo name of Kyndryl and surprise at Martin Schroeter being named CEO.
Really! After this IBM performance?
​Does Martin Schroeter's track record as IBM"s CFO indicate that he was a good choice to lead Kyndryl?

Employee Relations
Resource ACtions
​“Right-sizing” was the 1990s’ politically correct term for layoffs. Unfortunately the size never proved quite right. IBM layoffs, were usually executed over a period of twenty-four hours and have been quarterly, continual, persistent and arbitrary for more than two decades. Internally IBMers refer to them as Resource Action Days or, more poetically, R.A. Days.
Image of IBM resource actions happening worldwide and a crying elephant watching. Tagline:
IBM refers to this ongoing layoff practice in their 2021 Annual Report as "workforce reduction actions" and it performs them to "improve productivity." ​Here are two "R. A. Days" I experienced. ​Arvind Krishna has continued this tradition of his three predecessors.
Would you be more productive after experiencing one of these R.A. Days?

Age Discrimination
​The legal system recognizes that an employee may experience discriminatory intent, not necessarily at the hands of the “alleged” decision maker—who may have acted without any age-based animus, but from a person who was acting as the “cat’s paw” for another entity—who did have a discriminatory intent.
A slide with the image of a cat watching a mouse with the tag line:
Older workers at IBM are wishing for a pair of ruby red slippers they could click together to take them back to Kansas: a time and place when IBM’s management “adjusted policies based on principles” instead of “adjusting principles to implement a policy.” The New York Times is finally documenting some of these actions: Making Dinobabies Extinct.

This article shows that the news organization is late to the game.

employee engagement
Tom Watson Sr. told his shareholders that employee benefits existed “not because of any philanthropy on the part of myself or my executive staff or the directors and stockholders. … We do it because our people do a better job everywhere.” He and his son constantly reminded their shareholders of this fact in their annual meetings.
A road sign point two different directions. One Way is
The 21st Century IBM is proving the corollary to these practices and, in so doing, have reversed the financial and business results of the Watsons.

Aren't Buying into IBM
Consider this new, two-decade-long  employee trend when deciding where to deposit your next investment of time, loyalty or money. Fear of unemployment or poor appraisals may silence IBM's employees on social media, but they are speaking loud and clear with their wallets.
A lottery ticket with the question:
According to IBM's 2021 Annual report, "Employees purchased approximately one million shares under the ESPP during each year ending December 31 2021, 2020, and 2019."

​The employees' financial investment in their corporation isn't competitive, has plummeted since the turn of the century, and betrays a deep truth about the company's human resource practices.

A Massive WOrk Slowdown
​What the corporation is experiencing is quite unnatural: in both constant 1999 dollars and current year-over-year dollars IBM’s sales productivity has fallen for two decades. Previously, the longest back-to-back drop in sales productivity was a string of four years caused by the Recession of 1920-21—exactly a century ago.
An image of railroad tracks with a warning to IBM that there is trouble ahead:
The real threat to the company is not necessarily in its declining revenue but in management’s inability to reverse their falling sales productivity over almost two decades.

The Work at Home Failure
IBM's initial implementation of work at home failed because it was done for the wrong reason: it was a financial strategy intended to maximize the flow of short-term savings to the corporation’s bottom line. Work-at-home should be a productivity strategy that increases an employee’s availability, performance, and loyalty.
An image of railroad tracks a father and son walking on them with the tagline:
​If IBM had prioritized tracking and investing in work-at-home productivity improvements, greater savings would have flowed to the corporation's bottom line over a longer-term.

Financial Engineering
Aggressive Bookkeeping
On August 4th, 2017, The Register published an article entitled, "UK IBMers lose crucial battle in pension row." This is a similar situation to what the U.S employees experienced with the conversion of their defined benefit pension plan to a cash balance plan in 1999 by Louis V. Gerstner and the freezing of these benefits in 2008 by Samuel J. Palmisano.
Image of England (UK) with the tagline:
The U.S. meaning of "scheme" is probably correct as applied to all IBM's pension changes since 1995: scheme: /skēm/ - to make plans, especially in a devious way or with intent to do something illegal or ethically wrong.

Workforce Rebalancing
IBM’s twenty-first-century Chief Financial Officers (CFOs) have lost sight of their primary duty to their corporation: spend money to make people more productive, processes more effective, and products more valuable. Workforce rebalancing is an unrealized financial promise because the "new" workforce is not operating at the same or higher levels of sales and profit productivity. 
A chart about IBM's Financial Engineering: Workforce Rebalancing. Moving work from highly motivated, highly productive and therefore highly rewarded to lower paying and therefore less motivated and less productive individuals.
IBM has been increasing profits by lowering wages, but this has been offset by the ever-decreasing productivity of a newer, larger, discouraged, more disconnected, and widely dispersed workforce.

Shareholder Value and Risk
Share Buybacks
When America’s twentieth-century chief executives manufactured wealth for their customers, employees, shareholders and societies through their corporations, they created this country’s greatest and most formidable asset. To these businessmen, it was always business-first: investing in making people more productive, processes more effective, and products more valuable.​
A picture of IBM's $201 billion stock buyback over 25 years symbolized as a
At one time, our country’s chief executives believed that the business of America was business-first. It seems, though, that too many of our twenty-first century crop of chief executives believe that the business of their businesses is Wall Street-first.

Shareholder RIsk
​So far in this century, a long-term IBM shareholder would have received higher returns by investing in a lower-risk, low-cost, index mutual fund.
Most long-term shareholders seek a balance between risk and reward. It is one of the most basic questions an investment advisor asks a potential customer: “What is the amount of risk you want to bear for any given reward?”
PictuIBM Shareholder Risk as with a picture of three monkeys who see no evil, hear no evil and speak no evil with the tagline:
​Even though IBM spent $201 billion on share buybacks from 1995 though 2019, its twenty-first-century returns have significantly underperformed common low-risk indexes.

Employee Engagment
Shareholders to have their returns maximized need corporate employees that are engaged, passionate and enthusiastic about their corporation. There needs to be a two-way distribution of profits between all the stakeholders: customers, employees, shareholders and their shared societies.
A road sign point two different directions. One Way is
Watson Sr. and Jr. understood this concept well and because of it they achieved some amazing results: 17% compound annual growth rate (CAGR) over 32 years, and 21% CAGR over 15 years, respectively.

This is how IBM could get back those shareholder returns by establishing a sustainable stakeholder ecosystem.


Warren Buffett's Mistake
​When Warren Buffett invested in IBM, he thought all he needed for his investment to be safe was castle walls and enduring moats. To a competitor, a moat without defenders is just a pleasant water course! The 20th Century IBM was always more than brick and mortar surrounded by deep ditches filled with water. 
A picture of a castle's battlements overlooking a castle wall and moats with the tagline:
​Its walls and moats were defended by enthusiastic, engaged, and passionate stakeholders: customers, employees, shareholders, and their supportive societies. Warren should have learned that share buybacks can not compensate for the market's lack of trust and confidence in a corporation's leadership.

Do share Buybacks Work?
In 2019, Virginia M. (Ginni) Rometty stopped IBM's share buybacks after a twenty-five year run: 1995 through 2019. The IBM 2020 Annual Report states that, "At 2020 year end, we had $2.0 billion remaining in share repurchase authorizations." So the share buybacks could resume at a moments notice.
A picture of a baseball umpire signaling that the runner is out with a tagline:
There are better investments a technology company can make than in buying paper. This article looks at IBM's history of three failed stock buybacks: 1978–79, 1986–1998, 1999–2019.

​It isn't pretty.


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