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
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
​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!
​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.
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.
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."
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
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.
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.
​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.
IBM needs a leader to bring back the substance and spirit of Alfred P. Sloan Jr.'s "coordinated decentralization."
Divestitures
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.
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.
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.
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.
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. 
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
​“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.
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?
​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.
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.
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.
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.
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.
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.
​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.
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.
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.
​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
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.
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.
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. 
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
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.​
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.
​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?”
​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.
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.
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.
​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. 
​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.
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.
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.
© 2022 Peter E. Greulich. All Rights Reserved
​
Information posted on this site recognizes the legal right of copyrighted material. The following material is considered in the public domain effective January 1, 2022: (1) works published in the United States prior to 1927, (2) works published in the United States after 1926 but before 1964 with a proper © copyright notice that were not renewed in their 28th year, and (3) works published in the United States before 1978 that have no © copyright notice, and (4) all unpublished works created over 120 years ago. Other documents used here that do not fit these criteria are used in good faith and a belief that such usage would withstand a test of fair use. Any concerns with the public domain or fair usage of material on this site will be removed until a discussion can resolve the matter with its permanent removal or republication. Just use the "Contact" menu item above or the "Contact Us" hyperlink provided here: [Contact Us]