The one immutable fact that will surely come out of the current buzz about the revelations contained in Greg Smith's resignation letter about investment banking giant Goldman Sachs (NYS: GS) is this: Public corporations exist to make money for the shareholders. If that means stepping on customers, then so be it.
This sounds like a pretty good deal for investors, except for a couple of wrinkles. One is that investors are also consumers. The other is that callous behavior toward customers on the part of large companies can, and often does, translate into investor losses.
Unhappy customers organize for change
The most enlightening instance of this scenario involves the now-famous gaffe by entertainment subscription service Netflix (NAS: NFLX) . The company was riding high in the summer of last year, hitting a stock value of nearly $305 per share. Things went downhill from there, as the company announced a price increase for customers who subscribed to both DVD-by-mail and streaming services, then the plan to separate those two services into different entities. Subscribers left in droves, and investors lost so much confidence in the company that the stock fell to a low of approximately $63 in a few weeks' time, despite a quick about-face by Netflix on the issue of dividing the services. Things are looking better now, but the current $108 per share represents quite a loss for investors who bought in at nearly triple that price.
Similarly, Bank of America (NYS: BAC) and Verizon (NYS: VZ) also felt the ire of consumers, and both backpedaled on fees that seemed like a sure thing before the outcry against them. When Bank of America tried to levy a $5 debit card fee on cardholders, the maelstrom that ensued caused the bank to rescind the fee and post on its website the statement, "We heard you." Granted, other issues probably played more of a role in the depression of the bank's stock over the past couple of years, but it's notable that other large banks who were also mulling such a fee immediately announced that they were no longer doing so.
When Verizon cancelled its planned $2 fee for phone and online bill payers, it all happened so quickly that the stock didn't really have a chance to react. Customer backlash was so fast and furious that it attracted the attention of the Federal Communications Commission as well. Verizon cut its losses by simply rescinding the fee.
Companies don't operate in a vacuum and can't make a profit without customers. These examples show that, when organized, consumers can really effect changes in the companies with which they do business. Savvy investors pay attention to whether or not customers are happy, since it affects the companies' bottom line, which affects theirs, too.
Investors can actively effect change, as well
Investors have just as many, if not more, methods to change a company's behavior than consumers do. Since the board of directors and the CEO are both legally required to protect the interest of shareholders, they are in the driver's seat, so to speak.
But just like the consumers who made the above corporations see the error of their ways, stockholders need to get involved in order to change the ways their company does business. Although most CEO pay packages are generally entwined with the value of the stock, the foregoing examples show that errors in judgment still occur with regularity, and this is something that stockholders need to be aware of, and protect themselves and their investments against.
As Motley Fool analyst Joe Magyer notes, the Internet in general, and social media websites in particular, make organizing for change quicker and easier than it was just a short time ago. Indeed, activists accrued 300,000 signatures to pressure Bank of America using a petition posted on Change.org. Investors can do the same, though Magyer advises being a bit more behind-the-scenes, by doing things such as pitching ideas on boards and forums dedicated to the company or sector of interest.
Investors have other methods for changing the way companies run the business, as well. Magyer suggests speaking with investor relations about concerns you may have about the company's direction, but cautions to be well-informed, low-key, and persistent. Using your right to cast a proxy vote is important, as long as you educate yourself ahead of time about the issues at hand. Proxy battles have been known to change the course of a company, so don't discount the power of your vote.
Better yet, attend the company's annual meeting. This is hands-on learning at its best, and you may even get your voice heard -- literally. It's also a great way to get to know the major players, maybe even meet some of them.
When it comes to educating yourself about investing in a particular company, the Internet makes performing due diligence beforehand easier than ever. There are several excellent financial investment websites that offer insights and information about public companies and go a long way toward educating the new investor even before that first share is purchased.
To wrap up...
Whether or not the brouhaha regarding Goldman Sachs will affect its stock price remains to be seen, of course. Moreover, there are other pressing issues that could affect that institution at the moment, such as the concerns about its ability to pay out more in dividends to stockholders.
However, the fortunes of customers and investors are closely intertwined, and both groups have the power to severely punish corporations that don't bother to consider their points of view. Time will tell if Goldman is the latest to learn this truism, too late.
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At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above. The Motley Fool owns shares of Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Netflix and Goldman Sachs. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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