In the early 1990s, I met a management consultant who earned a PhD in history, aiming to get a job in the academic world. Back then, that was about as likely as aspiring to the seat in Congress held by Chuck Grassley or Nancy Pelosi (I was equally clueless: my own dissertation advisor retired a few years ago at 80).

The consulting firm he worked for wrote corporate histories. The idea was that successful companies are typically founded by out-of-the-box-thinking, risk-taking entrepreneurs. As time passes, however, as the firm expands and the founders retire, it gradually loses its original entrepreneurial spirit to bureaucracy. Arguably, a corporate history that documents and celebrates the disruptive talents of the founders, written by an ostensibly objective third party, shakes up the status quo of a once great but increasingly senescent corporation.

I have no idea whether the corporate history approach has been effective or not. But it does highlight a significant issue for us as stock market investors: companies age, and as they do (the reason they do?), bean counters gradually replace product creators. That’s bad, although firms can subsist on dreams of past glory for a shockingly long time.

Companies whose attraction to investors like us is their earnings growth potential–rather than the assets they control (and are at present under-using)–have a stock market shelf life of about five years. The best are able to extend that period through continuous innovation. But this isn’t the norm. Most companies that go ex-growth do so, in my view, because they they choose to. I imagine they think: I’m using the highest-quality ingredients today and customers love my products. But if I go down a notch to cheaper ingredients I’ll make more money and no one will notice. Inevitably, one notch becomes four, people really notice and the brand name is destroyed.

As I was thinking about this phenomenon yesterday as it relates to Boeing and the lack of quality control they must have, I noticed an article in the Financial Times, quoting the (angry) head of Emirates Airline. He observes that he has witnessed a long-term deterioration of Boeing’s commitment to engineering excellence in favor of enhancing financial performance. As I was searching for that article this morning, I came across a letter in the FT from a Boeing employee who points out that the last three Boeing CEOs have been veterans of GE, the long-running disaster created by Jack Welsh’s extreme focus on financial metrics. I read his message as: what did you expect, or didn’t you notice who’s been in charge for a long time?

This leads me to the question…

…can we detect corporate senescence?

I don’t think there’s a flat-out rule. But we can sometimes find clues. 

–for the Boeing employee in the previous paragraph, the tipoff was that multiple CEOs came from GE 

–for me, an early warning sign for GE was when the SEC sanctioned the company for falsified financial statements (in 2000?) in a subsidiary. This suggested to me that managers were under enormous, and inappropriate, pressure to meet financial goals.

–I’ll occasionally call up companies whose stock I own, get the investor relations people, identify myself as a shareholder and say I have a few questions (if you do this, make sure you’ve worked out something to ask). This is mostly because I want information, but the interactions can be revealing. INTC told me to buy a report from a broker. DIS (pre-Iger) told me they’d get back to me in a couple of days, again because the news media and brokerage analysts were more important. CASY, on the other hand, got me to the CFO right away, who chatted with me for a half-hour. 

I found INTC particularly irksome, but hugely informative. The company was going out of its way to give away information to non-owners, but telling me, an owner, that I could only get the data by purchasing it from third parties. Showed how messed up their priorities were. My sense is that management has changed since then–I’m actually an owner again–but I haven’t tried a call yet

–of course, we can we can go to stores and we can try company products

–and if we know a company well enough, we may be able to see changes early. COST is a company that comes to mind. The overall philosophy there has been to take a small markup on merchandise sales and have membership fees as the largest source of income. The original goal was to break even on merchandise, but even a 1% markup on a quarter billion dollars in sales is serious money. 

My sense is that there has always been an internal discussion about the benefit of taking a bigger markup, I imagine with a new CEO coming in, and from outside the company, this issue my well come up again. I’m torn among the road to perdition, the kiss of death and why take the risk to describe what I think the result of raising prices might be. At the very least, a change in corporate strategy would be a potential risk.