Philippa Kaur

“SUCCESS BREEDS complacency. Complacency breeds failure. Only the paranoid survive.” So said Andy Grove, the Hungarian emigré who helped build Intel from a scrappy startup in the 1960s into the firm that did more than perhaps any other to put the “silicon” in Silicon Valley. They will be ringing in the ears of Pat Gelsinger, the firm’s new boss, who began his job on February 15th.
Mr Gelsinger is taking the helm of a company that looks, from some angles, to be in rude health. With $78bn in revenue in 2020, it is the world’s biggest chipmaker by sales. It has a 93% share of the market for powerful—and lucrative—chips that go into data-centre computers, an 81% share in desktop PCs, and operating margins of around 30%.

Yet Intel’s share price has underperformed those of rivals. Nvidia, a firm with one-seventh of Intel’s revenues, has a market capitalisation, at $370bn, that is half as high again (see chart). The manufacturing technology on which much of Intel’s success was built has fallen behind. It has missed the smartphone revolution. Some of its big customers, such as Apple and Amazon, are turning into competitors. Mr Gelsinger inherits quite the in-tray, then.

Start with manufacturing. Chipmaking is propelled by the quest for smallness. Shrinking the components in integrated circuits, these days to tens of nanometres (billionths of a metre), improves the performance of both the components themselves and the microchip as a whole. For decades Intel led the way, with its “tick-tock” strategy promising a manufacturing revolution every other year. Now “it has lost its mojo,” says Alan Priestley of Gartner, a research firm, who worked at Intel for many years. The firm’s “ten nanometre” chips were originally pencilled in for 2015 or 2016 but did not start trickling out until 2019—an unprecedented delay. The technology is still not mature. Worse, the next generation of “seven nanometre” chips are also late. In July Intel said they would not start arriving until 2022, a delay of at least six months.
Those manufacturing stumbles have cost the company some business. AMD, Intel’s most direct rival, outsources production to the Taiwan Semiconductor Manufacturing Company (TSMC), whose technology is now ahead of Intel’s. That means AMD’s chips are generally faster, and consume less power; its market share has more than doubled since 2019.
A second problem is the industry’s growing specialisation—a problem for Intel’s traditional business of making general-purpose chips, especially as desktop PCs continue to stagnate. Technology giants, flush with cash and keen to extract every drop of performance for their specific purposes, are increasingly designing their own semiconductors. In 2020 Apple announced it would drop Intel from its laptops and desktops in favour of custom-designed chips. Amazon is rolling out its “Graviton” cloud-computing processors, also designed in-house and made by TSMC. Microsoft, whose cloud business is second only to Amazon’s, is rumoured to be working on something similar.
Intel has also failed to make any headway in smartphones, the most popular computers ever made. An effort in the late 1990s to build graphics chips, which have also proved handy for artificial intelligence (AI) and to which Nvidia owes its enviable valuation, petered out. Attempts to diversify into clever new sorts of programmable or memory chips—in 2015 it paid $16.7bn for Altera, which makes them—have yet to pay off in a big way.

Mr Gelsinger has not yet said how he plans to deal with these challenges. But he does not look like a revolutionary. He began working at Intel aged 18, before leaving to run EMC, a data-storage firm, in 2009, before heading heading VMWare, a software firm, for the past nine years. In an email to Intel’s staff shortly after his appointment was announced, he invoked the firm’s glory days, describing how he was “mentored at the feet of Grove, [Robert] Noyce and [Gordon] Moore”, the last two being the firm’s founders. Like them but in contrast to his predecessor, Bob Swan, Mr Gelsinger is an engineer by training, who in 1989 led the design of one of its flagship chips.
His first job will be to try to turn the firm’s ailing manufacturing division around. Intel already outsources the manufacturing of some lower-end chips to TSMC. Its production woes will force it, at least temporarily, to send more business to Taiwan, perhaps including some of its pricier desktop and graphics chips. Daniel Loeb, an activist investor with a sizeable stake in Intel, sent a letter to the firm’s management in December urging it to abandon factories entirely and restrict itself to designing chips that other firms, such as TSMC, would make. On paper, that looks attractive: Intel spent $14.2bn on capital expenditure in 2020, almost all of it on its chip factories. AMD, meanwhile, spun out its manufacturing business in 2009, and is thriving today. Nvidia has been “fabless” since its founding in 1993.

Finding a buyer could be tricky, says Linley Gwennap, a veteran chip-industry watcher, precisely because Intel’s factories are now behind the cutting edge. Most of the world’s chipmakers, which might be tempted by the fabs, are in Asia. Since chips are a front in America’s tech war with China, politicians may veto a sale to a non-American bidder.
In any case, Mr Gelsinger has said that he will ignore Mr Loeb’s suggestion. In an earnings call in January the new boss said that, although the firm may expand its use of outsourcing for some products, he intends to pursue the expensive and difficult task of restoring Intel to its customary position at the leading edge of chipmaking. He also seems minded to pursue his predecessor’s strategy of diversifying into new products, including graphics-and-AI chips. “Our opportunity as a world-leading semiconductor manufacturer is greater than it’s ever been,” he wrote. The direction of travel, in other words, is not going to change. Intel’s shareholders will have to hope that Mr Gelsinger can at least get his firm back on the pace. More

THE HINDU pantheon of gods has no shortage of deities with multiple arms. India’s government, with a hand in industries from energy and steel to finance and travel, would fit right in. A long infatuation with central planning transformed state-run business into a sprawling industrial empire encompassing 5% of the economy. But acquiring appendages is easier than managing them. Profits as a percentage of revenues are just over 1% at state-run companies, compared with 7-9% for the private sector. Many are a loss-making burden on the public purse—more family lead than family silver.
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In 2016 the Indian government under the then newish administration of Narendra Modi reviewed the 331 firms under central-government control. It prepared a list of 28 that it believed could be sold without controversy. The most prominent were Air India, the flag carrier, steel- and cement-makers, big energy companies, a hotel operator and an assortment of entities whose time had passed, such as Scooters India (which last produced a scooter in 1997).

Five years later the number of companies controlled by the state, far from shrinking, has swelled to 348. In January Scooters India did fall off the list—by finally shutting down. The value of most survivors has shrivelled. State banks are saddled with bad loans. State energy companies have fallen victim to the shale and renewables revolutions. Air India’s rotten service has turned off customers. A note buried in the government’s 816-page survey of its holdings disclosed that production at the state-run condom-maker fell from 1.85bn units in 2018 to 820m in 2019.
This month India’s finance minister, Nirmala Sitharaman, has pledged to start offloading the leaden assets—in earnest this time. The initial list to be put on the block contains 13 companies, including two unnamed state banks. The biggest are Air India, Life Insurance Company of India (LIC, often seen as the government’s emergency bail-out provider) and Bharat Petroleum, a large refiner. Unviable companies that cannot be sold, Ms Sitharaman promised, will be shut down.
Such commitments make longtime India-watchers roll their eyes. Trade unions and bureaucrats have little to gain from transactions which undermine their jobs and authority. On the rare occasions where a past sale actually generated returns for the buyers, the bankers and officials involved were hauled before the authorities and grilled about selling too cheaply. Ms Sitharaman’s announcement has already led to an outcry from Mr Modi’s political opponents, for whom state ownership of the economy’s commanding heights is a point of pride—never mind that those heights look distinctly unHimalayan.
Government officials have been meeting business groups to say this time is different. People close to those encounters say the effort could be charitably described as sloppy. But that it is being done at all suggests a degree of sincerity on the part of Mr Modi’s administration that previous efforts lacked. The reason is India’s covid-battered finances. Without the $24bn Ms Sitharaman hopes to raise from the asset sales, the central government’s fiscal gap would expand from about 9.5% to 12% of GDP, putting India’s sovereign rating at greater risk of a downgrade.

Between LIC and Bharat Petroleum, which has a market capitalisation of $12bn and is half-owned by the state, the government could be two-thirds of the way towards its goal, bankers in Mumbai report. An accounting firm has been engaged to prepare LIC’s books, a necessary first step for a planned initial public offering. Tata Sons, a big conglomerate, is said to be interested in Air India, which it used to own before nationalisation in the 1950s. Three bidders have their eyes on Bharat, including two big global private-equity funds.
The first buyer in the new era of privatisation could be inadvertent. There is some speculation that the cash-strapped government may grant Cairn Energy, a British firm, a state-owned oilfield as part of a settlement over retroactive taxes. ■
This article appeared in the Business section of the print edition under the headline “Flogging the family lead” More

FOR DECADES America’s labour movement has been losing steam. Trade unions represent only 7% of private-sector workers. No significant piece of pro-union legislation has passed in recent years. Right-to-work laws, which undermine the clout of organised labour, have spread to 27 states. Now the union movement has been showing signs of life in, of all places, the technology industry.
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Last month software engineers and other workers at Alphabet, Google’s parent company, announced a new Alphabet Workers Union (AWU), to “protect…workers, our global society, and our world”. The union has not sought official status but charges 1% of total compensation and has just collected the first round of dues from its 800 or so members—given their plush salaries, a good-size pot to spend on lawyers. And on February 8th union-eligible workers at an Amazon warehouse in Alabama were mailed 5,800 ballots. If a majority back the creation of a union by late March, the facility will become the e-commerce giant’s first unionised one in America.

Amazon’s and Alphabet’s unions seem worlds away. The warehouse staff hark back to labour’s blue-collar roots. The AWU looks to some as a vehicle for wokeness; it is certainly a rarity in computing (see chart). But the two strands of unionisation are interwoven. Google’s coddled coders are intent on improving conditions for lower-paid data-centre workers and other TVCs (temps, vendors and contractors). “No lone wolf should howl alone without a pack,” declares a developer on AWU’s website. On February 5th the union filed a labour complaint against Modis, an outsourcing unit of Adecco. AWU alleges that Modis illegally suspended a data-centre worker for questioning a ban on discussing pay.

Alphabet can afford to improve the lot of TVCs if it has to. It can also, up to a point, humour its progressive software engineers; no serious financial harm has come of having to abandon bidding for contracts such as one to provide cloud-computing services to the Pentagon, to which some peacenik Googlers objected.
Amazon has more to lose. A good deal for Alabaman workers may inspire others to clamour for the same rights. Collective-bargaining demands, on the timing of shifts, expanding capacity or automating jobs, may dent Amazon’s flexibility and speed, says Mark Shmulik of Bernstein, a broker. That could eat away at its already-thin profit margins on retail operations, possibly forcing it to pass extra costs onto customers, who could shop elsewhere.
AWU and the Alabaman workers are spurring others. “Workers across the digital economy are feeling the moment,” says Tom Smith, national organising director for Communications Workers of America (CWA), an 83-year-old union. The CWA recently formed the Campaign to Organise Digital Employees. CODE-CWA, as it is known for short, is targeting all of tech, including notoriously harsh conditions in the video-game industry, where 60-hour “crunch” weeks ahead of big releases are common. Mr Smith says more tech workers will unveil union labour efforts shortly. Geeks of the world are, it seems, uniting. ■

This article appeared in the Business section of the print edition under the headline “Labour coders” More

IT HAS BEEN a year since the pandemic started to affect Western societies. Here is how one columnist coped as the months unfolded.
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February/March: In the beginning, all was confusion. In the early stages a “last days of Saigon” feel pervaded the city centre. The trains and offices became steadily less crowded; more and more shops closed for lack of staff. Parents turned into hunter-gatherers, desperately foraging in the supermarket aisles for the last supplies of pasta. Successful scavengers’ trolleys overflowed with rolls of toilet paper. People were braced for dystopia.

Office workers hastily caught up on the disaster-recovery plans they had previously ignored and were grateful if they were able to get a good broadband connection. Bartleby remembered that he had left all his research back at the office and made a sheepish return to a near-empty building. Heading back out with a rucksack of books and papers, he felt like a very nerdish barbarian participating in the sack of Rome.
April: Some individuals were still struggling to master Zoom etiquette. Faced with an editorial meeting on a bank holiday, Bartleby combined it with a soothing river walk. At some point, his phone (while still in his pocket) became unmuted, meaning that his heavy trudge, and heavy breathing, was audible to every other participant on the call. In blissful ignorance, he returned home to a blizzard of emails, tweets and WhatsApp messages telling him to shut up. Sure enough, “you’re on mute” and “please mute yourself” became the breakout phrases of 2020.
May: Perhaps the best month of the lockdown. The British weather was good, with the sunniest spring on record, making it possible to work in the garden. The novelty of working from home had yet to wear off, and the absence of the daily commute was still a blessing.
June: A “Groundhog Day” syndrome had set in. Every day seemed the same; weekends lost their meaning. The main dilemma for the month was whether to cancel the summer holiday, or to hold on in the hope that the decline in covid-19 cases was permanent. The prospect of any break in routine seemed absurdly alluring.

July: Foreign holiday cancelled. Start to fantasise about ways of shortening Zoom meetings. How about a countdown clock, like the ones on television game shows, as speakers approach the one-minute mark, with a loud buzzer at the end? Hint to all participants: when the person chairing the meeting asks, “Does anyone else have any comments?”, the correct answer is invariably “No”.
August: Rain ruins short domestic holiday. Restaurants reopen and Britons recreate the feasts of Bacchanalia. “Eat, drink and be merry for tomorrow we get locked down” seems to be the (prescient) motto. Meetings no shorter on return to work. More extreme measures clearly required: a mild electric shock for those who speak for more than two minutes? Or the “raise hand” button could be converted into a “thumbs down” function. If more than half the participants press it, the speaker is cut off.
September: Just as The Economist organises weekly in-person gatherings so staff can start the process of returning to work, cases begin to rise. Tip for readers: if Bartleby is invited to a summer party in 2021, it is a sign of the impending apocalypse.
October: Head back to now-empty office to pick up more books. Feel like archaeologist analysing ancient civilisation. In this era, humans sat in glass booths so they could be observed at all times. They also gathered in “meeting rooms” to take part in religious ceremonies conducted by a priest known as the “manager”, who recited a long list of meaningless tasks penitents must undertake.
November: British government imposes new national lockdown on November 5th. From this year on, the date will no longer be commemorated as “Guy Fawkes night” but as “Boris Johnson day”. All citizens will celebrate by wearing masks, washing their hands obsessively and avoiding their neighbours.
December: The house has lights, and a tree. But the real meaning of Christmas now becomes clear: no more Zoom meetings for at least a week. Not just silent nights, but silent days as well.
January: The vaccines are on their way to save us. Perhaps at some point in 2021 Bartleby will be back on the London underground, crammed in like a sardine while waiting for the platform to clear at Earl’s Court. Suddenly, social isolation doesn’t seem so bad after all.
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This article appeared in the Business section of the print edition under the headline “Diary of a plague year” More

“WE FEEL BETRAYED,” laments Petra Braun, a southern German who with her partner, Peter Wengerodt, runs Hansel & Pretzel, a German deli and bakery in Richmond, a suburb of London. Since leaving the European Union just over a month ago, Britain’s once-welcoming government has made it hair-raisingly complicated and costly to import sausages, marzipan, quark cheese, apple sauce and other authentic staples. This year she has yet to receive any of the weekly deliveries of goods from her homeland.
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The flipside of headaches for the likes of Ms Braun, whose small business employs 15 people, is a migraine for big German exporters, some of which furnish the ingredients for her fare. Deutschland AG was never a huge fan of Brexit. But the trade deal rushed through before the transition period ended at midnight on December 31st put German bosses’ minds at ease. A month into the new regime, “supply-chain problems are hitting German companies very hard”, says Joachim Lang of the BDI, the main association of German industry.

And it will get worse. Trade has slowed because of covid-19. As soon as it picks up again, commercial ties are in for a “massive stress test”, warns Mr Lang. In April British customs will introduce new rules (such as pre-notification and health paperwork for products of animal origin), followed in July by physical checks.
On February 9th the Association of German Chambers of Industry and Commerce said that 60% of the 1,200 German companies trading with Britain it surveyed consider their current business situation in Britain to be bad. Nearly as many expect further deterioration this year. One in six have either already shifted investments away from Britain or are planning to do so. They see the bureaucracy related to customs as their biggest business risk, followed by logistics and legal uncertainty.
Were it not for the pandemic these problems would make headlines in Germany, says Ulrich Hoppe, head of the German-British Chamber of Industry and Commerce in London. In January DB Schenker, a German logistics giant, stopped shipping consignments to Britain for a week. About 90% of them had incomplete or inaccurate customs forms, explains Maximilian Floegel of DB Schenker. The main stumbling block has been the proof of origin from the EU required under the trade agreement between the bloc and Britain. This is finicky to get for, say, a shoe made in Italy with a sole imported from China. DB Schenker set up a Brexit task-force to help clients with the customs bureaucracy. But, says Mr Floegel, “the problem remains acute.”
In December BMW, which pre-emptively moved engine production from Britain to Germany in 2019, warned that a no-deal Brexit would cost hundreds of millions of euros, which the carmaker would pass on to clients in Britain and on the continent. At least BMW had the resources to prepare for January’s customs checks and to stockpile car parts in Britain. The pocket multinationals of Germany’s Mittelstand face an even bigger cross-channel struggle.

Take Schott, a 250-year-old maker of sheet music for which Britain is the second-biggest market. The family company started to get anxious at the end of last year about tariffs levied on each classical piece. Delays at the border could leave British orchestras that rent its sheet music unable to get the scores in time for rehearsals, once these resume. This won’t be the last of Brexit’s unintended consequences. ■
This article appeared in the Business section of the print edition under the headline “From bad to wurst” More

“I AM BECOME meme, Destroyer of shorts.” This recent tweet by Elon Musk struck a messianic tone that his disciples lap up. The past month has boosted the cult status of the uber-entrepreneur. The GameStop saga gave him ammunition in his long-running battle with short-sellers, while also positioning him as a champion of the little guy taking on Wall Street. This week fans were spellbound by the announcement that Mr Musk’s electric-car maker, Tesla, had invested $1.5bn in bitcoin and would start accepting the cryptocurrency as a form of payment. Earlier, a barrage of cheeky tweets from Mr Musk about dogecoin (“the people’s crypto”) had sent serious investors scrambling to learn more about a digital currency that started as a joke.
Impish humour is a Musk hallmark, but the impact of his missives is no joke. They can set herds stampeding. His bitcoin announcement propelled it to new heights. Tesla’s market value briefly climbed back towards $830bn, near its peak. The history of business is littered with Pied Pipers but, as Peter Atwater, a social psychologist, points out, none has matched Mr Musk for the number of things he has helped turn red-hot, from cars and crypto to space travel and Clubhouse, a live-podcasting app he appeared on. That invites two questions. What makes the Musk scent so intoxicating to so many? And what are the pros and cons of being a cult CEO?

Larger-than-life business figures enjoy various degrees of celebrity. One category includes bosses of big firms who, while charismatic, fail to inspire feverish devotion. Jeff Bezos, Amazon’s outgoing boss, commands admiration on Wall Street and envy in other corner offices, but is too restrained to attract drooling groupies. Similarly, in his 20 years running GE, Jack Welch earned a reputation (since disputed) for red-toothed success, but was too cold-blooded to mesmerise the masses.
The second group comprises tycoons who achieve cultlike status but whose businesses scarcely warrant the adulation. Their trademark is often shameless self-promotion. Richard Branson has spent decades cultivating an image as a corporate hippy-cum-pirate who takes on complacent incumbents in industries from aviation to finance. Donald Trump touted himself as the arch-dealmaker. Both have hordes of wide-eyed fans. Neither has built a business that comes close to $10bn in value or is built for stability.
The third category is more exclusive: those who build both cults of personality and huge businesses. Joining Mr Musk in this club is Jack Ma, the founder of Alibaba, China’s tech titan. Millions of Chinese college students and other wannabe entrepreneurs bought into the image he cultivated, of a humble teacher turned philanthropic tech titan with a splash of cultural cool (he once appeared as a tai chi master in a martial-arts film). Admiration of Mr Ma has often verged on religious fervour. In 2015 a group of online merchants created a shrine to him, to bring them good luck on “singles day”, an e-shopping festival.
Messrs Musk and Ma walk a trail blazed by an Indian business legend: Dhirubhai Ambani, who founded Reliance Industries, a petrochemicals-to-telecoms conglomerate. The son of a village schoolteacher who cut his teeth trading polyester yarn, Ambani pioneered the equity cult. His trick, in a country where companies had long relied mostly on banks for funding, was to see the untapped potential lower down the pyramid. He toured India, convincing middle-class savers that they, too, could join the capitalist class. When Reliance went public in 1977 it attracted 58,000 punters. The shareholders he drew in have done well: the share price has gained 275,000% since the flotation. When 30,000 of them turned up to pay homage at one general meeting, it had to be moved to a park. These days only Warren Buffett attracts zealots in such numbers (or did before covid-19).

Cult status confers perks. Equity is cheaper when those buying it are devout retail investors, not hard-headed institutions. Small investors are also more patient, heeding calls to “keep the faith” during profitless investment splurges. Marketing costs are low; Mr Musk can use social media to burnish his (and Tesla’s) brand for nothing. Fans are willing to overlook flaws that more dispassionate consumers won’t. Tesla’s build quality is hardly world-class and regulators, most recently China’s, frequently flag up concerns. Yet it is hard to see that reflected in the firm’s sales or share price. Lastly, mass appeal means political clout. Ambani’s popularity helped him bend India’s trade policy to his advantage. Mr Musk’s helps explain soft treatment by governments and regulators, over rogue tweets or reopening factories in the pandemic.
But combining star power and scale is not risk-free. Mr Musk forged his reputation as a David, fomenting rebellions against Detroit and Wall Street elites. But now he is a Goliath: the world’s richest man who runs its most valuable carmaker. Playing both roles is a dangerous game. This is made more so by being a cultural icon, which leaves him more vulnerable to changing social taste—and taste can change in a trice online.
Ye shall fund you no idols
Sentiment could turn if his devotees start to doubt he has their interests at heart. Ambani was able to bat away repeated allegations of financial manipulation; he beat back short-sellers with help from a group of brokers known as “Friends of Reliance”. Mr Musk may not be so lucky. Acolytes who piled into GameStop stock after his “Gamestonk!!” rallying cry on January 26th were buying near the top. His recent crypto-talk looks self-serving in light of Tesla’s bitcoin move.
Finally, political advantage can turn into a bane. Just ask Mr Ma, who, overestimating his power, publicly chided Chinese regulators last year. Irked, Beijing scuppered the planned listing of Ant, Alibaba’s financial affiliate, and is forcing it to restructure. Joining the ranks of cult CEOs may lower your cost of funding. But it raises the cost of miscalculation. More

BEFORE THE pandemic investors favoured companies with strong sales growth, low debt and high return on assets. In the past three months, they have been ploughing money into smaller, underperforming firms that have barely survived the covid-19 recession. A robust economic recovery, Wall Street seems to think, will pull the most covid-impaired away from the abyss and towards financial outperformance. Right now, says Jonathan Golub of Credit Suisse, an investment bank, “the market is rewarding failure.”

The bet on weaklings is the latest sign, if any more were needed, that 2020 marked a weird year in modern corporate history. Far from imploding, as many feared after the virus drained the life out of the world’s stockmarkets in March, America Inc has emerged from the plague year looking astonishingly healthy. It did not take long for analysts to start revising their profit forecasts back up (see chart 1). Even then, four in five of those big firms which have reported their latest quarterly results beat projections. Their aggregate earnings in the three months to December surpassed estimates by over 17%.
The losers—particularly in industries such as hospitality, travel and energy, which rely on people mixing or moving about—lost a lot. Of the 305 S&P 500 firms that have so far presented full-year results, 42 ended 2020 in the red, up from 18 the year before. Their losses added up to $177bn, five times as much as the comparable figure in 2019. But the winners won big: $860bn, all told, just 12% below last year’s profit pool. The technology titans without whose products socially distant shopping, work, socialising and entertainment would be impossible made more money than ever. Wall Street appears to be wagering that both winners and losers have room for improvement (see chart 2).

Big firms are the most bullish. A survey last month by Corporate Board Member, a trade publication, found that overall confidence has risen at public companies. Nearly two in three board members rated their firm’s outlook “very good” or “excellent”. Three-quarters of chief executives expect revenues and profits to increase, compared with less than two-thirds in December. Half predict increased investment.
Lacking the access to capital enjoyed by bigger firms, most of the smaller firms of the Russell 2000 index were bleeding red ink mid-pandemic. Now things are looking up even for them. In the last quarter the Russell 2000 posted a gain of 31% , far outpacing the 12% notched up by the S&P 500. The latest survey by Vistage, an executive-coaching outfit, found that 64% of bosses at small and medium-sized business plan to expand their workforce this year, up by a fifth from the previous quarter. Two-thirds think sales will increase in 2021. Over half expect profitability to rise.
There are two main reasons for this perkiness. First, investors are pricing in the successful rollout of vaccines in America by the summer, which would help reopen the economy. Citigroup, a bank, calculates that Americans have squirrelled away nearly $1.4trn in unspent income over the past year, which translates into oodles of pent-up demand. All told, $5trn or so is sitting idle in money-market funds which could be spent—on everything from a fresh pair of shoes to new shares—once the pandemic recedes. Second, it is widely assumed that unified Democratic control of the White House and Congress will mean continued fiscal and monetary stimulus that could fuel that demand further still.
These considerations have led financial forecasters to project that S&P 500 revenues in 2021 will match or surpass the levels seen in pre-pandemic 2019 for most sectors, according to Goldman Sachs, an investment bank. By 2022 everyone except America’s oilmen should be in rude health. Gregg Lemos-Stein of S&P Global, a credit-rating agency, foresees a speedier-than-expected revival in health care, building materials, business services and non-essential retail (see chart 3). On this interpretation, share prices have room to soar.

Two dangers lurk. If President Joe Biden fails to get something resembling his proposed $1.9trn stimulus through Congress, investors and bosses may start feeling jittery, regardless of the views of macroeconomists, many of whom worry that the stimulus plan is excessive. Given the uncertainty over post-pandemic demand for large industries such as corporate air travel, now that CEOs have concluded that Zoom is often a decent alternative, understimulation is a bigger risk than overstimulation, says the boss of a big private-equity firm.
The other danger is the vaccine rollout. The pace at which American states are administering the inoculations is indeed decent compared with most other big countries; only Britain has done a better job so far. But nine in ten Americans have yet to receive a single dose, let alone the full two. And a distressingly large share may refuse to be vaccinated. At the same time, the emergence of virulent new strains of the virus could mean that the transition from pandemic to no pandemic will not be a binary switch but a sliding scale. American business may need to cope with a much messier scenario of partial lockdowns and ongoing endemic disease for years.

In 2020 a strong stockmarket sat awkwardly atop a sickly economy. In 2021 the opposite may be true, thinks Michael Wilson, of Morgan Stanley, a bank. Yes, the recovery will be “extraordinarily robust”, he believes, with both GDP and earnings growing briskly. But, he warns, the stockmarket has “already priced in too much good news”. The pandemic year’s corporate champions may find that their solid sales included a lot that were pulled forward, so disappointment is all too conceivable. The stragglers’ valuations already look rich.
If the virus does turn endemic, and the recovery slows, the disconnect between Wall Street and Main Street may become untenable. Tobias Levkovich of Citigroup is confident that companies will learn how to find opportunities even under conditions of continued topsy-turviness. As for investors, the best ones “don’t try to predict the market,” says the private-equity boss. “They adapt quickly.” The year 2021 will offer them plenty of opportunities to shine in that department. More

HOW BEST should managers be incentivised? In the biblical parable of the talents, a master divides his property among three servants before going away. Two put his money to work and double its value; the third buries it in the ground. The first two servants are rewarded and the third is punished.
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The biblical story is an early example of the principal-agent problem. When delegating authority, how can a principal be sure that their agents will act responsibly? The problem is usually discussed in terms of the potential for the agents to be greedy, and take money for themselves. The unfortunate servant in the parable acts out of fear, declaring: “Master, I knew you to be a hard man.” Sure enough, the servant is cast into the “outer darkness” where there will be “weeping and gnashing of teeth”.

In the corporate world, some say, fear plays as big a part as greed in distorting manager incentives. Critics claim that managers are unwilling to invest in long-term projects because they fret this will damage the company’s profit growth in the short term. If that happens, the managers may worry that they will be fired by the board, or that the company will be subject to a takeover bid.
Companies have several layers of agents. The board is worried about pressure from fund managers who are themselves acting on behalf of the underlying investors, and fear losing clients if they do not deliver above-average returns.
Lucian Bebchuk of Harvard Law School argues that there has been too much focus on the role of institutional, and particularly activist, investors in driving short-termism. Writing in the Harvard Business Review*, he notes that managers at both Amazon and Netflix have been able to pursue long-term growth at the expense of short-term profits without experiencing any significant pressure from shareholders. Indeed, growth stocks in general (defined as those where the value depends on the expectation of future increases in profits) have been very much in fashion in recent years.
Mr Bebchuk says this short-termism “bogeyman” has been enlisted to argue in favour of insulating managers from shareholder control using restricted voting rights, special shares and the rest. Some think executives may be constrained by the concentration of ownership in a few institutional hands, as the fund-management industry consolidates. Mr Bebchuk believes it is foolish to think back to a “golden era” when share ownership was dispersed. Managers may have felt no pressure to produce short-term results. “But”, he says, “they felt no pressure to produce long-term results either.”

Perhaps the problem lies not with investors, but with the incentives used to motivate executives. Andrew Smithers, an economist, has calculated that the proportion of operating cashflow paid out to shareholders by non-financial American companies was just 19.6% between 1947 and 1999. By the end of that era, share options became a popular means of motivating managers. Subsequently, the proportion of cashflow paid to shareholders averaged 40.7% between 2000 to 2017, while cash used for investment fell.
To examine the effect of incentives, Xavier Baeten, a professor at the Vlerick Business School in Belgium, studied the Stoxx Europe 600 index of big European companies between 2014 and 2019. When he compared individual firms’ returns on assets with the chief executives’ remuneration, he found a positive impact of high pay on performance over the short term, defined as the next 12 months. Yet no such relationship showed up over a three-year period, implying that the initial gains soon dissipated. (The study controls for variables including a firm’s size.)
Mr Baeten then examined the composition of the executives’ packages. He found that short-term performance was better when incentives were more than 200% of base pay than when incentives were less than 100%. He also found that after the first 12 months, the impact switched. Executives with incentives of more than 300% of base pay performed significantly worse in the next two years than those who received less than 100%.
This is not proof that executive incentives have led to an excessive short-term focus. But it suggests the need for carefully designed incentive schemes. The principal-agent problem requires eternal vigilance by shareholders. Get the formula wrong and weeping and gnashing of teeth will follow.
*https://hbr.org/2021/01/dont-let-the-short-termism-bogeyman-scare-you
This article appeared in the Business section of the print edition under the headline “Talent management” More