Ethically, managers have the imperative to maximize shareholder wealth, which in a Milton Friedman view of the firm is the only reason for being. Because this duty is in the long-term, managers need to ensure that assets and revenue streams are protected. The duty implies that strategic actions on the part of the firm, if correctly oriented to the creation of long-term value, will have the objective of minimizing downside risk. There is also an ethical consideration that implies managers should attempt to time actions to position the firm for large gains during upward cycles. However, conservative value management would focus more on minimizing the damage during bust periods. Managers during the Great Moderation were not oriented towards managing for high volatility, but managers today must take volatility into account in their strategic decision-making.
Corporations also need to be acutely aware of their macroeconomic environment, in particular the key variables that act on their firm. Also, they need to understand the impact of other variables on their key variables. Corporate managers today need a much higher level of macroeconomic understanding than their counterparts during the Great Moderation did. Managers during periods of macroeconomic stability can be forgiven for focusing on firm-specific volatility or industry-specific volatility as key variables. Today, more attention needs to be taken with respect to systemic risk, if the managers are to meet their objectives with respect to preserving and enhancing shareholder value. It will no longer be acceptable to simply explain away poor performance as the inevitable effect of systemic failure. Managers instead will need to devise strategies and tactics that will minimize their exposure to systemic risk -- they will need to get their betas significantly...
Managers today must first consideration that macroeconomic variables play a stronger role in the microeconomic processes of decision-making. During the 2008 recession, savings rates increased significantly and consumer demand plummeted, even among those whose jobs were not really in jeopardy. Increased volatility frightens consumers, such that they are more likely to take macroeconomic variables into account. Volatility in general changes the way that consumers behave. They might spend more during a bubble -- profligacy was rampant in the mid-2000s. The aftermath, however, will be an extended period of de-leveraging much like the American economy is experiencing now.
Other changes in the microeconomic environment also need to be taken into consideration. Variables such as rapid technology diffusion, globalization at the consumer and individual level (as opposed to the world trade level), and the world's changing demographics will also have an impact on consumer buying behavior. Companies will need to understand how these changes affect buyers. For example, information is more readily accessible now, and in many industries this is driving down margins as consumers increase their bargaining power. However, social media also has the ability to transmit emotion (irrational decision making), something that can affect purchase decisions, stock market decisions and other elements of a business' value. The new environment post-Great Moderation is arguably more complex, and certainly less well-understood that the Great Moderation era itself. Managers need to adapt to this new reality and craft their strategies with conditions of higher macroeconomic volatility in mind if they are to create and protect shareholder value.
