The Shareholder Primacy

Last week, my newsfeed started to give me articles addressing capitalism and how we got here or maybe the impact of American capitalism. Not sure why I’m getting this influx of articles on this topic, but I will use a few posts to go over these articles because they bring up some good points. I think there are three, but I have to find the third one.

The first article addresses the history of how we arrived at this point in time with great inequality and workers agitating for work improvements or unions. The “Great Resignation” is upon us, and I don’t think the pandemic is the reason why we are in this state. The pandemic was the final push to arrive at the “Great Resignation”.

The title of the article perfectly encapsulates our state of affairs: “how shareholders jumped to first in line for profits”. This article actually came out back in 2016 but for some reason, the website or the newsfeed decided to repost it again. I just don’t know what has transpired to trigger them to post it again.

“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.” Profits for whom? For shareholders, Friedman wrote.

“How shareholders jumped to first in line for profits”, Marketplace, Scott Tong, June 14, 2016

Milton Friedman was the one who started the whole shareholder profit maximization that is still going on today. It began with his article in the The New York Times back in the 70s, roared through the 80s and 90s with numerous layoffs, cost cuttings, outsourcings – all with the shrill cry to maximize profits for the shareholders. I remember this, I lived through this, and I recognized the names and incidents in the article. A name I didn’t recognize was Michael Jensen, but I do recognize “The Theory of the Firm”.

I remember that argument about corporate managers diverting the profits from the shareholders into their own pockets.

I remember Gordon Gekko and the movie “Wall Street”, although I never have thought that movie was the reason why we’re here today. I thought of it as more representing the moods and mores of the times.

So into the business playbook went three words: maximize shareholder value.

“How shareholders jumped to first in line for profits”, Marketplace, Scott Tong, June 14, 2016

Yep, I heard that ALL the time; I’m so, so sick of it now, but that was all I heard back in the 80s and 90s.

A couple of names were mentioned in the article: Jack Welch and Carl Icahn. Those two were the ones that I thought were the face of this shareholder philosophy (along with Al Dunlap, although he could be more accurately described as the face of S.O.B. bad behavior). Whenever I think of shareholder value, I will always think of Jack Welch and Carl Icahn as well because they just epitomize that kind of cost cutting, raiding corporate executives with an eye solely for their own bottom line. They represent the worst of corporate executives.

Over the years, journalists and economists have tried to pinpoint the causes for our social decay or great inequality.

Real wages flattened. Job security became more tenuous and pensions and health care benefits eroded.

“This idea of maximizing shareholder value is an important reason why all that happened,” Wartzman said. “There are other reasons — the rise of technology, globalization, the decline of unions. But I’d put it right up there with any of those other factors.”

“How shareholders jumped to first in line for profits”, Marketplace, Scott Tong, June 14, 2016

I have always thought shareholders were a large part of our problem – they were not our friends if they cheered when people were laid off, just so their share price can go up. There is just something cruel about rooting for other people’s demise.

The problem I had was: who are the shareholders? In theory, shareholders could be anybody, if they had money and access to the stock market. My intuition was dubious about that but I had no facts to tell me who. Even today, I have difficulty getting a better answer than “individuals own stocks”. Um, yeah, right.

I don’t think the average individual owns stock.

I have found the following graphic, which I think came from Paul Krugman, who I trust to source his information from trusted sources:

Also, here’s a link to the article that appears to articulate the same set of facts on who is likely to own stocks – well, I’m seeing the same set of numbers, but I really have to dig into the article. Bottom line though: wealthy white families are holding more stocks than anyone else.

No surprise there.

So, the profits have been flowing to the shareholders, those who are already wealthy, possibly extremely wealthy.

Before the shareholder era came on, the distribution of profits was something like:

The company paid out 13 cents on each dollar in sales to taxes, 44 cents to suppliers, 36 cents to employees and 1 cent to plants and equipment. “General Electric share owners got the remaining … in dividends.”

“How shareholders jumped to first in line for profits”, Marketplace, Scott Tong, June 14, 2016

To do the math, that remaining to shareholders was 6 cents.

Today, we have:

By one measure, for every dollar in profits, 80 cents went to shareholders through dividends and what are called share buybacks.

“How shareholders jumped to first in line for profits”, Marketplace, Scott Tong, June 14, 2016

So, from 6 cents to 80 cents.

Is it any surprise companies are complaining about the skills gap? They haven’t been investing in their employees.

Is it any wonder why employees are disengaged? They know the reality. The pandemic just rearranged their life priorities.

Unfortunately, the shareholder maximization still has a hold on corporate executives.