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The failure of shareholder capitalism (Read 160 times)
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The failure of shareholder capitalism
Aug 1st, 2019 at 12:24am
 
The rising share prices seen daily are a symptom of the priority given to shareholder return over wages in industries of the developed world.

Health insurance and utility cost perpetual rising prices exemplify the fact that prices must rise by 10+% a year to satisfy shareholders desire for earnings growth.

Donald Trump and his stoolies falsely stated that corporate tax cuts would flow into higher wages, but this did not happen apart from some minor one-time payments of bonuses.

After the tax cuts profit growth stalls again without more stimulus.

https://www.salon.com/2011/03/29/failure_of_shareholder_capitalism/

Quote:
The failure of shareholder capitalism
Companies exist for their workers and their communities -- not just their CEOs and their investors


MICHAEL LIND
MARCH 29, 2011 3:01PM (UTC)
The verdict is in: The Thatcher-Reagan-Blair-Clinton model of capitalism is a failure.

By cutting taxes, slashing wages and destroying unions, the U.S. was supposed to lead the world in high-tech industry. But a recent study by the Asian Development Bank found that the majority of the added value of iPhones assembled in China come from high-tech companies in Japan, Germany and South Korea, whose inputs dwarf those from American companies. For a generation we've been told that the European and Asian capitalist countries were doomed by statism and high wages. Instead, they dominate global high-tech industrial production, while the U.S. continues to be deindustrialized.


Oh, well, who needs manufacturing, anyway? Let the rest of the world make things; we'll invent them and live off the royalties. Right? Wrong. The tech sector employers only a tiny number of Americans -- and offshoring the production of goods invented here will only shrink that number further.

Most Americans work in the nontraded service sector. In the last decade, as the economist Michael Mandel has pointed out, almost all of the new jobs have been created in health, education and government,  which share one characteristic in common: low productivity and rapidly escalating costs. The other big growth area, before the 2008 crash, was in the largely unproductive FIRE (finance, insurance, real estate) sector, where high salaries enticed smart young Americans who might have manufactured useful goods and services into manufacturing the toxic financial products that brought down the world economy. The homeland of Margaret Thatcher became even more dependent on a bloated financial sector than the over-financialized U.S.

Still not convinced that the Anglo-American model of the last generation is a failure? Orthodox economists recite the dogma that if productivity goes up worker compensation will follow. But according to the economist Alan Blinder in a Wall Street Journal Op-Ed titled "Our Dickensian Economy" last year, since 1978 productivity in the nonfarm business sector has grown by 86 percent, while real compensation -- wages plus benefits -- has grown only 37 percent. Take out the increased benefits, which tend to be eaten up by cancerous health insurance costs, and the real average hourly wage has not increased in 35 years.

Where have those missing gains from productivity growth gone? To a small number of rich American shareholders, CEOS and highly paid professionals, thanks to "shareholder capitalism."


Shareholder capitalism is the doctrine that companies exist solely to make money for their shareholders. It is frequently contrasted with stakeholder capitalism, which holds that companies exist for the benefit of their customers, workers and communities, not just for ever-fluctuating number of mostly remote and unengaged passive investors who just happen to own stock in them, often without even being aware that they do.

The rise of shareholder capitalism in the U.S. is often dated to an influential article in the Journal of Financial Economics in 1976, titled "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" by Michael C. Jensen and William H. Meckling. They argued that shareholders should demand higher returns from complacent corporate managers. The idea of shareholder value was publicized by a 1981 speech in New York by Jack Welch, who had just taken over General Electric, and by Aflred Rappaport's 1986 book "Creating Shareholder Value."


The shareholder value movement sought to persuade corporate managers to ignore the interests of all stakeholders like workers, customers and the home country, other than shareholders. Granting CEOs stock options, in addition to salaries, was supposed to align their interests with those of the shareholders.

The theory had an obvious problem: Who are the shareholders and what are their interests? Most publicly traded companies have shares that are bought and sold constantly on behalf of millions of passive investors by mutual funds and other intermediates. Some shareholders invest in a company for the long term; many others allow their shares to be bought and sold quickly by computer software programs.


Unable to identify what particular shareholders want, CEOs with the encouragement of Wall Street have treated short-term earnings as a reliable proxy for shareholder value. According to shareholder value theory, breaking up a firm and selling its pieces might maximize shareholder value in the short run more than long-term investments that would not pay off for many years.  ...
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Ye Grappler
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Re: The failure of shareholder capitalism
Reply #1 - Aug 1st, 2019 at 1:00am
 
By George - your holiday has done you the world of good... keep up the good work.

So the attempt at stimulation of the economy via trickledown has proven a failure - so what's left?

The Labor concept of stimulation via government payments to the many?

This already occurs in genuine welfare issues such as PPL and childcare subsidy and quite a few corporate let-offs and generous donations from governments.... where does the stimulus need to be applied?

Offering the minority = shareholders, a bonus gift didn't work... trickledown farted and then stopped up .... giving the majority a government stimulus is a short-term measure......

Ergo - do we need to be looking at long-term deficiencies in the underpinning of the economy?  What are those and how can they be improved or replaced with underpinnings that actually do something?

A house built on sand cannot long stand .....   Huh
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« Last Edit: Aug 1st, 2019 at 1:05am by Ye Grappler »  

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”
― John Adams
 
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Re: The failure of shareholder capitalism
Reply #2 - Aug 1st, 2019 at 9:16am
 
"Company owners are choosing to maximize short-term profit by paying their employees as little as possible."

...

...

https://www.businessinsider.com/henry-blodget-better-capitalism-1-2018

Quote:
It's time for better capitalism
Henry Blodget Jan. 23, 2018, 10:00 AM

Over the past few decades, the US economy has undergone a profound change.

This change has helped rich Americans get richer. But it has also contributed to growing income inequality and the decline of the middle class. In so doing, it has fueled populist anger across the political spectrum and slowed the growth of the economy as a whole.

What is this change?

The embrace of the idea that the only mission of companies is to maximize short-term profit for shareholders.

Talk to some people in the money management business, and they'll proclaim that this is a law of capitalism. They'll also cite other supposed laws of capitalism, including the idea that employees are "costs" and competent managers should minimize these costs by paying employees as little as possible.

But these practices aren't actually laws of capitalism.


They're choices.

They're choices that arose out of the shareholder activism movement that began in the early 1980s — a movement that was reasonable and necessary back then but has since been taken too far.

And they're choices we should revisit if we want to restore a sense of fairness and opportunity to reinvigorate our economy.

Not long ago, America's corporate owners and managers made different choices — choices that were better for average Americans and the economy. These managers and owners also had a profoundly different understanding of their responsibilities.


"The job of management," proclaimed Frank Abrams, the chairman of Standard Oil of New Jersey, in 1951, "is to maintain an equitable and working balance among of the claims of the various directly interested groups… stockholders, employees, customers, and the public at large."

By paying good wages, investing in future products, and generating reasonable (not "maximized") profits, American companies in the 1950s and 1960s created value for all of their constituencies, not just one. As a result, the country and economy boomed.

Over more recent decades, however, this balance has radically shifted.

The stagnation and bear market of the 1970s contributed to the rise of shareholder activism, a trend immortalized in the 1980s by the fictional corporate raider Gordon Gekko in the movie "Wall Street." In that era, American companies had become bloated and complacent, and they needed a kick in the ass. "Greed is good," Gekko declared, while firing smug, overpaid managers and restructuring weak companies. Beleaguered shareholders justifiably cheered.

But 30 years later, Gekko's shareholder revolution is still going strong, and the pendulum has now swung too far the other way. Urged on by a vast and hypercompetitive money management industry, American companies now increasingly serve a single constituency — shareholders — while stiffing employees and minimizing investments in future products.

This "shareholder value" religion is visible in the divergence between profits and wages.

Corporate profit margins have been rising for 15 years and are now near their highest levels ever. Corporate wages, meanwhile, have been declining for four decades and are near their lowest level ever.

Nor are these the only ways that the "shareholder value" obsession has warped our economy.

The richest 1% of Americans now own nearly 45% of the country's wealth, near the highest level since the "Gilded Age" of the 1920s. These Americans had an average net worth of $14 million in 2013. At the same time, the average wealth of "90%-ers" has plunged in recent years to just above $80,000, the same level as in the mid-1980s. Millions of Americans who work full time for highly profitable corporations earn so little that they're below the poverty line. The bottom 50% of Americans own nothing.

Beyond fairness and decency — the ethical decision to share more of the economic value a company creates with the people who devote their lives to creating it — the profit-maximization obsession also hurts the economy.

Why?

Because wages and investments at one company become revenue for other companies.


Consumers account for about 70% of the spending in the economy, so our spending is what drives economic growth. Most consumers work, so another name for them is "employees." And except for the richest Americans, most of us spend almost everything we make.

When we are paid less, we have less to spend, and economic growth slows. When we are paid more, we spend more, and growth accelerates.

Consumer spending also drives business investment. When consumers are flush, businesses invest aggressively to meet demand. When consumers are strapped, however, companies sit on their cash — or just hand it to shareholders. Amid today's already weak demand, companies are exacerbating the problem by cutting investments and increasing dividends and stock buybacks.

To be clear: There's nothing necessarily wrong with some hedge fund managers making $500 million a year — or a president being worth a self-reported $10 billion ...
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Ye Grappler
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Re: The failure of shareholder capitalism
Reply #3 - Aug 1st, 2019 at 11:54am
 
Nothing new - the problem arises when they break the laws in doing so, and you could extend that to discussion of offshoring industry for cheaper labour, a move that only postpones the inevitable collapse of that industry, BTW.  Those market and social forces that develop at an accelerating rate once you intervene in a local poverty economy soon catch up and render your move equally uneconomical.  Look at China these days with rising social disruption based on economic divide, and Hong Kong seeking to assert its independence.

How will the world respond when the Chinese government sends in the tanks?  How many New Robber Barons are pissing in their pants at the prospect of sanctions against Chinese trade?
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“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”
― John Adams
 
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