Below is excerpt from 23 Things They Don't Tell You About Capitalism.
Summary: Since 1980s, the decision power in US corporations started to move to the hands of shareholders. They care about short term profits, not about the employees.
> And then, in the 1980s, the holy grail was found. It was called the principle of shareholder value maximization. It was argued that professional managers should be rewarded according to the amount they can give to shareholders. In order to achieve this, it was argued, first profits need to be maximized by ruthlessly cutting costs – wage bills, investments, inventories, middle-level managers, and so on. Second, the highest possible share of these profits needs tobe distributed to the shareholders – through dividends and share buybacks. In order to encourage managers to behave in this way, the proportion of their compensation packages that stock options account for needs to be increased, so that they identify more with the interests of the shareholders. The idea was advocated not just by shareholders, but also by many professional managers, most famously by Jack Welch, the long-time chairman of General Electric (GE), who is often credited with coining the term ‘shareholder value’ in aspeech in 1981.
> Soon after Welch’s speech, shareholder value maximization became the zeitgeist of the American corporate world. In the beginning, it seemed to work really well for both the managers and the shareholders. The shareof profits in national income, which had shown a downward trend since the 1960s, sharply rose in the mid 1980s and has shown an upward trend since then.
And the shareholders got a higher share of that profit as dividends, while seeing the value of their shares rise. Distributed profits as a share of total US corporate profit stood at 35–45 per cent between the 1950s and the 1970s, but it has been onan upward trend since the late 70s and now stands at around 60 per cent. The managers saw their compensation rising through the roof, but shareholders stopped questioning their pay packages, as they were happy with ever-rising share prices and dividends. The practice soon spread to other countries – more easily to countries like Britain, which had a corporate power structure and managerial culture similar to those of the US, and less easily to other countries, as we shall see below
> Now, this unholy alliance between the professional managers and the shareholders was all financed by squeezing the other stakeholders in the company (which is why it has spread much more slowly to other rich countries where the other stakeholders have greater relative strength). Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits, and wage increases were suppressed (often by relocating to or outsourcing from low-wage countries, suchas China and India – or the threat to do so). The suppliers, and their workers, were also squeezed by continued cuts in procurement prices, while the government was pressured into lowering corporate tax rates and/or providing more subsidies, with the help of the threat of relocating to countries with lower corporate tax rates and/or higher business subsidies. As a result, income inequality soared and in a seemingly endless corporate boom (ending, of course, in 2008), the vast majority of the American and the British populations could share in the (apparent) prosperity only through borrowing atunprecedented rates.
> It was called the principle of shareholder value maximization.
But that's not what happened. It was just rhetoric for covering executive team compensation maximization. Shareholders have been screwed along with the rest of us (he says while checking his 401k).
Wild-eyed socialist that I am, the single biggest, quickest improvement to corporate responsibility and governance would be to increase shareholder rights.
It's not that simple either. Shareholders are often also stupid and prone to mob mentality.
Moreover, if your primary shareholders are, say, hedge funds, the motivations for all parties have become so removed that in that case increased shareholder rights would almost always be a bad thing, especially if your metric is over worker happiness.
I'm ignorant of hedge funds, so can't comment. I have read many laments from institutional investors about being screwed; they're the shareholders I'm thinking of (eg my county's investment manager, the team managing my 401k).
I'm aware of the "low information voter" problem. And yet I'm a pollyanna. I believe (as a matter of faith) that high quality information leads to high quality decisions.
Given the choice between corporate rule (oligarchy) and mob rule, I guess I'd side with the mob.
And note that anyone can buy and sell stocks. And yea, the wrong incentives can be worse than no incentives at all. The increase in CEO compensation AFAIK were actually helped by making it public. I wonder what would happen if it was made private again and CEOs could control it themselves like in the 1970s.
> It was argued that professional managers should be rewarded according to the amount they can give to shareholders.
To put a face on this: I had a boss who lectured my team on "shareholder value" and "capitalism" to justify his decisions regarding how he chose to restructure our team, set goals, etc. I left that company within 60 days of that lecture. Not because I fundamentally disagree with the philosophy of shareholder value, but because the outcome of his decisions destroyed my morale. Any attempt to discuss the issue with him was always steered back to increasing shareholder value. He didn't seem to grasp the fact that other things matter, too.
Most people don't know what they're doing. To be able to fill one's head with a script in the form of shareholder value is a godsend for such managers. It sure beats trying to understand the employee machine.
"Since 1980s, the decision power in US corporations started to move to the hands of shareholders. They care about short term profits, not about the employees."
Wow, that's quite a coincidence, because I don't really give a rat's ass about them either.
Corporate governance is a lot more complicated than that. In a stock corporation (generally) shareholders elect the directors which then appoints executives that execute the day-to-day management of the corporation. This doesn't necessarily translate to a lot of decision power.
Sure it does. Ultimately you do what your boss wants you to do, or you look for another job. Boards know that, and CEOs know that. Of course shareholders don't have any interest in getting involved in the day-to-day stuff. But if they want something, as a group, they get it.
You know how if you look at polling data, you'll find that a representative democracy doesn't actually act according to the will of the majority? Well, the connection between the actions of a corporation and the shareholders is even more tenuous then the connection of the public and the actions of government, there's the extra layer of the board.
I think you're reaching here. Of course representative democracies don't act according to the will of the majority. First of all, not everyone votes. Secondly, and more importantly, the electoral majorities commonly want their government to pursue policies that are in opposition to each other. That is, they want both more services and lower taxes. Ask people if they want free health care and you'll get a sizable majority. But so what? Saying you want something isn't the same thing as saying you're willing to pay for it.
Corporations are no different. Shareholders want higher returns and less risk. But they ultimately get the compromise they're willing to live with.
Summary: Since 1980s, the decision power in US corporations started to move to the hands of shareholders. They care about short term profits, not about the employees.
> And then, in the 1980s, the holy grail was found. It was called the principle of shareholder value maximization. It was argued that professional managers should be rewarded according to the amount they can give to shareholders. In order to achieve this, it was argued, first profits need to be maximized by ruthlessly cutting costs – wage bills, investments, inventories, middle-level managers, and so on. Second, the highest possible share of these profits needs tobe distributed to the shareholders – through dividends and share buybacks. In order to encourage managers to behave in this way, the proportion of their compensation packages that stock options account for needs to be increased, so that they identify more with the interests of the shareholders. The idea was advocated not just by shareholders, but also by many professional managers, most famously by Jack Welch, the long-time chairman of General Electric (GE), who is often credited with coining the term ‘shareholder value’ in aspeech in 1981.
> Soon after Welch’s speech, shareholder value maximization became the zeitgeist of the American corporate world. In the beginning, it seemed to work really well for both the managers and the shareholders. The shareof profits in national income, which had shown a downward trend since the 1960s, sharply rose in the mid 1980s and has shown an upward trend since then. And the shareholders got a higher share of that profit as dividends, while seeing the value of their shares rise. Distributed profits as a share of total US corporate profit stood at 35–45 per cent between the 1950s and the 1970s, but it has been onan upward trend since the late 70s and now stands at around 60 per cent. The managers saw their compensation rising through the roof, but shareholders stopped questioning their pay packages, as they were happy with ever-rising share prices and dividends. The practice soon spread to other countries – more easily to countries like Britain, which had a corporate power structure and managerial culture similar to those of the US, and less easily to other countries, as we shall see below
> Now, this unholy alliance between the professional managers and the shareholders was all financed by squeezing the other stakeholders in the company (which is why it has spread much more slowly to other rich countries where the other stakeholders have greater relative strength). Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits, and wage increases were suppressed (often by relocating to or outsourcing from low-wage countries, suchas China and India – or the threat to do so). The suppliers, and their workers, were also squeezed by continued cuts in procurement prices, while the government was pressured into lowering corporate tax rates and/or providing more subsidies, with the help of the threat of relocating to countries with lower corporate tax rates and/or higher business subsidies. As a result, income inequality soared and in a seemingly endless corporate boom (ending, of course, in 2008), the vast majority of the American and the British populations could share in the (apparent) prosperity only through borrowing atunprecedented rates.