The American corporation has been transformed by globalization and new technology. But equally powerful is the belief on Wall Street and in boardrooms that the sole responsibility of a corporation is to maximize profits for its shareholders.
For many people, it feels like the wheels have come off the American Dream. Wages are stuck. The once sure-fire step up, a college degree, is becoming unaffordable. Jobs a family can plan a future around can seem scarce. Much of the angry passion this election year stems directly from these concerns about Americans’ personal economies.
In response, candidates for president have offered a wide range of solutions: Bring back jobs from overseas. Keep out immigrants. Drop out of international trade agreements. Rein in Wall Street. Reform campaign finance laws. Invest in infrastructure. Train Americans for jobs of the future. Slash taxes on job creators, the rich.
What the candidates all shared was an outdated vision of corporate America. They grew up in an economy ruled by big corporations like General Motors, General Electric and IBM, which provided careers and the financial security that defines middle class.
These corporations put customers first, then employees, then community and then shareholders. But in the last half-century — in the candidates’ lifetimes — that corporate ethos turned upside down.
Call it the rise of the Shareholder Value Economy. Corporations had no choice but to react to foreign competition, the globalization of wages and the advantages of new technologies. They had to change how they did business. They had to cut, lay off and restructure.
But what also changed was the idea of what corporations are for. What business schools teach today, and what Wall Street enforces and CEOs carry out, is that a corporation’s only responsibility is to make as much profit as possible for shareholders.
Now, that might seem reasonable. If you have an IRA or 401(k), you’re a shareholder, and you’d like to make as much money as possible. That’s natural. And a lot more Americans are shareholders that way than just 30 years ago. But hedge funds and other investment funds are far bigger shareholders, and their goal is to make as much money as possible now. What are the costs of businesses putting profits for those big, short-term shareholders before everything else?
One answer: middle-class jobs and income. It's simply faster to raise profits by cutting jobs and wages than by investing in growth. And that’s what big corporations have done the last 30 years, cutting and laying off to increase profits, in the process transferring trillions in wealth from the workforce to Wall Street.
A baby boomer’s lifetime ago, General Motors agreed to a union contract that helped create the American middle class. Its agreement with the United Auto Workers in 1950 gave assembly line workers health insurance and pensions. Now even factory workers had economic security. But GM didn’t make the deal out of generosity. It wanted to avoid strikes. The UAW wanted to provide for workers who were “too old to work and too young to die.” In the “Treaty of Detroit,” GM promised benefits to be paid in the future for a contract barring strikes then.
GM was the nation’s largest employer, and the new benefits spread quickly among companies. Big corporations, not government, would provide the safety net that enabled a new middle class to greet the future as confident consumers.
The corporation had been a legal entity just right to serve the world’s first mass market, the United States, in the early 1900s. It owned itself, but could raise huge sums by selling stock. It could invest in giant projects like steel mills and car factories because it could live forever. The corporation thrived on efficiency of scale. It rewarded size. By 1930, the economist Gerald Davis writes in “The Vanishing American Corporation,” just 200 companies held half of all corporate assets. By 1970, just two dozen employed one of every 10 workers in the U.S.
Now, skip ahead that baby boomer’s lifetime, to today. A lot has happened to corporations.
Japan and Germany rebuilt after World War II and became competitors. Factories that moved to the South for low wages found even lower wages overseas. Computers and the internet eliminated layers of jobs. And Wall Street — an enabler of economic activity — became the economy’s biggest profit generator. In 2007, just before the financial crisis, finance produced 40 percent of all corporate profits.
What does General Motors look like in today’s economy?
Eight years after the 2008 bailout by the federal government, General Motors employs one-fourth as many people as it did in the 1980s.
Last year, United Auto Workers members got their first GM raise in 10 years — while GM threatened to move more jobs out of the U.S. if wages went higher.
At the same time, GM announced it’s spending $5 billion to buy back its own shares, raising their value for big investment funds that own them.
GM is not alone in cutting jobs and wages to “stay competitive” as it spends billions of those savings to boost returns for shareholders. Cutting, once applied to bloated conglomerates like Gulf and Western Industries, or needed as a response to global competition and other changes, is now used to raise profits for shareholders. Wall Street once made money by injecting capital into corporations. It now makes money by taking money out.
The result: An immense redistribution of wealth from workers to CEOs and big investment funds. Size — and jobs — are no longer an advantage for corporations.
Listen to business news on cable TV, and you’ll hear bankers, fund managers and CEOs talk about a corporation’s legal responsibility to “maximize shareholder value.” The idea that the product of a corporation is profits is gospel. It’s taught in business school. But it’s not true.
“Just pick up the Supreme Court case, Hobby Lobby, decided just a few years ago,” said Lynn Stout, a Cornell law professor and the author of “The Shareholder Value Myth.” “Read the majority opinion, where Justice Alito says, ‘Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else.’”
Coming out of World War II, big corporations produced almost everything in-house. It was the most efficient way, the most profitable way, to organize work. An experienced workforce was an asset. One result: lifetime careers. Shareholders came after employees in a company’s long-term success. They didn’t own the company. They hadn’t directly invested money in it. Most bought shares from other shareholders, betting that their value would go up.
That worked for everyone, as corporations grew and grew in the 1950s and ’60s. But when the growth stopped, debate over “who is a corporation for?” resumed. Employees, communities, the environment, fighting inflation — all these took money from shareholders, economist Milton Friedman wrote. It was “unadulterated socialism.”
Now, this was half a century ago — beyond most people’s lives or memories. Corporations did face new challenges and did have to change. But shareholder-first thinking kept growing, and if shareholders always got more, others had to get less.
Loyalty to employees went early. General Electric was known as a company that offered lifetime employment. But in the 1980s, new CEO Jack Welch eliminated 100,000 jobs, closing or selling entire lines of business.
“You can guarantee lifetime employability by training people, making them adaptable, making them mobile to go other places to do other things,” Welch said. “But you can’t guarantee lifetime employment.”
If jobs were the first target, how to spend a company’s profits was next. A corporation can invest in itself and grow or — what? Giant investment funds pressed for higher returns — higher share prices. An increasingly favorite strategy was to spend profits buying back the company’s own shares. It was financial engineering: fewer shares, higher share price.
The former corporate raider Carl Icahn, for example, started buying shares of Apple in 2013, and eventually owned more than 50 million, nearly 1 percent. He pressured Apple to buy back shares — and Apple is spending more than $100 billion doing so.
Icahn sold his shares this spring. Economist William Lazonick, the author of a shareholder-value analysis, “Profits Without Prosperity,” noted that Icahn was a share-renter, not a shareholder. He never invested a dollar in Apple itself.
Icahn said his investment in Apple shares netted him $2 billion. Apple? Its shares are below what the company paid for them. So far, Apple is a loser.
The financial crisis bottomed out in 2009. Over the next six years, American corporations went on a $2.7 trillion spending spree — buying back their own shares. How much is $2.7 trillion? More or less, the entire value of Alphabet. And Apple. Microsoft. Berkshire Hathaway. ExxonMobil. Facebook. And Amazon.
What happened to all those shares the corporations bought? They went away. Gone. What happened to that $2.7 trillion? Ah….
Publicly owned corporations today are like sharks: They have to keep moving forward or they die. Wall Street demands ever-higher profits. “Wall Street” is shorthand for not only the big investment banks, but also hedge funds, pension funds, endowment funds and mutual funds. That is, us. Everyone wants the highest possible returns, often without thinking about how they’re gained.
Few businesses grow forever. Industries rarely invent what replaces them. Railroads did not invent cars. Newspapers did not invent the internet. So there will come a time when a corporation is making money but standing still. What to do? These mature companies need to keep Wall Street invested in them. And this is where investment funds come in and say, raise cash and use it to grow your share price. Profits become these companies’ product. It’s called financialization.
This cash can come from profits, or from selling assets, or from cutting costs — for example, jobs. If a company is not going to spend it on its workforce, or new products, or expanding its market, what is the best way to return it to shareholders?
Quarterly dividends are a time-honored way. They’re like interest on a savings account. But, like a savings account, they create expectations, plus they’re taxable. In 1982, the Securities and Exchange Commission opened the door to another way for companies to return money: buying back their own shares on the open market.
Now, buying back its own shares doesn’t change a company’s performance; it changes its financial report. Fewer shares, divided into the same earnings, produce an increase in earnings-per-share. That’s an important target for executives.
Buying large numbers of shares can also bump up a company’s share price. Demand raises price. But that rewards shareholders who then sell. Hedge funds, for example, that bought stakes and pressured directors to buy back shares. Executives who get bonuses based on share price.
That $2.7 trillion in share buybacks? It did nothing to grow companies, invent new products, enter new markets or attract and train the best, most productive workers to help them do all those things.
To the extent it propped up the stock markets — by some estimates, corporations became the biggest buyers of their own shares — a lot of the gains went to fund managers. Hedge funds typically take 20 percent of clients’ gains.
Assets, you might think, are a good thing. Your house, if you own one. Your savings. That $10 million you’ve hidden in Luxembourg (just kidding). But in business … assets used to be good. A company owned a steel mill, so it had the ability to mass-produce steel. It had a large roster of experienced steel workers, who made the steel. And it had accountants, a personnel department, salespeople, engineers and maintenance workers, because that was the most cost-efficient way to get everything done: in-house, by people who knew the business.
Today, when investors rate businesses by how much profit they generate, assets are not so good. When Wall Street analysts compute “return on investment,” the smaller the investment, the larger the return. That steel mill? It’s like an anchor. A big workforce, lots of jobs plus benefits? Another anchor.
When Wall Street demands ever-higher profits, one way to generate them is, paradoxically, to get rid of assets. Sell that steel mill. Automate those workers, or hire temps in their place. Get all that stuff off the books. As Gerald Davis, the author of “The Vanishing American Corporation,” has written, “Under current conditions, creating shareholder value and creating good jobs are largely incompatible. Companies are job creators only as a last resort.”
In Nashville, Marketplace's Sarah Gardner met an emergency room doctor who is a contractor, employed by a staffing agency that works with hospitals. She talked to people who worked for Nissan as assembly line temps. All automakers rely on them; General Motors said this month that one-fourth of its workforce is made up of temps, so it can adjust numbers at any time.
Any job that can be contracted out reduces a company’s assets and increases its bottom line. And technology now makes it easy. Uber and similar online platforms are a very small slice of the workforce at this time. But as Davis writes, as the shift from careers to jobs to tasks proceeds, “when smartphones are ubiquitous, Uberization has the prospect of turning the world into a Home Depot parking lot.”
The lesson: traditional government incentives aimed at encouraging companies to create jobs are misplaced when companies see no value in creating jobs.