Sometimes, a throwaway sentence, a passage not intended to make a major point, ends up telling a great deal more than the author intended. One such passage popped up in a recent Wall Street Journal story that documented U.S. corporations’ scramble to buy overseas companies and thereby shift their legal residency abroad to benefit from lower tax rates. It noted that roughly 1,700 U.S.-based companies currently are holding $1.5 trillion offshore rather than bringing it home and paying taxes on it. “But that,” the story said, “has left the bulk of their funds for paying dividends or buying back shares effectively out of reach.”
Actually, those funds locked away abroad could be put to more uses than buying back shares or paying dividends if those companies brought them home. They might fund more research and development, or start a new product line, or even give employees a raise. But the Journal story has it right. American big business these days is in the business of rewarding shareholders (a group that very much includes chief executives), to the exclusion of any other activity that might help companies flourish. They’re in the business of raising their dividends and buying back stock, practices that effectively raise the value of outstanding shares but do nothing to enhance a company’s long-term value. But long-term value is a diminishing factor in many CEOs’ calculations, as they come under pressure from extortion artists — the euphemism is “activist investors” — who demand bigger dividends, and as the CEOs’ own fortunes are linked to share value as well.
As The Post’s Steven Pearlstein recently ntoed, 80 percent of the companies listed on the S&P 500 bought back shares last year, spending $477 billion on raising share values by diminishing the number of shares outstanding. The S&P 500 spent 30 percent more on dividends and stock buybacks than they did on capital expenditures. Worse yet, most of these buybacks were funded by these corporations taking on debt. Indeed, of the $3.4 trillion in debt that U.S. non-financial corporations have incurred since 2009, nearly 87 percent has gone to stock buybacks and dividend payments.
The next time a corporate CEO chastises the federal government for taking on debt to meet current expenses, tell him to clean up his own house first.
Shareholder capitalism in the United States has reached the point of absurdity. More than three decades ago, economist Milton Friedman argued that a company’s sole obligation should be to its shareholders. But even Friedman didn’t argue that companies should cut back on everything else or plunge themselves deep into debt just to raise their shareholders’ rewards. Nevertheless, that — as that Wall Street Journal so succinctly illustrated — is what shareholder capitalism has become today.
That’s why an increasing number of top business reporters and commentators have turned against shareholder capitalism. Two years ago, writing in the Harvard Business Review, that magazine’s editorial director, Justin Fox, and Harvard Business School professor Jay Lorsch argued that shareholders performed none of the three basic tasks that, theoretically, justified their claim on corporate profits: They didn’t normally provide the companies with capital (which corporations usually get through retained earnings and borrowing), they didn’t provide a barometer of the company’s value (unless you believe that the share price is always accurate) and they didn’t provide a check on management — save to feather their own nests. In a recent issue of the American Prospect, a magazine I help edit, Pearlstein delivered his own withering critique of shareholder capitalism. And last week, Martin Wolf, the chief economics writer for the Financial Times — the most venerable and respected journal for investors — argued that shareholder capitalism had become so dysfunctional that “we need to rethink ownership and control” of corporations.
Wolf’s point is that shareholders are far from the major risk-holders in the modern corporation. That distinction goes to the firm’s employees, who have “firm-specific skills.” And yet, he continued, “employees have no voice in what happens to a company to which they might have devoted their lives, while the shareholder of ten seconds does.”
The alternative model to which Wolf implicitly points is the kind of stakeholder capitalism that exists in Germany, where workers, and sometimes public representatives, take half the seats on corporate boards and have a real voice in company decision-making. Changing corporate structure in the United States will require an epochal political battle, but it’s long past time that that battle began.