As I’ve explained recently, one big problem with the U.S. economy these days is that big American companies are hoarding cash, treating their employees like ‘costs,’ and maximizing profits instead of investing in their people and future projects.
This is contributing to record income inequality and starving the primary engine of U.S. economic growth — the vast American middle class — of purchasing power.
If average Americans don’t get paid living wages, they can’t can’t buy products and services. And when average Americans can’t buy products and services, the companies that sell them can’t grow. So the profit obsession of America’s big companies is, ironically, hurting their ability to grow.
One reason American companies are treating their employees as “costs”–and seeking to minimize them–is that this is exactly what Wall Street insists that they do.
As more of the economy’s wealth has gone to investors, more of the country’s smartest and most ambitious executives have followed the easy money to Wall Street. And these folks have done an extraordinary job of capturing a record share of the country’s income and wealth for themselves.
To make America’s economy healthy again, we’re going to have to persuade (or force) Wall Street and corporate America to share more of their wealth with the folks who create it–the hundred million or so Americans who work as average employees.
But that’s going to be tough to do.
Because the “trickle-down” philosophy and power structure that has led to a record share of America’s income going to the owners (a.k.a., “capital”) has been decades in the making.
And it’s likely going to take decades to reverse.
As evidence of this, I recently got the note below from a former state public official. He offered some examples of how entrenched our shareholder value religion has become:
Your recent series on profits and pay has hit the nail on the head, and as a citizen I deeply appreciate you publishing and pressing on them. All of your points about capital winning over labour, the exaltation of short-term profits over long-term profitability and growth, and the view of labour as a cost that must always be minimized, challenge assumptions that Wall Street has baked into the “conventional wisdom” to its (and only its) advantage. From a macroeconomic standpoint, there are great arguments in favour of spreading more of a corporation’s profits to employees. So please keep making them.
For what it’s worth, I offer two additional sets of observations. In my current role, I can’t opine on these kinds of things publicly, so please don’t identify me:
1. This mindset of profit maximization uber alles is baked directly into American corporate law, in a way that makes it very hard for boards (especially of publicly traded companies) to measure success with anything other than returns to investors.
Imagine the quarterly earnings call for a company that misses the Street’s expectations — or, God forbid, lowered its dividend — because it decided to increase wages. Within nanoseconds, there would be calls for management’s heads and complaints about inefficiency or a failure to stay competitive. And unless (and until) the company could demonstrate a tangible ROI from that decision — higher sales/profits from happier, more productive employees, from a more robust local economy — it would take an enormous risk pursuing such a strategy. Success would be hard to prove, especially for the company that might try this first or early, because competitors would have an incentive to keep their employee “costs” lower and take economic advantage of the difference. Under the current Street-oriented thinking, the only companies who will raise wages are those in a space where there’s a shortage of skilled labour and a risk that they won’t be able to compete if they lose people. And that leaves out a LOT of people and job functions.
The problem of the governing law manifests itself most tangibly in the M&A context. A public company that makes itself “uncompetitive” by increasing wages risks being taken over by a private equity firm that sees an opportunity to run the company more efficiently. And the law strongly favours the takeover because the only question a court would consider if the Board declined it would be the relative return to shareholders — a long-term view of what’s good for the company or the economy would lose to investors who want a premium return now. Always. So it’s not enough to ask the question and re-frame our thinking — the rules of the game are rigged to the advantage of the capital/investor class, and boards buck their thinking to their (and their companies’) serious potential detriment.
2. This notion of investor expectations has other insidious tentacles. In my former public life, I saw investor expectations increasingly driving companies’ strategies in two overt ways.
First, despite the fact that regulated utilties are about the lowest-risk businesses in America, the companies routinely sought returns on equity of 10.5-11.75%, citing investors’ expectations. Never mind the historically low interest rate environment and the dramatically lower cost of borrowing — the companies brought in experts who opined that investors would leave these companies in droves without returns in that range. In one case, an expert argued that the low interest rate environment REQUIRED the state to increase the utilty’s return because the returns in risk-free investments like insured bank deposits and Treasuries were so low — in other words, someone had to provide an opportunity for investors to make a lot of money for little to no risk, and so it was incumbent on the state to raise electric and gas rates by a lot. Everyone just assumed that if we reached a decision that Wall Street deemed “unconstructive” or “negative,” the utilities’ credit would tighten and life would be bad, but they offered no actual evidence of this, and indeed when other factors (like the 2008 meltdown) tightened credit, they took the utilities down with everyone else. The argument was classic trickle-down — take care of investors first and then good things might happen (but might not if other factors intecede). Any state that resisted these arguments was considered a hostile regulatory environment by the investor community, even with approved returns above 9.5% for nearly every one of these companies. Regulators in many states have sided with the industry, and investors have made a ton of money with virtually no risk.
Second, more and more of the utility sector is controlled by large, publicly traded holding companies that view that business in Wall Street terms. So companies that began as local, monopoly service businesses accountable to their customers are now huge national and international companies for which which the regulated local company is expected to deliver cash and earnings to support the now-unregulated businesses in the bigger corporate family. This has happened because the financial community saw an opportunity in the 90s, got Congress to repeal the Public Utility Holding Company Act, then lobbied state legislatures to “restructure.” Enron was a HUGE player in that movement, by the way. But much as you’ve observed with regard to employees being seen as “costs,” the utility sector views customers entirely in terms of revenue and returns.
In other words, Americans, get used to your lives as serfs. The day when America’s companies once again share their wealth with all three of their constituencies–customers, shareholders, and employees–appears to be a long way off.
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