It’s that time of year again.  Where I have the perennial argument with some clients and friends about who really owns American corporations.  After all, they show me their stock certificates.  That is their “proof” that they own a portion of the corporation.

Except…

Do they get to vote on the directors or owners of the firm?  Or, do they just get to provide lip service to the choices the firm already made?  Which management has already worked out deals with other corporations who own large blocks of stock that swamp the needs and desires of individual investors (who typically constitute the majority of stockholders), yet who have no real say in corporate management.

Or, maybe they need to recognize that it is impossible to get a vote on executive compensation.  Oh sure- an individual may post the vote- but  for a non-binding decision.

Or, that corporations believe they have the right to take corporate funds and buy back corporate stock.  35 years ago, that would have been an illegal action.  But, like the situation that pertains in the current Administration, wolves were inserted into the government, who abrogated rules that had long protected the public from corporate venality (pollution, buybacks, oil drilling in sensitive areas, etc.)

You see, in 1981, John Shad was the CEO of  E.F. Hutton (acquired by Smith Barney after his departure, and subsumed yet again by J.P. Morgan Chase). But, then, for the first time in 50 years, a Wall Street executive was appointed to the head of the Securities and Exchange Commission. And, after 1 year in charge, Shad removed the rules against stock buybacks (which were properly called ‘stock manipulation’ by the rule he abrogated).  That change has led to the ability of firms to provide stock-based compensation for their executives, who in turn,  greatly benefit from this stock manipulation.

After all, stock buybacks are simply a method for a firm to manipulate the stock price (upward) over the short-term, with nary a thought to long-term growth or the financial health of the enterprise.  Not withstanding that chicanery, how is that the cash held by a firm is NOT the property of the stockholders?   And, since the stockholders expect and desire to see the long-term health of the enterprise are doubly deprived.  The firm amplifies short-term gain instead of investing for the future (with the “extra benefit” of rewarding corporate executives for their chicanery with bonuses awarded by this manipulation) – but this action simply deprives the stockholders, who better deserve that cash in their pockets as dividends.  (And, since the stock buyback was effected, are told there is no cash available to reward them with the proper dividends.)

How about this fact?  Over the past decade, 54% of corporate profits were used to buy back stock.  Not to improve production, not to improve sales, not to rebuild or expand corporate infrastructure.  Nope, firms use their profits to buy back stock.  And, as stated above, this then reward the executives making this reprehensible decision,  since their compensation is tied to the short-term rise in stock prices.  (Notice how the dividends that should be awarded to those folks who THINK they own the corporation are, instead, diverted as dividends [stock bonuses] to the corporate executives- at the expense of those ‘deserving’ stockholders.)

Hmm.  I’m sure by now you are realizing that it’s the executives of the firm- and the executives of other firms who own blocks of corporate stock- who are the only “stakeholders” in the firm.  Oh, sure, you and I may own stock- we just don’t share in the benefits one would expect.

While I can point to John Shad and his abrogation of common sense regulations, his action was simply the logical next step for those who adhered to Milton Friedman’s proposition.  That major shift in philosophy wasn’t announced in a peer-reviewed economic journal, an economic forum, or even a government-issued white paper.  No, it was presented in the New York Times Magazine section!

 

And, what was this proposition?   That corporations abrogate the social contract that had obtained between business and its employees, between business and the community where it was based. One that began during the Industrial Revolution, standing for a century before it was abrogated almost overnight.

Because Milton Friedman announced that executives are not really employees of the corporation, but basically the corporate structure itself.  And, that meant that the corporation’s treasury was not a corporate asset.  And, the only obligation the corporation need have was to increase profits.  (Now, if they really cared about profits, and not the short-term stock price, the results would not have been as devastating for American citizenry as it turned out.)

In essence, this meant that the rich got richer- a LOT richer and the middle class faded away.  And, that situation is getting worse- since the Great Recession (2008/2009), the top 1% earners in the US have garnered 22% of the personal income in the US.

Tomorrow, I’ll talk about a glimmer of hope on the horizon.