Fuck ‘shareholder value.’
The most interesting, innovate companies right now don’t give a shit about their stock price. And here’s the evidence that middling, corporate drones are fucking everything else up with their quarterly obsessions:
“Over the last month, the Financial Times has been doing a great job in cataloguing the problems caused by the shareholder value theory. Now Robin Harding has terrific article pinpointing its role in undermining the US economic recovery.
In his article entitled ‘Corporate investment: A mysterious divergence’ he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?
In standard economic theory, this makes no sense. When profits go up, companies should be seizing investment opportunities to lay the groundwork for even more profits in future. In turn, that investment should create jobs, generate more capital goods and lead to higher wages. That’s how capitalism is meant to work. So why isn’t it happening? Mr. Harding explores systematically why all the leading scapegoats for what’s gone wrong—regulations, Obamacare, tax policy, fear of another financial crisis and so on—and shows why they don’t add up.
Then he comes up with the kind of thing that you rarely see in economics—a study that enables us to pinpoint the problem by offering ‘with’ and ‘without’ data.
A brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled ‘Corporate Investment and Stock Market Listing: A Puzzle?’ compares the investment patterns of public companies and privately held firms. It turns out that the lag in investment is a phenomenon of the public companies more than the privately held firms.
‘They find that, keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.’
As Matthew Yglesias at Slate writes:
‘On this account we are reaping the bitter fruits of the ‘shareholder value’ revolution. Executives at publicly traded companies are paid to generate higher share prices, which is done by hitting quarterly earnings targets. This leads to underinvestment relative to the behavior of managers of privately held firms. Not because managers of private firms are indifferent to the interests of shareholders, but because there’s less need for creating the shareholder value link via a simplistic relationship between compensation, share price, and quarterly earnings.’”
Oh, look, Business Insider talks about this as well:
“One of the big reasons the U.S. economy is so lousy is that big American companies are hoarding cash and ‘maximizing profits’ instead of investing in their people and future projects.
This behavior is contributing to record income inequality in the country and starving the primary engine of U.S. economic growth — the vast American middle class — of purchasing power. (See charts below).
If average Americans don’t get paid living wages, they can’t spend much money buying products and services. And when average Americans can’t buy products and services, the companies that sell products and services to average Americans can’t grow. So the profit obsession of America’s big companies is, ironically, hurting their ability to accelerate revenue growth.”