How the pursuit of shareholder value weakened the economy

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Shareholder capitalism strikes again..

Research this week by Santander blows the whistle on the ever-growing portion of our monthly pay that goes on largely unavoidable household bills. It looked at bills for gas, electricity, water, TV, phone and so on – and found they have escalated in price far, far ahead of average wage rises. Since 2006, average pay packets in Britain have gone up by 19% in pounds and pence terms (in other words, not adjusting for inflation). Meanwhile, the average gas bill has gone up 73%, electricity 72%, and water 41%. 

At the top of the utility companies the view is very different. Just weeks after arguing against consumers having their bills capped to save them £100 a year, the boss of one utility, SSE, was given a 72% pay rise to £2.92m after this “robust performance”. The reward comes after years of bumper dividend payouts which have doubled from 32.7p a share 10 years ago to 62.5p most recently. 

The water companies have also been fabulous performers – for the stock market, not you. As a study by the University of Greenwich found last month, consumers are paying around £2.3bn more a year in water and sewerage bills to the privatised companies than if they had remained in state ownership. It found they have invested no significant new shareholder equity, but have managed to extract nearly all of their post-tax profit as dividends. The report calculated that every household is worse off by around £100 a year as a result..

Forget austerity, here’s who is to blame for your empty pockets | Patrick Collinson | Money | The Guardian

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Public pensions and college endowments are some of the biggest investors in hedge funds, investment vehicles that have made their managers some of the wealthiest people in the world. Middlemen funnel this public money into the hedge funds, as do funds of funds. All of them collect fees. Pensions could have been better off investing in cash than in hedge funds, largely because of the high fees investors pay hedge fund managers. Hedge funds haven't met the expectations for endowments over the past several years, either.

College endowments and public pensions enrich hedge fund billionaires - Business Insider

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Up until the 1980s, investment by the US corporate sector averaged 4% of GDP while dividends averaged 2% of GDP. Today, it is the other way around. Distributed profits used to average 35-45% of total US corporate profits in the 1950s, which is why there was plenty left over to invest in growing the business. Yet for the past few decades, the trend has been unmistakable: less money for investment, more set aside for dividends. In the UK, 2017 is expected to be a record year after analysis by Capita showed that shareholders grabbed north of £33bn in the second quarter.

Governments have to invest in the fourth industrial revolution | Larry Elliott | Business | The Guardian

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Toys “R” Us Inc. received court approval Tuesday to pay millions of dollars in bonuses to executives despite objections raised by a federal bankruptcy watchdog. Judge Keith Phillips of the U.S. Bankruptcy Court in Richmond, Va., signed off on the bonuses following lengthy arguments from lawyer Lynn Kohen on behalf of the U.S. trustee over the timing of the payments given the big-box retailer’s uncertain future. “I think there’s real fear here this debtor won’t survive past this holiday season,” Kohen said Tuesday. Kohen also said the bonuses at issue were really retention payments to company insiders that are prohibited under bankruptcy law.

Bankruptcy judge allows Toys ‘R’ Us to pay executive bonuses - MarketWatch

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As Amazon builds up its distribution network, it’s hit on a trick long practiced by the likes of Walmart: using the federal government to help pay its workers. A new study by Policy Matters Ohio found that more than 700 Amazon employees receive food stamps, or more than 10 percent of the tech giant’s 6,000-strong workforce in the state. Some of those recipients may be part-time help, but the fact that they need federal aid to survive suggests that they would be happy to work more. “Why is this giant, successful company offering such limited pay and hours of work that many of its workers need help buying food?” asked Zach Schiller, research director at Policy Matters. 

Amazon ranks nineteenth among Ohio businesses in number of employees on food stamps, behind Walmart, McDonald’s, and Kroger. But Amazon is only the fifty-third-largest employer in Ohio, suggesting a higher rate of employees on food stamps than its counterparts. More important, Amazon has obtained at least $123 million in state tax incentives to place warehouse and data center locations in Ohio. This reflects a perverse form of double-dipping: Amazon gets a bounty to create jobs in Ohio, and then a good chunk of the jobs are so low-paying that workers have to seek federal assistance, providing a second subsidy for the e-commerce giant.

Amazon Is Thriving Thanks to Taxpayer Dollars | New Republic

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In September 2017, House Speaker Paul Ryan traveled to a Harley-Davidson plant in Menomonee Falls, Wisconsin, to tout the Republican tax bill, which President Trump would sign later that year. “Tax reform can put American manufacturers and American companies like Harley-Davidson on a much better footing to compete in the global economy and keep jobs here in America,” Ryan told workers and company leaders.

Four months later and 500 miles away in Kansas City, Missouri, 800 workers at a Harley-Davidson factory were told they would lose their jobs when the plant closed its doors and shifted operations to a facility in York, Pennsylvania — a net loss of 350 jobs. Workers and union representatives say they didn’t see it coming. Just days later, the company announced a dividend increase and a stock buyback plan to repurchase 15 million of its shares, valued at about $696 million.

It’s a pattern that’s played out over and over since the tax cuts passed — companies profit, shareholders reap the benefits, and workers get left out. Corporate stock buybacks hit a record $178 billion in the first three months of 2018; average hourly earnings for American workers are up 67 cents over the past year. Harley-Davidson is an American symbol, and President Trump has trotted it out as an example of business success. But as it’s getting its tax cut, it’s outsourcing jobs and paying shareholders..

Tax cuts aren’t saving jobs at Harley-Davidson - Vox

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The CEO of a pharmaceutical company is facing criticism for describing a 400 percent price increase of an antibiotic as a "moral requirement." Nostrum Laboratories, based in Missouri, raised the price of nitrofurantoin last month from $474.74 a bottle to $2,393, according to the Financial Times newspaper. The drug treats urinary tract and bladder infections.  CEO Nirmal Mulye said the price hike was based on market dynamics, according to the newspaper.  “I think it is a moral requirement to make money when you can ... to sell the product for the highest price," he said.  Mulye said the branded version of the drug increased in price to $2,800.

Mulye also defended Martin Shkreli, the disgraced pharma CEO who faced national criticism, including outcries from members of Congress, after he increased the price of a life-saving drug by 5,000 percent. 

“If he’s the only one selling it, then he can make as much money as he can,” he added. “This is a capitalist economy, and if you can’t make money, you can’t stay in business.”

Drug company CEO calls 400 percent price hike 'moral requirement' | TheHill

He argued it was an "moral obligation" to shareholders. If that's true, shareholder capitalism has really run amok.

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Robert Reich sets out how Trump's economic nationalism runs against the barriers of shareholder capitalism:

Donald Trump’s “America first” economic nationalism is finally crashing into the reality of America’s shareholder-first global capitalism. Last week, General Motors announced it would cut about 14,000 jobs, most of them in the politically vital swing states of Michigan and Ohio. This doesn’t quite square with the giant $1.5 trillion tax cut Trump and the Republicans in Congress enacted last December, whose official rationale was to help big corporations make more investments in America and thereby create more jobs. Trump told Ohio residents “don’t sell your homes,” because lost automaking jobs “are all coming back.” GM got a nice windfall from the tax cut. The company has already saved more than $150 million this year. But some of those Ohio residents probably should have sold their homes.

Robert Reich (Trump Takes on General Motors (And Guess Who...)

• Companies answer to shareholders and nobody else, pocket the tax cuts and move if circumstances demand.
  
• Unions have disappeared as counterbalance, in the 1950s GM workers received $35 an hour (2018 dollars), now only a fraction of that.
  
• Trump's steel tariffs were in part the reason for the move.
  
• Trump also wants GM to close their China plant but this doesn't sell to the US as China is now a more important market for GM.
  
• Technology doesn't recognize borders, it's the property of companies and GM is happy bringing it to China.
  

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By contrast, according to Federal Reserve data compiled by Goldman Sachs, over the past nine years, corporations have put more money into their own stocks—an astonishing $3.8 trillion—than every other type of investor (individuals, mutual funds, pension funds, foreign investors) combined... 

A study by the research firm Fortuna Advisors found that, five years out, the stocks of companies that engaged in heavy buybacks performed worse for shareholders than the stocks of companies that didn’t. One class of shareholder, however, has benefited greatly from the temporary price jumps: the managers who initiate buybacks and are privy to their exact scope and timing.

Last year, SEC Commissioner Robert Jackson Jr. instructed his staff to “take a look at how buybacks affect how much skin executives keep in the game.” This analysis revealed that in the eight days following a buyback announcement, executives on average sold five times as much stock as they had on an ordinary day. “Thus,” Jackson said, “executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement.”

Why Are Stock Buybacks So Popular? - The Atlantic

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Shareholder payouts at Britain’s biggest companies have risen more than six times faster than workers’ wages since 2014, according to a study that shows how investors have won the largest slice of company profits in recent years. Returns to shareholders at FTSE 100 companies increased by 56% between 2014 and 2018, while wages edged up by just 8.8%, the report says. Firms maintained shareholder dividends and share buybacks “regardless of company performance” through good times and bad.

Shareholder payouts have risen 6.4 times faster than wages – TUC | Money | The Guardian