Profits at All Costs: Shareholder Value vs. Stakeholder Value
At one point, most American companies saw their role as being accountable to their stakeholders – that is, being a good corporate citizen and taking care of both their shareholders and their workers. There was a shift in the 1980s toward increased shareholder value, that is, a shift toward treating corporate earnings as primary, even if it hurt the rest of their shareholders. The graph to the right shows how that change affected our economy. Corporate profits rose, CEO salaries rose dramatically, and worker salaries stagnated.
Wal-Mart is a good example of that change. As with many companies, the corporate culture changes when the founder passes away. Sam Walton believed that he should buy American products and that he should treat workers fairly, a policy to maximize stakeholder value. His heirs apparently thought that profits should be the main goal, a policy of maximizing shareholder value and, in the process, getting fabulously rich. The company now imports many of its products and pays its workers poorly. Wal-Mart just announced that it could raise its minimum wage to $ 8.50 an hour. Tulsa World’s editorial board approved saying, “If they (workers) earn more, they will spend more, stimulating the economy. They will also be less likely to need government entitlements like food stamps.” It’s true, and while the pay increase may seem generous, it’s actually not. In 2009, when the minimum wage was raised to $ 7.50, Wal-Mart stock was worth $ 50 a share. In 2014, workers still made just $ 7.50, but the stock is now at $ 88. If wages had kept up with the share price, the minimum wage worker would get $ 13.20.
Corporate profits are one of the most observed indicators of a company’s profitability. Stock prices reflect the companies’ earnings or their earning potential. Wall Street likes it that way, as it reduces the value of a company to a number that can be roughly measured or estimated for the future. CEO salaries are closely related to the performance of their actions, so increasing shareholder value is the company’s primary goal. This leads to policies that increase the company’s profits and the CEO’s salary in the short term, although it can hurt the company in the long term. That’s why most CEOs insist on Golden Parachutes, which make them fabulously wealthy even if the company declines in the future. Rewarding CEOs for increasing profits had led to policies that created a huge pay gap. While in 1980 the CEO earned 42 times more than the average worker, that gap has grown to 354 times more.
Wages are one of the biggest expenses for most businesses, and keeping average employee wages low increases profits. The announcement of layoffs, while it may reduce a company’s future productivity, is often rewarded with an increase in the share price. Some companies resort to practices such as shifting profits abroad, establishing tax havens, or ignoring safety and environmental regulations that would cost money to implement. These policies hurt workers, hurt the American economy, and sometimes shift business expenses from a business to the American taxpayer. Many companies justify these practices by saying that they are following the law, but we must not forget that many of the laws were enacted by politicians influenced by lobbyists and money. Even though they are following the law, the ethics and patriotism of those companies are questionable.
Although Wall Street and CEOs can benefit from a focus on shareholder value, there are other stakeholders in the company that should be considered. Workers have an interest in the company, since their well-being depends on it. However, low wages make life miserable for workers and many of them have to sacrifice time with their families in order to get a second job. Taxpayers also have a stake in companies. Tax avoidance and tax havens reduce tax revenues and increase the national debt. Switching jobs abroad hurts the purchasing power of American workers and reduces their income tax contributions. Workers who cannot afford health insurance or enough food for their families are forced to apply for government help. This shifts the burden on taxpayers and the reduction in purchasing power slows down the economy. Taking shortcuts in safety means harming the lives and health of workers and puts a strain on our health care and workers’ compensation system. And we are all interested in the environment, as clean air, pure water and a hospitable environment are considered our birthright.
The idea that corporations exist to reward shareholders did not arise from the law but from the work of ideologically driven economists. It’s a change wrought by Wall Street and corporate executives as they reap the rewards. They argue that shareholder capitalism will bring the greatest good to our society, but in reality it creates economic inequality that is destroying the quality of life for the majority of American citizens. On the contrary, Germany has adopted an emphasis on stakeholder values. German corporations are required by law to have at least 50% of hourly workers on corporate boards. German workers participate in decisions about wages, health care, pensions, overtime, vacations and other decisions that affect them. Workers certainly have an incentive to see that the company succeeds and they have more security and opportunities than we do. Germany has the strongest economy among the European Union countries and much greater economic equality after taxes.
Socially responsible investors recognize the value of considering all of a company’s stakeholders. Many retirement funds and mutual companies have social option mutual funds. The fund’s investments favor companies that are strong stewards of the environment; dedicated to serving local communities; committed to higher labor standards; dedicated to producing high quality and safe products; and those managed in an exemplary or ethical manner. Although the funds are chosen for their ethical values, some do quite well. The TIAA-CREF Social Choice Equity Fund, for example, now has $ 2.6 billion in assets and has grown at a rate of 15% annually for the past five years. Socialist-choice funds are typically less volatile, as they are more immune to the sudden swings in stock prices that occur when earnings reports are released.
Another factor driving the shift toward stakeholder investment is the decision by socially responsible institutions to ditch companies that have a history of labor or environmental abuse. At its 2014 meeting in Geneva, the Central Committee of the World Council of Churches (WCC), a community of more than 300 churches representing some 590 million people in 150 countries, endorsed the divestment of fossil fuels, agreed to phase out their own properties encouraged its members to do the same.
The United States is unlikely to pass laws requiring more emphasis on stakeholder values, but a shift in that direction is beginning. Recently, there was a business seminar that promoted “Social Entrepreneurship: The Difficult Balance of Doing Good While Doing Good”. He noted that twenty-seven states have passed laws to make possible “profit corporations,” called B Corporations. These are for-profit, tax-paying corporations that include an explicit social mission in their corporate bylaws. One example is the Grameen Bank, an organization that popularized microcredit, which makes small loans to impoverished families in developing countries so they can invest in small businesses. Its founder was recognized with a Nobel Prize. Another example is Ben & Jerry’s ice cream, with its explicit corporate emphasis on social causes, such as paying more for sustainably grown milk, sugar, eggs, vanilla and chocolate; curb climate change; and mandatory labeling of genetically modified organisms. Apparently, people are willing to pay more for a product from companies that emphasize stakeholder values.
(c) 2014 JC Moore