Capitalism 101: Shareholder Value


Someone sent me this, so I’m just going to repost it because I really can’t top it.

The first thing you need to know about capitalists is that the only people who talk about “maximizing value for the shareholders” are the ones who are defending corporate greed. It’s the universal lubricant of capitalism: it excuses anything, if you believe it at all.

It divides the world into two people: the shareholders, and everyone else. By definition, maximizing the value for the shareholders means that you’re accepting that everyone else is going to get fucked. Because, in any decision, you’re going to maximize value for the shareholders. If I am getting out of my limo and someone is bleeding in the gutter, I step over them because I have a marketing meeting to get to.

Another thing the cartoon captures well is that shareholder value may fluctuate. What maximizes their value today may kill them tomorrow, in other words. Oh, that global warming stuff? Sure, it’s just a byproduct of maximizing your shares’ value by exporting dirty industrial processes to places where there was no regulation.

One of the huge lies of capitalism is that it actually optimizes things other than shareholder value. Free markets actually are incredibly inefficient for everyone except the rich buyer who wants to play sellers off against eachother. In the case of labor markets, that means those dirty industrial jobs wind up in Chile or China or Malaysia, where there is no Environmental Protection Agency (or it’s corrupted by insiders) and they can offer lower prices by cutting more corners, or screwing labor harder. The result is that jobs shift not only to where they can be done cheapest but often to where they are most exploitive. I.e.: capitalism’s markets trigger a race to the bottom.

This is one of the reasons I am not optimistic about humanity’s future. To deal with a problem like global warming, it’s not simply enough to get rid of nationalism, the capitalist system needs to be replaced with a global economy that makes cheating on safety, screwing labor, or emitting pollutants non-profitable. Getting rid of nationalism seems like an impossible task but thanks to the US, capitalists are pulling the strings behind the nationalists – and they are greedier, more vicious, and utterly amoral.

Comments

  1. johnson catman says

    Well, they NEED that 100-foot yacht or that extra 5000-square-foot vacation home because {other rich capitalist} has more conspicuously visible wealth than they do, and they can’t let that guy show them up.

  2. says

    Google ” the dumbest idea iin the world” for some amusing material on this notion.

    The Chicago school of economics has a large karmic burden to bear.

  3. Ridana says

    I have frequently heard the argument that corporations are required by law to “maximize shareholder value.” Is that true?

    I haven’t investigated it myself, steering far away from the stock market after finding myself the unwilling owner of a share of stock worth about $10 that was materialized out of thin air by some corporate merger alchemy with my life insurer. Trying to figure out how to report it on my tax forms became such a nightmare that no matter how tempted I might be to invest, I just flash back to that and all temptation vanishes as magically as the stock came into existence to plague me. And like the raven, it’s still there, mocking me, because I don’t know how to sell it without invoking the wrath of the IRS again. I’ll let my heirs figure it out.

  4. says

    @Ridana: not really. The management team is supposed to build shareholder value but they have a lot of leeway how, and are overseen by the board of directors that evaluates their performance.

    If a board/ceo is irresponsible or screws up too badly, the shareholders can sue, claiming that they did not fulfill their fiduciary responsibility. Most often shareholder lawsuits are a response to outright fraud, e.g., Enron.

  5. says

    The requirement to maximize shareholder value is usually described as a “fiduciary obligation” and is fabricated out of thin air.

    Shareholder’s elect board of directors. That board hires a CEO. The CEO hires everyone else. So, there is a reporting chain. If there board fails to meet shareholder expectations, it can be replaced. If the CEO fails to meet the board’s expectations, they can be replaced

    What those expectations are is up for grabs.

  6. says

    This is why I keep hoping for an oil supply crash, where oil can no longer be used for transport, military use, manufacturing (including computers), or anything else. The entirety of post-WWI society is predicated on it and not possible without it.

  7. says

    In my opinion, the way shareholder companies behave is the strongest argument for abolishing the whole concept of shares, or at the very least tax it and regulate it heavily. It is the greatest plague, it makes the markets demonstrably less free and it leads to ever more increased inequality.

    In order to meet the shareholder expectations (i.e. continuous growth), sooner or later every company in such a scenario must start cutting corners, screw employees and customers and break the laws, and eventually, there is a disaster, a recession or worse and people die. There is no other way, continuous growth is unsustainable.

  8. bmiller says

    I agree with Robert Baden. Intransitive may (in reality) wish for a Mad Max world, but there were not many people left wandering in the wasteland.

    Whether Peak Oil and Mad Max is inevitable is a good question, but wishing for 80-90% of the population to disappear does not seem like a very humanist goal.

  9. jrkrideau says

    @ Marcus
    Have you read Debt: The First 5,000 Years a book by anthropologist David Graeber? I think, in the first chapters he is drawing on the historian Michael Hudson’s work.

    He makes the point that a relatively unregulated free market economy without capitalism can work rather well. Of course, it can have its problems but the problem is not so much the idea of a free market but of capitalism.

    Or as George Bernard Shaw put it, in a free market it make sense for the butcher to do his best if you wanted a Sunday roast. It was not so clear if your surgeon wanted to amputate your leg.

  10. lochaber says

    I’m not having any luck finding anything specific, but wasn’t there a court case where Henry Ford gave his workers a raise, and was sued by the shareholders because the worker raise cut into shareholder profit? I think that has something to do with the idea that corporations are legally obligated to “maximize shareholder profit”

  11. says

    lochaber@#12:
    It’s trickier than that nowadays. A lot of public companies run in the red for a long time before they make a profit (e.g.: Amazon.com) the CEO has a reasonable argument that they are running the company at a loss, for whatever reason, in expectation of longterm gain.

    Those sort of decisions are usually made by the CEO and if the board thinks they are bad decisions they replace the CEO.

    Someone like Andrew Carnegie, who was chairman of the board and CEO could have doubled the workers’ wages and nobody could say shit about it. It probably would have meant no strikes at all, and higher productivity, too.

    Fiduciary reaponsibility means being a good custodian of the shareholder’s property (the company) and it’s OK for there to be disagreements about that. There is no hard and fast rule that the CEO has to maximize profits right now. What the CEO has to do is build the business and make it succeed and sometimes that might entail rearranging compensation plans.

    Someone who says it’s a shareholder requirement is talking through their hat. When I was CEO of NFR we hit our goals and numbers and my board began asking me why we weren’t taking bigger risks and ramping the company faster. That resulted in us burning through capital and running out during a down-market so we had to take money from some skeevy investors at a bad price. That ruined the company, because the “bad price” included an equity note that wiped out our next years’ earnings. The shareholders were also the board!

  12. says

    There’s another issue that irritates me, viz., the original purpose of joint-stock companies is kind of obsolete at this point. Back when they first became A Thing, they were mostly used to fund some risky venture– an overseas expedition to trade in rare goods, for example. Shares in such an undertaking represented a real share of the undertaking’s profits, realised in the form of a dividend. Shareholders might hold the shares for long periods of time, possibly even their whole lives: the income from dividends could be used to support them after they ceased working, in those days before Social Welfare pensions. A company would only issue new shares if it needed capital for a new investment.

    Nowadays, shares are traded at high frequency and their point-in-time price is all that matters, with little attention given to the dividend, or an individual share’s worth as a long-term investment. Most companies in the tech sector, for example, don’t pay out a dividend at all– their attitude seems to be, our shares are worth so much and they always increase in value¹– why bother with piddling dividends when you make really big bucks selling the shares themselves later? Also, tech companies hardly ever issue stock for the original reason– raising capital– instead, they do so to actualise the notional wealth built up in them (tech companies hardly need that kind of big capital anyway and most are quite cash-rich; even in its pre Steve Jobs doldrums of the 90s, Apple, for example, was known to be sitting on a pretty big pile of cash. The biggest issue facing tech companies seems not to be raising capital but trying to figure out what to do with all the loot).

    TL;DR the result is endemic short-termism where the goal is to keep the share price up at all costs, seemingly regardless of the impact on the long-term viability of the company.

    ¹ And if they don’t, they’ll just buy them back themselves to keep the price jacked up, like what a lot of them did with Trump’s tax cut on funds held overseas…

  13. says

    Nngh.

    Shares are still issued primarily to raise capital. Rather than paying dividends, companies choose to either hold or reinvest cash to drive the stock price up – because capital gains receive preferential tax treatment. Outside the tax treatment it’s a wash either way. Share buybacks are also a wash. They are also a wash, except some shareholders and up with cash, not equity. The rest wind up with the same dollars value of equity in a slightly smaller company.

    A large driver of many of these things is that Wall Street collects few to make things like IPOs happen.

  14. Dunc says

    Plenty of companies still pay dividends. The yield of the FTSE 100 is currently somewhere between 4 and 5%, which is a lot better than you’ll get from a cash deposit or most bonds.

  15. says

    Cat Mara@#14:
    the original purpose of joint-stock companies is kind of obsolete at this point.

    You are darned tootin’!!

    There was a time when someone had a big idea, like a transatlantic cable, and raised a company to take on the project and divide the profits if it succeeded. That has evolved with the stock markets into a gambling game and inter-generational con.

  16. says

    It seems the commandment is less to maximise profit and more to maximise share value, or arguably to maximise the perception of the likelihood of the shares’ value increasing. I wonder how many shareholders have a genuine interest in the company. I wonder how many shareholders even know which companies they hold shares in… investment banking is a modern profession.

    So long as a significant number of people are just trying to buy low, jack the share price and dump stock the market is going to be insane. Building computers that do the same thing really doesn’t help.

    So far as the other vices of capitalism go, what is needed and arguably possible is an international agreement in the vein of the WTO which says that everyone, worldwide, needs to provide basic workers’ rights, or be restricted from international trade. Unfortunately I suspect that would likely stymie the attempts of second world nations to improve the lives of their citizens. A large part of the progress that has been made over the last fifty years in global income inequality is precisely because of the outsourcing of manufacture to places without any health and safety regulations.

  17. says

    avalus@#19:
    I really want to see the word “Globetrottel” (an amalgamation of globetrotter and a german word for idiot) thrown around more (at least in Germany.

    That’s a good one. I’ll upload it into my lexicon.

    German is a great language for creating new words by jamming old words together in creative ways. I wonder what “globe trotting parasitic idiot” would be?

    (Since I can link images and nobody else can, here’s the image avalus linked:)

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