Profits at All Cost: Shareholder Value Vs. Stakeholder Value
At one time, most American companies saw their role as being responsible to their stakeholders, i.e., being a good corporate citizen and taking care of both its stockholders and its workers. There was a change in the 1980’s toward increasing shareholder value, i.e., a shift toward considering the companies’ profits to be primary even if it hurt the rest of its stakeholders. The graph at the right shows how that change affected our economy. Corporate profits increased, CEO pay increased remarkably, and worker wages stagnated.
An example: Wal-Mart is a good example of that shift. As with many companies, the corporate culture changes when the founder dies. Sam Walton believed you should buy American and that you should treat workers fairly, a policy of maximizing stakeholder value. His heirs apparently thought that profits should be the main goal, a policy of maximizing shareholder value, and in the process making themselves fabulously wealthy. The company now imports many of their products and pays its workers poorly. Wal-Mart just announced that it may raise its minimum salary to $8.50 an hour. The Tulsa World editorial board approved saying,” If they (the workers) earn more, they will spend more, spurring the economy. They also will be less prone to need government entitlements such as food stamps.” True, and while the salary increase may sound generous, it really isn’t. In 2009, when the minimum wage was raised to $7.50, Wal-Mart stock was worth $50 a share. In 2014, workers still earn only $7.50, but the stock is now at $88. If wages had kept up with the stock price, the minimum wage worker would get $13.20.
Earnings: Corporate earnings are one of the most closely watched indicators of a company’s profitability. Stock prices reflect the companies earning or its potential for earnings. Wall Street likes it that way, as it boils a company’s value down to one number which can be measured or approximately estimated for the future. CEO salaries are closely tied to their stock’s performance, making increased shareholder value the primary goal of the company. This leads to policies which boost the company’s earnings and the CEO’s pay in the short term, even though it may 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 CEO’s for increased profits had led to policies that created a huge pay gap. While in 1980 CEO earned 42 times as much as an average worker, that gap has grown to 354 times as much.
Abuses: Salaries are one of the biggest expenses for most companies, and keeping average employee salaries low increases profits. Announcing layoffs, though it may reduce a company’s future productivity, is often rewarded with an increase in stock price. Some companies resort to practices such as shifting earnings overseas, setting up tax havens, or ignoring safety and environmental regulations which would cost money to implement. These policies hurt the workers, damage the US economy, and sometimes shift a companies business expenses to the US taxpayer. Many companies justify these practices by saying that they are following the law, but we should not forget that many of the laws were made by politicians influenced by lobbyists and money. Even though they are following the law, the ethics and the patriotism of those companies are questionable.
Stakeholders: Though Wall Street and CEOs may profit from the focus on shareholder value, there are other stakeholders in the company who should be considered. Workers have a stake in the company as their well-being depends on it. Yet, low pay makes workers lives miserable and many of them must sacrifice time with their family in order to take a second job. Taxpayers also a have a stake in companies. Tax avoidance and tax havens reduce tax revenue and add to the national debt. Shifting jobs overseas hurts American worker’s buying power and reduces their contributions to income taxes. Workers who are unable to afford health insurance or enough food for their family are forced to apply for government assistance. This shifts the burden to taxpayers and the reduced purchasing power slows the economy. Cutting corners on safety means damage to worker’s lives and health and puts a burden on our healthcare and workmen’s compensation system. And, we are all stakeholders in the environment as clean air, pure water, and a hospitable environment are considered our birthright.
Stakeholder value: The idea that corporations exist to reward shareholders arose not from law but from the work of ideologically driven economists. It’s a shift that Wall Street and corporate executives brought about, as they reap the rewards. They argue that shareholder capitalism will bring about the greatest good for our society, but in reality it is created economic inequality that is destroying the quality of life for a majority of American citizens. As a contrast, Germany has adopted an emphasis on stakeholder values. German corporation are required by law to have at least 50% of hourly workers on corporate boards. German workers are involved in decision about wages, healthcare, pensions, overtime, vacations, and other decisions that affect them. The workers certainly have an incentive to see that the company succeeds and they have more security and opportunity than ours. Germany has the strongest economy among the European Union countries and a much greater after tax economic equality .
Socially responsible investors recognize the value of considering all the stakeholders in a company. Many retirement funds and investment firms have social choice investment funds. The fund’s investments favor companies that are strong stewards of the environment; devoted 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. Though the funds are chosen for their ethical values, some of them do quite well. The TIAA-CREF Social Choice Equity Fund, for example, now has $2.6 billion in assets and has grown at the rate of 15% a year for the last five years. Socialist choice funds are often less volatile as they are more immune to the wild swings in stock prices that occur when earnings reports come out.
Another factor driving the shift toward stakeholder investing is the choice by socially responsible institutions to divest from corporations which have a history of worker or environmental abuses. At its 2014 meeting in Geneva, the Central Committee of the World Council of Churches (WCC), a fellowship of over 300 churches which represent some 590 million people in 150 countries, endorsed fossil fuel divestment, agreeing to phase out its own holdings and it encouraged its members to do the same.
Social entrepreneurism: Is not likely that the United States will pass laws requiring more emphasis on stakeholder values, but there is beginning to be a shift in that direction. There was recently an entrepreneurial seminar which promoted “Social entrepreneurism: the tricky balance of doing good while doing well”. It pointed out that twenty-seven states have passed legislation to make ”for benefit corporations”, called B Corporations, possible. These are tax paying for-profit corporations which include an explicit social mission in their corporate charters. One example is Grameen Bank, an organization that popularized micro-credit, 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; curbing climate change; and mandatory labeling of genetically modified organisms. People are apparently willing to pay more for a product from companies that emphasize stakeholder values.
(c) 2014 J.C. Moore