Shareholders or Stakeholders?

Cameron has “threatened” a “new law” to “rein in executive pay”; the inference that shareholders in limited companies should be given a legal right to “veto excessive pay”.

Harrumph. As you know, in the Deft Left we don’t believe in being cynical. After all, during the War of Position we Socialists mustn’t look like a bunch of beardy grumblers. But we’ll allow ourselves, just this once, to shout “Hogwash. A typical smoke ‘n’ mirrors Sunday Westminster village story!” Thanks.
 
Now we’ve got that off our chests we feel better and ready to rock.
 
It really is a load of old boll*cks that Shareholders “own” companies and that they’re run in the Shareholders’ interest. And Shareholders generally care little about the long term interests of the company; Shareholders can be mobile with their investment; sell-up and bugger off taking their loss or profit. Plus once the dividends are maximised in this kind of organisation there’s less cash for reinvestment and proper efficiency. Or Shareholders are actually us, our pension funds, our savings, our vehicles we’ve had mis-sold to us to help us pay off those daft loans we’ve been encouraged to buy. But it’s not us getting the votes at the AGMs, or in cahoots with the Boards and remuneration committees. No. It’s the fund managers and so on. Small wonder GDH Cole wouldn’t even accept interest on his savings, let alone play any part in this seemingly unavoidable racket.
 
Marx foresaw the limited company. In his youth capitalists gambled their own money in the main and went to jail if they went bankrupt. But no one had the personal wealth for a railway or big cotton mills so by the mid-1850s the ‘limited liability’ idea became widespread, i.e. smaller investors could give money in return for shares but if the company went bust they’d only lose just their investment. Marx realised the significance of this and his prediction (in 1865) that this would put the forces of capital onto “a different plane” has proved prescient. He was a good lad. You should read some Marx.
 
By the early 1900s the fear that management would take excessive risk (as they weren’t playing with their own money) appeared irrelevant, as limited companies run by charismatics such as Ford & Edison were part-owned by the board. But as multi-nationals became larger no-one had the personal wealth to own a large chunk. So ‘management’ has become the dominant business class. The shareholders have become passive. Management is about maximising sales, maximising abstract stock-market value; not maximising reinvestment. Capitalism has gone wrong. Even big (if critical) fans of American capitalism warned against this in the mid-20th Century (e.g. Joseph Schumpter and JK Galbraith) as any 1980s ‘A’ Level Sociology student will tell you.
 
Then, in the 1980s the Reaganites and the Thatcherites found the Holy Grail. The principle of ‘Shareholder value maximisation’. Management were to be rewarded according to the amount of bread they scored for shareholders. So, 1) Profits had to be seen to be maximised immediately by cutting (i) costs; (ii) wage bills, (iii) decent inventory, (iv) proper reinvestment – all that went up the creek. 2) The highest possible slice of those profits had to therefore go to shareholders, ergo 3) management were encouraged to behave this wayby having their pay-packages heavy with relevant “on-target” bonuses and stock-options – so they identified with the shareholders. Stocks went up and up, with a couple of minor dips, for almost 30 years. So shareholders didn’t question the pay-packets of the managers.
 
Meanwhile all the other stakeholders in the companies got fuck*d over. Jobs were cut. Workers were fired and re-hired as non-unionised labour (especially in the US); real wage increases were diminished (often by outsourcing and relocating to countries such as China or simply threatening to do so). Suppliers (and, of course their workers) got squeezed by cuts to their procurement price. Governments cut corporate tax rates and (in the case of former UK nationalised industries such as energy and rail) bunged subsidies to anyone who asked nicely. The proletariat were encouraged to join in by borrowing money as ridiculous interest rates. Inequality soared.
 
This method doesn’t do the company much good either. Fewer workers and the threat of redundancy means poorer performance. Workers are discouraged from learning company-specific (and therefore company enduring) skills. Once all the cuts have been made for short-term shareholder benefits then higher and higher dividends have to be paid. If stock goes up the company starts to buy back its own shares, thereby keeping the price high and so indirectly redistributing even more cash to shareholders while they sat at home. Share buybacks used to be (pre 1980) less than 5% of US corporate profits, but, according to Business Week (24th August 2009) it was a mind-boggling 280% in 2009! This is what knackered G.E. in 2009.
 
Then profits don’t get reinvested. According to Professor Ha-Joon Chang from the Economics department of the University of Cambridge UK income growth rates have fallen from 2.4% pre-shareholder value maximisation (1960-1980) to 1.7% during the heyday of shareholder capitalism (1990-2009). So running companies in the interest of shareholders certainly doesn’t help the wider economy.
 
Elsewhere in the world, outside the old Anglo-American idea of shareholder capitalism, other capitalist countries have generally attempted to reduce the influence of short-term floaty shareholders and have tried to create long-term stakeholders. In some countries central government holds a sizeable share in key organisations (e.g. Renault in France) or indirectly have a stake by having state-owned banks (such as South Korea). In Germany there is an ongoing tradition of significant union representation on the boards of key enterprises. That’s why in these capitalist countries there’s not so much sacking, more efficient reinvestment, less buybacks. General Motors did all that and went bust, b*ggering the lives of tens of thousands of Americans and their cities.

Running companies in the interests of mobile shareholders is why ‘fat cats’ get their corporate bonuses and their share dividends. They are supposed to empathise with the shareholders.

Cameron’s sudden concern is, inevitably, towards the Thatcher generation, the small-town Tories, small businesses and the ‘squeezed middle’, not towards the majority who are outraged at the sheer waste and injustice of all this cr*p. Giving shareholders a vote on corporate pay new isn’t a new idea, you can do it in a large percentage of these kinds of companies anyway (although shareholdings are dominated by institutional holders  – mostly playing with your money – who nearly always go along with the board).

The biggest joke of course is that Cameron is saying, on behalf of his stakeholders, that the rest of us can just p*ss off; only shareholders have any right to decide what the bosses get. A profit for shareholders is king. The workforce is merely a variable necessity to bring this about. Sounds like the 1920s and 1930s.

It’s semantics. ‘Shareholder value’ is a total smokescreen to mean THEM.

THEIR power and wealth.

US: we are to stay quiet, suppressed by anti-union laws and a capitalist press.

WE, the workers, are a much bigger part of the teamwork of production than remote shareholders. Putting a representative of the workforce on the top earners’ remuneration committee would be a start, even though we accept that person could be ignored or outvoted by the other members of the committee, but 
pay MUST be agreed in the future by the workforce as a whole at an annual meeting of representatives of all the main occupational grades within the organisation. Or, far better, let’s remove individuals – whether workers or cronies – from the remuneration process. Let’s instead force companies to stick to a formula whereby the highest paid person in the firm cannot be paid more than x-times the lowest paid. So if you want to pay yourselves a fortune you don’t need to persuade the tame worker on the committee. Instead you have to raise everyone else’s wages to stay within the ratio. We’d recommend a ratio of 5:1. Or less.
But these are interim measures, to make capitalism bearable. In the last analysis, the Guilds should be running things. Meanwhile, if we’re going to have to put up with private ownership of one kind or another for a while longer, let’s make sure the workers own the companies. Not outside interests. John Lewis is a good example. A certain amount of the pain of alienation and surplus value is removed when employee ownership kicks in. Not all of it, mind. But it makes capitalism more bearable. Until the Great Day. Don’t get us wrong. This stuff doesn’t solve capitalism’s problems. But it soothes the pain a bit for those of us on the receiving end.

If pay structures are to be efficient then the workforce, not just the shareholders, must have a major say in determining it. 

Let’s discuss this further on 16th February at the Half Moon in Putney.
 
 
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