Myth #6: We are all shareholders; we all benefit from corporate focus on shareholders’ interests
Whenever I think about the nature of the corporate entity, I am reminded of John Steinbeck’s novel The Grapes of Wrath. Set during the Great Depression, the book is a powerful indictment of the insatiable greed of the capitalist system. When a poor family of tenant farmers is kicked off the land their ancestors settled, they plead with their landlord for a reprieve. He responds:
‘The bank – the monster has to have profits all the time. It can’t wait. It’ll die … When the monster stops growing, it dies. It can’t stay one size.’
So the tenants are forced to move off the land because the landlords need to pay the bank. The dialogue continues as the owners say:
‘We’re sorry. It’s not us. It’s the monster. The bank isn’t like a man.’
‘Yes, but the bank is only made of men.’
‘No, you’re wrong there ‒ quite wrong there. The bank is something else than men. It happens that every man in a bank hates what the bank does, and yet the bank does it. The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.’
Later, when the hired farm hands come to run the tenants off the land, the tenants want revenge; they don’t want to go without a fight. One demands:
‘But where does it stop? Who can we shoot? I don’t aim to starve to death before I kill the man that’s starving me.’
The response comes:
‘I don’t know. Maybe there’s nobody to shoot. Maybe the thing isn’t men at all …’
A company is a figment of our collective imagination; if you poke it then it disappears. A fictional organization can have only fictional responsibilities. ‘Men made it, but they can’t control it.’ But like in The Wizard of Oz, there is actually someone standing behind the spectre. A few very powerful someones. They did not create the system ‒ they did not create the monster ‒ but, nevertheless, there they stand, baiting the monster to do their bidding.
Shareholder value might be much less problematic if we were all shareholders ‒ but, alas, we are not. In theory, the pursuit of profits benefits us all indirectly through the spread of efficiency throughout the economy, trickling down to make everyone better off, but in practice the efficiencies are distributed unevenly, turning the corporation into a chute through which profits are propelled towards the already wealthy.
In the 1980s, Margaret Thatcher set out her vision for how Britain was to become a ‘nation of shareholders’, where owning shares would be as common as owning a car. The idea was to spread economic independence, and also to get the public invested, both literally and metaphorically, in the well-being of business. ‘Popular capitalism’ was advocated in terms of empowerment: ‘power through ownership to the man and woman in the street, given confidently with an open hand’.1
Sounds like a great idea, but did it actually happen? If we are all shareholders then we do not have to hope that rapacious companies will benefit us indirectly through innovation and cheap goods and consumer welfare, we stand to get a direct payout. But there is a question here that is begged but so very rarely asked: who actually are these shareholders for whom the corporate sector is run?
The answer is: we mostly do not know who owns the companies we buy from, work for, transact with, subsidize and bail out. Part of the difficulty is that the sources of information are patchy or hard to access, but also many shares are held in nominee accounts that shield the identity of the true owner ‒ for legitimate and sometimes illegitimate reasons ‒ and shares are often legally owned by an asset manager on behalf of a pension fund, for example, but the identity of the ultimate beneficiary will be undisclosed. The situation is even more murky with privately held companies, although countries are increasingly requiring private companies to disclose significant beneficial owners, as part of the global crackdown against corruption and money laundering.
What we do know is that whilst governments today still celebrate whenever the stock markets reach new highs, and lament when they reach new lows, everyday people are not sharing directly in these booms and busts. In the US, the top 10 per cent of American households own 84 per cent of all stocks, with half of that owned by the top 1 per cent, whilst the bottom 80 per cent own only 7 per cent.2 So we have most of the people owning not very much of the so-called public markets. Although almost half of households own some shares, the value is heavily skewed towards the rich, with 94 per cent of the very rich having more than $10,000 in shares, and only 27 per cent of the middle class having the same.3 Meanwhile, the middle class is laden with debt, and although the global economy has recovered from the financial crisis, the wealth of the middle class has not bounced back fully, relative to the recovery of the wealthy. In the UK, the most recent surveys show that around 20 per cent of households hold shares, but the vast majority hold only a few and they are not regularly traded.4 And we do not have data on the value spread of those shares across wealth brackets. As for the rest of the world, over half a billion people own shares worldwide.5 But again, there is almost nothing known about who holds these shares, what they are worth, and how wealthy these shareholders are already.
Meanwhile, some shareholders are able to treat the companies they control as their own personal ATMs, even if real jobs are at stake. It is usually only in extreme circumstances that we push aside the fiction of the company and look at the founders and owners behind the corporate mirage. With the collapse of British retailer BHS in 2017, which resulted in the loss of 11,000 jobs and left a shortfall in the employee pension scheme of £571 million, eyes finally turned to billionaire Philip Green. Investors, including Green, had pocketed £586 million from a deal selling the company to a serial bankrupt, precipitating the implosion of a British high street institution. Green agreed to pay £363 million out of what he considered to be his own money, but he found the questions raised about his levels of wealth irksome. His comments reflect the extent to which many business people have internalized the idea that their wealth is completely deserved: ‘I feel like I’ve got to justify I had the ability to pay, that my family has got a yacht, that I’m living a nice lifestyle. Thank goodness, along my journey, I was very successful and therefore I was able to pay.’6 In Green’s eyes the former employees and pensioners should be glad that Green had enough money to partially bail them out – even if from a disaster of his own making.
MPs, on the other hand, leading an inquiry into the collapse of BHS, found that Green had ‘systematically extracted hundreds of millions of pounds from BHS, paying very little tax and fantastically enriching himself and his family, leaving the company and its pension fund weakened to the point of the inevitable collapse of both.’7 And yet total extraction of corporate value by shareholders is what shareholder value can mean, when taken to its logical conclusion. The scandal was a reminder that the norms of protecting the shareholder over and above any other constituency are well embedded with the heads of company executives, shareholders and their legal advisers.
Shareholder value does not serve us all as shareholders in equal measure. It turns out that the ‘nation of shareholders’ argument is a little like saying that anyone who has ever bought a lottery ticket has some stake in this week’s winnings, even if only a few people ever hit the jackpot and your ticket may no longer even be valid. It is not a compelling reason to engineer a whole economy around the needs of the winners on the basis that we are all ‘in it to win it’.
And yet any attempt to weaken the grip of shareholder value faces the argument that maximizing returns for shareholders is a necessary evil for the future pensioners who will rely upon stocks for their income.8 But these pensioners-to-be also rely on safe and well-paid jobs whilst they are working and clean, breathable air whilst they raise their families and when they retire, so it is very selective thinking to zoom in only on their financial needs as shareholders.
The campaigning charity ShareAction argues that since the public is invested in publicly listed companies via its pensions, we should have a greater say over how those companies are run, and they should be operated for the public benefit.9 It is true that pension pots can be large – $2 trillion in the UK, $300 billion for two pension plans in Canada, $500 billion for two plans in the Netherlands, $300 billion for a pension plan for public workers in California ‒ with global pension assets being worth $41 trillion.10 But that actually under-represents the many ways in which the public and the state invest in these companies, from providing the use of public infrastructure to educating and ensuring the health of their employees. If we think about the investment chain, with shareholders at the top and workers and consumers at the bottom – we live and work in the real economy at the bottom of the chain, but shareholder value and monopoly draw money and resources up, slurping it up through the company as if through a straw, to the top, where participation is much more uneven. We absolutely should have a say over how our investee companies are run, and our influence should reflect the full extent of our investment, not just our shareholdings.
For executives, the reframing of corporate responsibility to prioritize taking care of shareholders only has proven highly remunerative. As MIT Professor Thomas Kochan puts it:
An entire generation of managers and executives has been indoctrinated with the view that their primary, if not sole, responsibility is to attend to shareholder interests and, even worse, attend to and shape their own compensation and rewards to be aligned with short-term shareholder value.11
In the 1980s, a typical top chief executive in the UK was paid approximately 20 times as much as the average British worker.12 By 2002 this had risen to 70 times the average salary, and by 2014 to almost 150 times. Across the FTSE 100, between 2010 and 2015, the average pay of company directors increased by 47 per cent, whilst average employee pay rose by just 7 per cent. This whilst Oxfam has reported that it takes just four days for a CEO from one of the top five global fashion brands to earn what a Bangladeshi garment worker, like those killed in the tragic Rana Plaza factory collapse, will earn in an entire lifetime.13
Executives can ‘shape their compensation’ by having their preferred packages rubber-stamped by others in their elite group. But if their pay is linked to the share price – justified by a desire to better align managers’ interests with those of shareholders – they can directly manipulate the share price through buybacks. A share buyback occurs when, instead of investing in a company’s productive capacity, directors arrange to buy back shares off the investors, to return cash to the shareholders (often including themselves) but also to boost the share price by artificially increasing demand for the shares. There are various circumstances in which returning money to shareholders in this way might be sensible but when whole industries are raiding the corporate coffers to deliver returns to shareholders, at the expense of pretty much every other stakeholder, it would seem to be a sign that something is amiss. Economist William Lazonick shows that the total remuneration of the 500 highest paid executives in the US averaged $24.4 million in 2013.14 Of this, the gains from exercising stock options and the vesting of stock awards amounted to 84 per cent in 2013, with the combination of salaries and bonuses only accounting for 5 per cent of executive pay in 2013. Lazonick has referred to this financialization of the corporation as a ‘socioeconomic disease’. In 2018, share buybacks reached a value of $1 trillion.
The irony is that in trying to align managers with their own interests, shareholders have created a beast that they cannot tame. As one Harvard Business Review article puts it:
One could spin this as a tale of wily, self-interested managers’ taking advantage of investors ‒ because it is. But it’s also a case of shareholders’ pushing for change and then proving incapable of controlling it. The adversarial, stock-market-oriented approach to pay appears to have motivated executives to think more like mercenaries and less like stewards.15
Men made it, but they cannot control it.
If the image you have in your mind of a generic shareholder is of a white man then, in the US and Europe, you may not be far off. In terms of gender inequality, although there has been very little research into the phenomenon, we can expect that women will be under-represented in the ‘shareholder class’. According to Gallup, there is only a small gap in the percentage of share ownership between men and women in the US, with 56 per cent of men owning shares against 52 per cent of women.16 But this tells us nothing of the relative value of the shareholdings ‒ it may be that 52 per cent of women have bought a lottery ticket but they may not be making substantial winnings.
Most ‘everyday shareholders’ own their shares via a pension scheme, and the size of the individual pension pots are closely tied to lifetime earnings. But the median woman in 2017 in America held just $42,000 in retirement savings compared to $123,000 for men.17 The situation is even more dire for transgender people. Transgender Americans experience poverty at double the rate of the general population, and transgender people of colour experience even higher rates.18
Men control over 80 per cent of corporations, and women make up only 6 per cent of CEOs in Fortune 500 companies.19 Over the last few decades, women have increased their participation in the economy as workers and consumers in their own right. But the private companies they work for and buy from ‒ whose questionable conduct they suffer the burden of, along with the general populace ‒ are run on behalf of a wealthy elite comprised mostly of men. This is profoundly unjust, and it is not a sustainable way to run capitalism.
There has been very little research into the racial divide in stock ownership20 but the overall trend seems to be as you might expect. In the US, black and Latin households hold much less stock than white; 60 per cent of white households have retirement accounts and/or own some stock, but only 34 per cent of black households and 30 per cent of Latin households do.21 As with the middle class, minorities have tended to hold their wealth in their homes, not through stocks, in part because they have less wealth to invest. Meanwhile, poor, minority households are disproportionately affected by imbalances of power in the workplace, they are reliant on precarious and poorly paid jobs, and they are exploited in consumer markets where companies take advantage of uninformed purchasing decisions or consumer biases.
We generally shy away from the kinds of language used by Marxists – who decried the exploitation of one class by another – but the uncomfortable reality is that our corporate system, which extracts value from consumers, workers and the planet, and delivers to shareholders, is one in which a white, wealthy elite of men profits at the expense of the poor ‒ brown, black, Latin and Asian men and women and transgendered people, and every other ‘minority’ that exists.
Shareholder value was meant to be a mechanism for holding corporate managers to account but has instead served to weaponize the firm into a tool for inequality and power – turning every company into a prospective robber baron.22
We rely on a collective mythology that successful companies deserve their higher profits and rich people deserve their wealth, for both have made some noble sacrifice or have shared their talents with the world. Another myth is that money and power can be dissipated through taxation, redistribution and regulation, but instead it compounds and accumulates whilst wealth is removed from the real economy altogether. And finally, there comes another myth: that the rich – those benefiting from these higher profits and higher returns – are all of us, all of our savings and all of our pensions. But we are not all shareholders, not to the same extent.
Since we are not all shareholders, we can let go, finally, of the idea that shareholder value benefits the general public. We benefit neither indirectly from the efficiency of markets nor directly as investors ‒ or not enough to compensate for the harms perpetuated in the name of shareholder value and competition. Democratizing the firm – real democratization, not just empowerment of shareholders – would allow the public to share in the creativity of capitalism and to direct companies away from the most egregious public harms. We have our work cut out for us.
Myth #6: We are all shareholders; we all benefit from corporate focus on shareholders’ interests.
Reality: Most shareholders are already wealthy.