All this damages the long-run prospect of the company. Cutting jobs may increase productivity in the short run, but may have negative long-term consequences. Having fewer workers means increased work intensity, which makes workers tired and more prone to mistakes, lowering product quality and thus a company’s reputation. More importantly, the heightened insecurity, coming from the constant threat of job cuts, discourages workers from investing in acquiring company-specific skills, eroding the company’s productive potential. Higher dividends and greater own-share buybacks reduce retained profits, which are the main sources of corporate investment in the US and other rich capitalist countries, and thus reduce investment. The impacts of reduced investment may not be felt in the short run, but in the long run make a company’s technology backward and threaten its very survival.
But wouldn’t the shareholders care? As owners of the company, don’t they have the most to lose, if their company declines in the long run? Isn’t the whole point of someone being an owner of an asset – be it a house, a plot of land or a company – that she cares about its long-run productivity? If the owners are letting all this happen, defenders of the status quo would argue, it must be because that is what they want, however insane it may look to outsiders.
Unfortunately, despite being the legal owners of the company, shareholders are the ones who are least committed among the various stakeholders to the long-term viability of the company. This is because they are the ones who can exit the company most easily – they just need to sell their shares, if necessary at a slight loss, as long as they are smart enough not to stick to a lost cause for too long. In contrast, it is more difficult for other stakeholders, such as workers and suppliers, to exit the company and find another engagement, because they are likely to have accumulated skills and capital equipment (in the case of the suppliers) that are specific to the companies they do business with. Therefore, they have a greater stake in the long-run viability of the company than most shareholders. This is why maximizing shareholder value is bad for the company, as well as the rest of the economy.
Limited liability has allowed huge progress in human productive power by enabling the amassing of huge amounts of capital, exactly because it has offered shareholders an easy exit, thereby reducing the risk involved in any investment. However, at the same time, this very ease of exit is exactly what makes the shareholders unreliable guardians of a company’s long-term future.
This is why most rich countries outside the Anglo-American world have tried to reduce the influence of free-floating shareholders and maintain (or even create) a group of long-term stakeholders (including some shareholders) through various formal and informal means. In many countries, the government has held sizeable share ownership in key enterprises – either directly (e.g., Renault in France, Volkswagen in Germany) or indirectly through ownership by state-owned banks (e.g., France, Korea) – and acted as a stable shareholder. As mentioned above, countries like Sweden allowed differential voting rights for different classes of shares, which enabled the founding families to retain significant control over the corporation while raising additional capital. In some countries, there are formal representations by workers, who have a greater long-term orientation than floating shareholders, in company management (e.g., the presence of union representatives on company supervisory boards in Germany). In Japan, companies have minimized the influence of floating shareholders through cross-shareholding among friendly companies. As a result, professional managers and floating shareholders have found it much more difficult to form the ‘unholy alliance’ in these countries, even though they too prefer the shareholder-value-maximization model, given its obvious benefits to them.
Being heavily influenced, if not totally controlled, by longer-term stakeholders, companies in these countries do not as easily sack workers, squeeze suppliers, neglect investment and use profits for dividends and share buybacks as American and British companies do. All this means that in the long run they may be more viable than the American or the British companies. Just think about the way in which General Motors has squandered its absolute dominance of the world car industry and finally gone bankrupt while being on the forefront of shareholder value maximization by constantly downsizing and refraining from investment (see Thing 18). The weakness of GM management’s short-term-oriented strategy has been apparent at least from the late 1980s, but the strategy continued until its bankruptcy in 2009, because it made both the managers and the shareholders happy even while debilitating the company.
Running companies in the interests of floating shareholders is not only inequitable but also inefficient, not just for the national economy but also for the company itself. As Jack Welch recently confessed, shareholder value is probably the ‘dumbest idea in the world’.
Thing 3
Most people in rich countries are
paid more than they should be
In a market economy, people are rewarded according to their productivity. Bleeding-heart liberals may find it difficult to accept that a Swede gets paid fifty times what an Indian gets paid for the same job, but that is a reflection of their relative productivities. Attempts to reduce these differences artificially – for example, by introducing minimum wage legislation in India – lead only to unjust and inefficient rewarding of individual talents and efforts. Only a free labour market can reward people efficiently and justly.
The wage gaps between rich and poor countries exist not mainly because of differences in individual productivity but mainly because of immigration control. If there were free migration, most workers in rich countries could be, and would be, replaced by workers from poor countries. In other words, wages are largely politically determined. The other side of the coin is that poor countries are poor not because of their poor people, many of whom can out-compete their counterparts in rich countries, but because of their rich people, most of whom cannot do the same. This does not, however, mean that the rich in the rich countries can pat their own backs for their individual brilliance. Their high productivities are possible only because of the historically inherited collective institutions on which they stand. We should reject the myth that we all get paid according to our individual worth, if we are to build a truly just society.
A bus driver in New Delhi gets paid around 18 rupees an hour. His equivalent in Stockholm gets paid around 130 kronas, which was, as of summer 2009, around 870 rupees. In other words, the Swedish driver gets paid nearly fifty times that of his Indian equivalent.