The US and Europe have different ideologies when it comes to maximizing shareholder value through stock buyouts. The former believes that corporations are major contributors while the latter are of a different opinion.
In advance of a public lecture that I am delivering in Madrid on the financialization of the US corporations, Expansion, one of the city`s financial sent me questions and here are the answers published:
- Why do companies think of their shareholders only?
Mid 1980s saw the introduction of the ideology of free markets and maximization of shareholder value. As a result there was a shift in Wall Street from investing to trading. Corporations that adopted this ideology gave power to their executives to lay-off employees in response to foreign competition, hostile takeovers or underperformance. Remuneration began to take the form of stock-based compensation and there was a rise in New Economy start-ups in the 1970s and 1980s
- What is the greatest danger if they go on behaving thus?
In order to manipulate the stock market, companies engage in what is known as re-purchases or buybacks. Over the last decade, 500 companies in the S&P 500 Index which account for 70% of the market capitalization have wasted almost $3 trillion on stock buybacks. This has led to companies overlooking innovation and high value-added job creation while allocating most of its resources to stock buybacks.
3. How did we reach this situation?
The three main drivers were:
- The ideology of free-market individualism.
- The greed of top executives;
- The complicity of the SEC in allowing buybacks so that companies can manipulate the stock market.
4. Is it the fault of the top officers of the companies that companies only think of shareholder value and top officers’ earnings?
Yes. Top corporate executives in the US have power to control allocation of corporate resources. Any person aspiring to rise to top position and is against MSV is eliminated.
5. How could this problem be solved?
The SEC should simply ban stock buybacks by large corporations
6. How should officers be remunerated?
Corporates should be rewarded based on real performance criteria related to innovation. This is because innovation is a collective and cumulative contribution of employees and government support.
7. And board members?
The same as the executives, they should be rewarded based on innovation.
8. Some of these are supposed to be independent, but are they really?
No. Board members are picked by incumbent management making it more of an exclusive club to which recitation of the MSV mantra is condition for membership.
9. Are there examples of companies that behave this way, that behave as they should, and that behave as they shouldn’t?
The likes of IMB, Exxon Mobil, Wal-Mart, Microsoft etc. work to manipulate stock prices. Apple stopped any buybacks after wasting $1.8 billion on buybacks between 1986 and 1993. Employee owned companies such as NyPro based in Massachusetts and Mondragon Corporation based here in Spain are examples that don’t engage in stock market behaviour.
10. If not shareholders, what should be companies’ main concern?
Jack Welch former CEO of General Electric in his interview with financial times said that shareholder value is a result not a strategy. The main constituencies should therefore be customers, employees and products.
11. How would companies improve if they followed this alternative rule of behaviour?
They would focus on generating higher quality, lower cost products, while distributing returns to taxpayers, workers, and financiers who contributed to the innovation process. This ensures equitable and stable growth in the economy as a whole.