At annual meeting of the Clinton Global Initiative, former President Bill Clinton predicted the corporations would soon care less about maximizing profits and more about employees and society. This would happen without significant government involvement because “of proof that markets work better that way.” Companies would understand that they gain greater overall success by taking care of their employees and doing good for more than only their shareholders.
We should only hope. This revolution in the corporate worldview would be immensely important, to say the least. The focus on “shareholder value” -- magnified by lavish executive compensation packages – has driven executives to focus on meeting short-term profit goals, scramble for every tax dodge, trample worker rights, and play communities and countries off against one another in a brutal race to the bottom.
There are socially responsible companies. Many gather at the Social Venture Network. Socially responsible investment funds give investors the ability to screen their investments. The recent movement to divest from fossil fuel companies is an example.
Sadly, there is little to suggest that major corporations have gotten the former president’s message. Current trends suggest the reverse: that CEOs are plundering their companies assets, cashing in their future to reap short-term profits and bonuses.
A recent column by Edward Luce in the Financial Times summarized in naked capitalism reported on the current executive gambit: using corporate funds to buy back its stocks, hike the stock price and pocket bigger bonuses.
According to Barclays, US companies have lavished more than $500bn in the past year on stock buybacks – a multiple of what most are spending on research and development and other capital investments. In the first six months of the year, buybacks surged to $338.3bn – the largest half-yearly volume since 2007. The rationale is simple. By reducing the volume of outstanding shares, chief executive officers increase earnings per share. That in turn lifts their pay, which is heavily tied to short-term stock performance. If you need an explanation for why the top 0.1 per cent is doing so well, start with equity-based compensation.
William Lazonick of the University of Massachusetts, Lowell explains the true scope of the perversity:
In total, the top 449 companies in the S&P 500 spent $2.4tn – or more than half their profits – on buybacks in (the decade of 2003-2012] They spent almost the same again in dividend payouts. Taken together, they came to 91 per cent of net income.
[S]even of the top 10 largest share repurchasers spent more on buybacks and dividends than their entire net income between 2003 and 2012. In the case of Hewlett-Packard, which spent $73bn, it was almost double its profits.
In a time of soaring profits, CEOs are putting off capital investments and starving research and development budgets while devoting profits and sometimes taking on debt to buy back stocks, hike stock values and reward themselves. This does not reflect growing concern for consumers, workers, communities, or even the long-term health of the company. CEOs are plundering their companies to reward their shareholders – and themselves – in the short term. In the long-term, they’ll have gotten theirs and will be gone.
Clinton convened a panel of business leaders to echo his views, but the selections didn’t help his case. Tony James, president and CEO of Blackstone Group, a private equity firm, praised socially responsible companies, but Blackstone is under investigation for violating anti-bribery laws, and is infamous for its rabid defense of the obscene “carried interest” deduction that enables private equity billionaires to pay a lower tax rate than their chauffeurs. Private equity firms like Blackstone clean up by buying companies, burdening them with debt, taking their money out up front, and then selling off the remains.
Antony Jenkins, CEO of Barclays, suggested there was a “sweet spot” where a company can “create real commercial value” while still doing good. Barclays isn’t exactly exploring that sweet spot, having just paid a record fine for illegally co-mingling its depositors funds with its own money, while under separate investigation for, among other things, rigging the Libor and interest rate markets, and for “systematic fraud and deceit” of its investors in its “dark money pool” trading practices.
Policy and law matter. Corporations and the rich have rigged the rules to benefit themselves. They don’t deploy armies of lobbyists out of public spirit; they deploy them to carve out exemptions and build in subsidies and defend their privileges. Concern about consumers hasn’t stopped turncoat Burger King from doing a foreign merger to duck paying US taxes.
In a later interview, Clinton suggested that the solution for Burger King and other turncoat companies is to reform and lower corporate taxes. But the corporate tax code is complicated because corporate lobbies have carved out exemptions and dodges to avoid taxes. The effective tax rate most US corporations pay is already low. Continuing a race to the bottom – competing with tax havens like the Cayman Islands – is to fall for the rigged game.
We need leaders who understand that the rules have been rigged, and rouse the country to fix them. We need progressive tax reform that raises taxes on the wealthy and treats the income of investors and private equity buccaneers the same as the wages of workers. Corporate tax reform should end deferral of taxes on profits reported abroad, and tax multinationals on the same scale as domestic companies. Executive compensation packages that give CEOs personal multi-million dollar incentives to plunder their own companies, ship jobs abroad, borrow money to hike stock prices and other perversities have to be penalized, not rewarded.
Clinton knows this. His effort to limit excessive executive pay while president carved out an exemption for “performance pay," premised on aligning executive incentives with shareholder value. That led directly to today’s perverse compensation packages. It is good that he’s predicting that era must come to an end. But it won’t happen unless the rules are changed, and new laws passed and enforced. And that won’t come out of those who are making out like bandits under the current arrangements. It will require a people’s movement that demands the change, and leaders who seek a mandate to make it happen.
(This article was first published at ourfuture.org, the blog of the Campaign for America's Future)