Profits, Profits, Uber Alles

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The Washington Post business section points out that there is no law or other type of written rule that states that the single goal of a corporation must be maximization of shareholder value. It’s just a meme that arose since the ’70s and the rise of the Chicago School economists. And frankly, it’s done far more damage than good so far as I can tell. Jia Lynn Yang points out:

It used to be a given that the interests of corporations and communities such as Endicott were closely aligned. But no more. Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.

Driving this change is a deep-seated belief that took hold in corporate America a few decades ago and has come to define today’s economy — that a company’s primary purpose is to maximize shareholder value.

The belief that shareholders come first is not codified by statute. Rather, it was introduced by a handful of free-market academics in the 1970s and then picked up by business leaders and the media until it became an oft-repeated mantra in the corporate world.

Together with new competition overseas, the pressure to respond to the short-term demands of Wall Street has paved the way for an economy in which companies are increasingly disconnected from the state of the nation, laying off workers in huge waves, keeping average wages low and threatening to move operations abroad in the face of regulations and taxes.

Yang uses IBM as the primary example in her article, using what has happened in Endicott, New York as an illustration of how IBM’s adoption of stock price as the company’s only value has affected its employees and has a very informational graphic on the history of IBM stock price and important events in the company’s history.

In the face of corporate indifference to their employees public policy can do little to change the situation for Americans who need not only jobs, but better jobs than many of the ones available to them. Of course the businesses involved deny that their actions have a negative effect on their employees or the nation’s economy but it seems telling to me that IBM has, since 2009, refused to break out its employment statistics by country. The juxtaposition of these parts of the article seem to say a lot:

“The shift in what employers think of as their role not just in the community but [relative] to their workforce is quite radical, and I think it has led to the last two jobless recoveries,” said Ron Hira, an associate professor of public policy at the Rochester Institute of Technology.

The change can be seen in statements from IBM’s leaders over the years. When he was IBM’s president and chief executive, Thomas J. Watson Jr., son of the company’s founder, spoke explicitly about balancing a company’s interests with the country’s. Current chief executive Virginia Rometty has pledged to follow a plan called the “2015 Road Map” in which the primary goal is to dramatically raise the company’s earnings-per-share figure, a metric favored by Wall Street.
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“If you stick it to the equity holders, you’re going to stick it to the retirees,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
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In 1994, Gerstner outlined his own set of eight principles, a clear break from the old document. Near the top was that the company’s primary “measures of success” were shareholder value and customer satisfaction. The last one: “We are sensitive to the needs of all employees and to the communities in which we operate.”
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One of the most influential changes took place in 1999, when IBM overhauled its pension plan under Gerstner to help cut costs, shocking longtime employees.

Guyer, the former IBM software developer, said she still remembers the surprise of getting a letter in the mail showing her cash balance for retirement after about two decades at the company: $30,000.

“It was like, ‘Oh, my God, we’ve been totally ripped off,’?” she said.

IBM employees later filed a class-action lawsuit over the pension changes. In 2004, the company agreed to pay $320 million to current and former employees in a settlement.
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“IBM was a critical company, because everybody after that said, ‘If IBM is going in that direction, we’ll all go in that direction,’?” Lazonick said. “By 2000, really the whole system had changed.”

The company has continued tinkering with its retirement benefits. Late last year, it changed its 401(k) contribution policy so that IBM matches employee savings just once a year rather than throughout the year. The company said it was making the change to stay competitive, but the new plan also means that employees who lose their jobs before a set date in December do not see any of the matching funds.

Since Gerstner’s time running the company, the pressure to please shareholders has only ratcheted up. Samuel J. Palmisano, chief executive from 2002 to 2011, charted new goals in 2010, calling the plan IBM’s “2015 Road Map.” The primary objective: nearly doubling earnings per share, to $20.

IBM’s current chief executive, Rometty, has picked up where Palmisano left off. The company’s 2012 annual report notes that the company’s road map “delivers long-term value and performance for all key IBM stakeholders — investors, clients, employees and society.”

But as sales flatten, questions have emerged about how the company will hit its ambitious target, aside from slashing jobs.

“This is a horrible business model,” said Lee Conrad, a coordinator for Alliance@IBM, a group that advocates for company employees. “It’s all about the EPS [earnings per share] and not about growing the business. The customers are being impacted by this when good employees are being cut. It’s just a mess.”

The italicized section is one of the most repeated defenses of the business model that puts stock price on a pedestal above everything else. The one in bold is a pretty good rejoinder to it, showing that the system doesn’t provide much benefit for retirees when even their 401K is considered an avoidable expense that can be devastated at the whim of corporate management. On top of that type of manipulation there is of course what the Great Recession did to the values of retirement plans of every stripe. Yes, even that has something to do with the topic of this article in the Post although nowhere does Yang point it out. Why? Because at its root the cause of that massive recession was the collapse of a real estate and financial system bubble that was inflated to an even greater danger point for not only the United States but the world because of people who strove to come up with ever more complex and unworkable financial instruments to hide what was going on and their managers who didn’t bother asking questions because of what their manipulations meant for their profits and therefore their stock values.

Author: JIM SATTERFIELD