At the annual meeting of the Clinton Global Initiative this week, former President Bill Clinton predicted 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. That 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 companies that adhere to more socially responsible policies; the Social Venture Network brings many together. There are also socially responsible investors that use values to screen what they are willing to invest in. The current movement to divest from fossil fuel companies exemplifies that.
Sadly, there is little to suggest that big corporations and investors have gotten the former president's message, or that executives share his fantasy. 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 at naked capitialism reports 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 while devoting profits and sometimes taking out loans to buy back stocks, hike stock values and reward themselves. This does not suggest a 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 reinforce his views, but the selections didn't exactly support 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. Blackstone, like other private equity firms, often make their money by taking over companies, burdening them with big debts, getting their money out first in fees, and selling off the remains, all in the name of exacting "shareholder value."
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 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.
Laws and policy 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, build in subsidies and defend their privileges. Concern about consumers hasn't stopped turncoat Burger King from doing a foreign merger to duck paying U.S. 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 paying taxes. The effective tax rate of most U.S. corporations 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 will tell the people the truth. 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 multimillion-dollar incentives to plunder their own companies 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 pay with shareholders' interest. This lead 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 from those who are making out like bandits under the current arrangements. It will require a people's movement that demands the change, and leaders that seek a mandate to effect it.