Stockholders gain at the expense of the rest of us

Unemployment is now officially below 6%, but the point is still valid.

Large businesses such as General Motors earmark less money for workers’ pay and for investment, research and technology compared to earlier eras.

They do this in order to be able to hand over more money to stockholders in the form of dividends and stock buybacks.

The reason is that stockholders have leverage and workers don’t, and stockholders no longer take the long view. In 1960, the average stockholder owned a stock for eight years, Harold Meyerson reported in the Washington Post.  Now they sell their stocks after four months, and, when high-frequency trading is factored in, it’s 22 seconds.[1]

Passive, short-term stockholders, unlike the original investors, contribute little or nothing to the value of a company.  Why should their interests be paramount?

How corporations are being milked

This chart tells a shocking story.  It says that stockholders of American corporations are taking out more in dividends and stock buybacks than the corporations are earning in profits.  They are eating the seed corn.  They are taking for themselves the funds the corporations need to reinvest in new products, new equipment and research.

The blue line is corporate profits.  The dotted red line in dividends to stockholders.  The solid red line is the total of dividends to stockholders plus corporate purchases of their own stock.  In some years, the solid red line is below the dotted red line; those are years in which the amount corporations took in more by selling new stock than they paid out by buying back their existing stock.

Somebody who starts a company that produces something of value deserve a rich reward for their risk and effort.  The investors who enable somebody to start a successful company deserve a rich reward for their risk.  People who keep a company going deserve a reward for their effort.  But the passive stockholders who come after contribute very little.  They are not the equivalent of venture capitalists.  Their only role is to create an aftermarket into which the initial investors can cash out.

I have nothing against stockholders.  I put my own savings into Vanguard and T. Rowe Price mutual funds.  I would like to earn a return on my savings, but that does not entitle me to go to the front of the line, ahead of the workers, managers, suppliers and others who actually create value in the companies in the mutual funds.

On many levels, the United States is pulling back from investing in the future except for future war.  This is not sustainable.

Click on Disgorge the Cash! for more about this.

Are stockholders owners?

When Eastman Kodak Co. began its downsizing in 1982, the company initially offered extremely generous severance pay to those who voluntarily quit.  This prompted protests from stockholders and stock analysts. They said the stockholders are their owners of the company, and their interests should come ahead of mere employees.

Is this true? Are stockholders really owners? Much of my retirement savings are in stock mutual funds, and I never have felt I am the equivalent of the owners of my car dealership, my neighborhood restaurant or my favorite second-hand bookstore.  I never exercised any control over the businesses in which I owned stock, even when I owned individual stocks.

What does someone who buys stock on the open market contribute to a business?  He doesn’t provide capital to finance the business, because his payment simply goes to another passive stockholder.

As a passive stockholder, it seems to me that I contribute to the economy in three ways:

• I maintain the aftermarket that allows the original entrepreneur or venture capitalist to cash in his investment. When a company goes public – that is, offers its stock for sale on the open market – it provides a way for those who put up the money to start or finance the business to recoup their investment. This would be much harder otherwise.  And few people would buy the stock if there was no way to sell it. So it is the hope that there would be people like me in the future to buy the stock that enables the investment in the first place.

• By buying and selling stock, I help set a price on the value of the company.  The stock price of a company, as compared to similar companies, provides an impersonal, if not always correct, estimate as to how well the company is doing.

• By investing in stock, I refrain from current consumption, which frees up societal resources for other peoples’ use.  If the economy grows faster than the value of my investment, I will be less of a burden on society when I cash it in.

These contributions are not nothing, but they are minor in comparison to those who do the actual work of the firm.

What I get in return for buying stock is (1) limited liability and (2) potentially unlimited gains.  If a company in which I invest goes under, I can’t lose anything more than what I put into it.  All other loss has to be absorbed by the company’s suppliers, lenders and other creditors. But there is no upper limit on how much I get if the company does well.

That is a good deal.  I should be willing to take it.  I should be willing to take what is left over after the company gives employees reasonable pay, the suppliers a reasonable price, and customers a good quality product. It is they who create the value that supports my stock price and dividends.

But this is not how things work.