I heard on Saturday, May 6, NPR’s Scott Simon interviewing Bloomberg News business reporter Joe Nocera. Mr. Nocera was talking about how corporations and investors have shifted over the years towards focusing the company’s operations almost exclusively on maximizing shareholder price. This has become a major objective of hedge fund operators who buy shares to gain votes towards moving the company’s operations solely on its stock performance, at the expense of everything else. Mr. Nocera referred to a recent article he wrote where American Airlines was blasted by financial institutions for giving a bonus to employees.
Now there is nothing wrong with boosting shareholder price. Nocera mentions that many citizens, like myself, own share in mutual funds that look to increase in value. However, manipulating operations at the expense of either employees and/or customers is not the only way to obtain increased share price. These hedge fund operators seem to believe that it is. The biggest beneficiaries with increased shareholder price are executives for whom increased shareholder price leads to increased compensation. This has been a contributing factor in the wage gap between workers and management–not necessarily the only factor, but a contributing one.
Such obsession on shareholder price increase has led to companies often moving away from investing in research and development–usually the one thing they did when they were on the rise. What they will do then, is invest cash – and debt – into acquiring companies rather than coming up with their own new divisions or products. The newly acquired companies will often lose their cultural soul and become subject to the whims of their new “owners.” Also, as companies become national – and international – they become bureaucratic, with layers of management that make them almost like dinosaurs–almost extinct as smaller firms adapt to the changing winds. In addition, the bureaucracy results in top management become physically disconnected from its employees, customers and community where operations are located. Small businesses allow for greater feedback from all three, because they can communicate face-to-face.
Where does the solution lie? In my opinion it is with tax reform–ease the burden of both taxes and regulations on small, independent businesses. Maintain or even increase taxes and regulations on those corporations that seek to manipulate the markets in order to gain a near monopoly. Lowering taxes and regulation on the already huge will increase the divide which already exists. More to come on this area.