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Forum Post: How does Wall Street reward companies?

Posted 6 years ago on April 12, 2012, 2:33 a.m. EST by francismjenkins (3713)
This content is user submitted and not an official statement

If a company can figure out ways to reduce employee wages, reduce benefits, or even better, find some third world sweat shop that employs children under horrible conditions, to relocate production to, they are rewarded with a higher stock price. In other words, our system rewards screwing people over, and reducing their quality of life as much as possible. Is this really the best the human race can come up with? If it is, then it doesn't speak well for our species. It may be true that alternative models like Soviet style socialism are unworkable (and undesirable), but certainly there must be a bigger menu of choices than either the way things are, or the Soviet gulag.



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[-] 2 points by FriendlyObserverB (1871) 6 years ago

There was a time, not so long ago, capitalism caused people to bow their head with respect.. now people are begining to bow their head with shame at the mention of capitalism.

[-] 0 points by monetarist (40) 6 years ago

First tell me how many people do you employ?

[-] 1 points by francismjenkins (3713) 6 years ago

What I do is none of your business, and it certainly isn't relevant to this conversation.

[-] 1 points by monetarist (40) 6 years ago

It is actually. Because according to you an employer should just give away as much as possible in salaries, profit margins and growth be damned. if you had ever run even a 3 people business, you would not be making such foolish statements.

[-] 1 points by francismjenkins (3713) 6 years ago

It's not actually, and if you think "personalizing" the argument is logical, I suggest you go on Amazon and find a book on logical fallacies.

Moreover, there was no "according to me" .... I identified the problem (I did not list proposed solutions, but I'm glad to offer some ideas). In my view, most companies should be employee owned, nonprofits, co-ops, etc. (all proven to be effective, and in studies I've looked at, they're more productive, survive longer, provide better benefits, etc.).

As I said below, this may not work in all cases. There could be a valid role for capital markets, venture capital, etc., but as it is now, Wall Street is a parasitic industry. It's success comes at the expense of the rest of our economy and society.

In the largest and most significant study to date of the performance of ESOPs in closely held companies, in 2000 Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales, employment, and sales/employee by about 2.3% to 2.4% per year over what would have been expected absent an ESOP. ESOP companies are also somewhat more likely to still be in business several years later. This is despite (or perhaps because of) the fact that ESOP companies are substantially more likely than comparable companies to offer other retirement benefit plans along with their ESOP.


The above referenced study shows that employee owned companies, and participative management, is a better model (using all the conventional metrics), in the context of closely held corporations.

The question is why would our public policy favor large, publicly held, multinational corporations, when small to mid-sized, closely held, employee owned and managed corporations, are not only a better model (from an empirical perspective, using the standard metrics), but are also better for our society?

This question is easy to answer. While I don't have a study to prove this, I think we see a corresponding relationship between the amount an industry harms our society, and the amount of money they spend trying to influence the political process. There's some nuance to this, because I imagine that some special interests, which are good for our society, spend considerable amounts trying to influence the political process, but this still has a cause and effect relationship with the overall dynamic, because these interests are forced into this role by deep pocketed opposing interests.

[-] 1 points by monetarist (40) 6 years ago

If in your opinion most companies 'should' be employee owned then

  1. why aren't there more companies that are employee owned?
  2. Why dont the employees buy back shares from the shareholders and turn it into a employee owned company?

I will tell you why. Because employees don't want to. Employees don't want to own the company they work in, they would much rather prefer to work at a place for a few years and then change jobs and companies. That's what people do. Nobody want's to own a company and be tied to it and neither does the average employee bother about running the whole friggin company. Employees are happy doing their jobs and getting paid well for it.

As for ESOP, those are offered by companies to the best performers to keep them in the company. Not every new hire gets ESOP, one needs to have put in quite a few years in the company to get some (or one needs to be in a middle or high management position).

Also you mentioned that small companies are a better model from a 'empirical perspective using standard metrics'? Care to explain the perspective and the metrics behind your assertion? And hey, it's not our public policy that favors this rather the owners want that. Which entreprenuer does not want his/her company to grow? Do you suggest that the govt should not regulate the size of companies? What have you been drinking? And big companies have plenty of advantages that small ones don't. The only advantage I can think of for small companies is that they can react to change much more faster because of lesser layers.

[-] 1 points by francismjenkins (3713) 6 years ago

This necessarily presumes that most employees have a choice in the matter, and that's simply not true (and even though this seems to be a common objection to this idea, I really have no idea where it comes from).

And no, I'm absolutely not suggesting that government should regulate the size of companies (that would be absurd), nor am I suggesting that this model should be imposed on companies through government coercion. But I think government could have a "positive" role here. In other words, it could promote the formation of these sort of companies through public policy.

For example, 42,000 factories have shut down since 2000 (dislocating millions of workers, who in most cases, now work at jobs providing less pay, less benefits, etc.). Why not have a SBA program that enables these workers to buy these closed factories, and reopen them (using the "direct loan" approach, rather than bank intermediaries)? This could be done using the methodology we use for conventional commercial loans (although some innovations would likely be necessary).

The objection I foresee is that this may lead to some degree of malinvestment, which I concede is possible. Another objection may be that these companies would still be forced to compete with products produced in overseas sweatshops, which is why I think a properly structured value added tax would be necessary for something like this to succeed (for instance, we could have a "cottage industry" exemption to the tax, and a VAT is permissible under WTO rules).

We may wind up with some degree of malinvestment, but should that really prevent us from considering this idea? I think we can safely say that government intervention in general tends to distort the market (sometimes for the good, but sometimes it produces poor outcomes, and unforeseen consequences). For instance, FDIC insurance tends to induce risky behavior among big Wall Street banks. Does that mean we get rid of FDIC insurance? I don't think that would be a good idea (particularly considering the fact that rational regulation, like Glass Steagall, was able to mitigate against the worse consequences of this potentiality, and there's very good reasons supporting the concept of FDIC insurance, notwithstanding the fact that it probably has at least a minor distortive effect on market dynamics, even under the best conditions). Moreover, even if we wind up having to forgive many of these loans (some might call that a de facto bail out), I'd much rather see us err on the side of the people, rather than on the side of concentrated special interests.

[-] 1 points by monetarist (40) 6 years ago

Who says they don't have a choice? They can form a fund and buy the factory from the owners who would only be too happy to sell off a factory that they otherwise were shutting down.

However, that does not change the fact that the global economy has transformed considerably since the manufacturing boom in US which was decades ago and now it would be very tough for manufacturing in US to be globally competitive. If the workers want to throw their money down a drain, they are free to do so.

[-] 1 points by francismjenkins (3713) 6 years ago

I'm proposing something much more aggressive; but I guess the question is, can the US maintain (or ideally enhance) quality of life without a manufacturing sector (or a very thin manufacturing sector)? Don't get me wrong, it would be great if we were a society comprised of scientists, lawyers, doctors, engineers, great poets, artisans, etc. (and no worker bees who lack this sort of academic background), but whether or not that ever happens, I think it's fair to say it's far in the future, so do we accept decline, or do we try and do something about this problem (assuming you agree that we have a problem)? I do think we can compete, but unless we implement a VAT (which every other developed nation on earth has), then I suppose it would be an insurmountable challenge.

[-] 1 points by monetarist (40) 6 years ago

The US can still manufacture high end stuff. Also costs in China are rising fast and once they allow full convertability of their currency and open up their economy further costs will increase and may be US will become competitive.

[-] 1 points by francismjenkins (3713) 6 years ago

We've been hearing this line for a decade now. The Chinese can keep labor costs wherever they wish, because they're a totalitarian country. We keep thinking the Chinese economy will grow so large that it will eventually be beyond the capacity of its government to control and manage, but the Chinese GNP is now in excess of $10 Trillion. Now, the Chinese are using the same tactics to get at our high end manufacturing that they used to capture the lower end, labor intensive stuff, yet we're still fed mythical magical fairy tales by trade economists (and at this point, the objective evidence makes clear, those fairy tales are just that ... fairy tales). Don't get me wrong, I don't blame the Chinese for exploiting our stupidity. The idea ponied by economists is that eventually the Chinese will stop manipulating their currency and exploiting certain segments of its workforce, because it will no longer be advantageous. But of course this is a very theoretical idea, and obviously the Chinese have a different theory (and all the evidence suggests, they're exactly right).

However, I don't think our government ponies these fairy tales with an actual belief that they're true. It's the same old story, government collusion with multinational corporations. For companies, it's their never ending quest to exploit humans as much as possible (because the market rewards human exploitation, and it punishes companies that aren't willing to play the game), for the government, it's the old hegemony game.

[-] 0 points by Builder (4202) 6 years ago

Collective capitalism. The workers get shares in their own companies. Profit benefits all the staff from bottom to top of the tree.

[-] 1 points by Anti385 (58) 6 years ago

How will you get self-entitled CEOs to give up that much power/profit?

[-] 2 points by Builder (4202) 6 years ago

The quantity of shares available to the workers will be less, or equal to, the holdings of the CEO or company owner/s. The workers elect their own representative/s to attend company board meetings to discuss profits and share allocations. It's worked in Australia for decades now. Instead of bonuses or overtime pay, workers are given shares that they are free to hold or trade as usual. It works well, and is a great incentive for the workers to actually put more effort into their company.

[-] 1 points by francismjenkins (3713) 6 years ago

Maybe (I like the idea of employee owned companies, call it democratic capitalism, and it's not just a theoretical idea, we have many employee owned companies in the US & overall they're more productive, survive longer, provide better benefits, etc.), but I'm not sure what the overall solution will be (I just know what I said in my OP is true, which would imply our system needs changing).

The counter-argument (I suppose) would go something like this. Cheaper products give consumers more purchasing power, and therefore enhance quality of life. However, in light of the fact that employee owned companies are so successful, and considering that some countries have strong labor laws, value added taxes (which helps the sustainability of their manufacturing sector), and a strong public safety net, while they're able to maintain a robust manufacturing sector, high living standards, their workers enjoy at least a semi-democratic workplace, etc., these counter-arguments seem weak.

There could be limits to the effectiveness of the employee owned model. Maybe very capital intensive industries (like computer chip factories or other operations that require a high level of automation and technical expertise) are well served by the conventional model (and capital markets), but in most cases this just isn't true. I've heard it said that our financial industry is one of our strongest industries (and thus we shouldn't want to harm it through public policy), but it seems that Wall Streets success comes at the expense of the rest of the economy. In other words, it's a parasitic industry (and its overall net effect is negative, sort of like organized crime).

There was a time when the mob had significant political influence, and the degree to which an industry harms the general public seems to correspond with the amount of money they spend trying to influence the political process. Good industries don't need a government strongman.

[-] 1 points by monetarist (40) 6 years ago

Well if employees of a company are willing to buy back all the shares of a company from shareholders, then it can be turned into a employee owned company. In fact, sometimes management decides to buy all shares from shareholders if there is a threat of a hostile takeover or if the board tries to enforce a decision on the management that they don't agree with. Back in 2009-10 when Sun was about to get bought by Oracle, many of its employees were unhappy and there were talks of such a management leveraged buyout.

As for what Wall Street rewards, well rewards a company doing what is best for it's shareholders. Shareholders care about their dividends and stock price and thus wall street tracks these numbers. If shareholders cared about keeping jobs in the country at the expense of rising manufacturing costs, they are free to do so and the company can then do that. But wall street cares about numbers and CSR does not come in the balance sheet.

[-] 1 points by francismjenkins (3713) 6 years ago

As it stands now, in most cases, employees lack the resources to do this, and as you say, it's often a defensive tactic by management (so in some cases, it really doesn't change the character of the corporation). In the study I cited above, the evidence shows that employee ownership alone doesn't provide many advantages over the conventional model (although it's not disadvantageous either).

The real advantage is gained when the company is not only employee owned, but its management is participative. So why do we grant all these special favors to industries that are less than ideal, when a much better model exists? The answer is very clear (at least in my view), the corrosive influence of money in politics.

[-] 1 points by monetarist (40) 6 years ago

what do you mean by participative management?

[-] 1 points by francismjenkins (3713) 6 years ago

From the study I cited above:

On financial performance, the researchers were only able to look at public companies with ESOPs, which generally had very small plans (about 5% ownership). Majority-owned ESOPs are all closely held and financial data are not available. ESOPs had no significant independent effect on return on equity, but the combination of ESOPs, or other shared capitalism approaches, with employee engagement was 3.9% greater than for firms without this combination. Engagement alone, however, also had no significant impact.

What these various studies show is that factors like greater employee influence on new products, marketing, work design, etc., correlate with better performance (in employee owned companies).

I imagine that enhanced workplace collaboration is probably advantageous for most companies (including conventional companies), but the biggest advantages are gained when the companies are both employee owned and employee managed.

Nevertheless, this doesn't negate the role of professional managers. All of the functions critical to conventional companies (finance, marketing, accounting, etc.) are just as important in employee owned companies.

[-] 1 points by monetarist (40) 6 years ago

Dude ESOP are pretty common.

[-] 1 points by francismjenkins (3713) 6 years ago

Yes, ergo my point :)