Home—Blog—Shareholders need to act like they own the business
Jan 24, 2012, 10:32
Posted byMerryn Somerset Webb
Comments (7)
I wrote here last week that rising income inequality could easily have been the cause of our financial crisis. Very high incomes at the top of the tree have translated into toxic clouds of hot money hopping from asset class to asset class and leaving a trail of crashed bubbles behind.
Yet at the same time, squeezed incomes in the middle and falling real incomes plus rising unemployment at the bottom have meant low demand across Western economies. The result? Low growth and endless asset bubbles.
The solution to all this is tricky. The aim of any action is obvious. We need to rebalance the distribution of profits so that the top gets less and the bottom gets more. But how?
Some people interpreted my post as a Keynesian call for increased government spending. It wasn’t that. Regular readers will know that I already think the state is far too big (so I can’t really approve of more taxes and more state action) and that I think our current levels of debt are deeply destabilising (so I can’t possibly approve of more borrowing for more spending).
Some interpreted it as a call for more regulation on pay. But it wasn’t really that either. This government, for all its reducing red tape rhetoric, has turned out to be abnormally fond of regulation.
That’s not a good thing. I agree with those calling for shareholder votes on pay to be binding (who knew they weren’t already?). After all, if we want shareholders to act as owners – and if we want to banish short-termism in the markets, we do want them to act as owners – we should surely give them the kind of rights that are supposed to come with ownership.
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But the other suggestions seem more like rules for the sake of reaction - and we have enough of those already. What I am really saying is that we need to rethink the way we treat our big businesses. Companies can only consistenly pay out vast bonuses because they consistently make what used to be called 'super profits' and so have the cash to do so.
Take our banks. They like to call themselves good citizens, but they are no more than oligopolistic gangs. Their managers make as much money as they do simply because the money is there. The average big bank makes more in profit than a business in any other sector could ever dare to dream of.
So the question we should really be asking is: "Why do investment banks make so much money?" And why do we allow the conditions that let them to continue? Why doesn’t our form of capitalism, such as it is, encourage competition?
But we also need to look at the lack of real competition among CEOs and top managers of all companies. They’re making incredible fortunes. In a normal, capitalist society, they wouldn't just be making good money: the rest of the fortune would be in the pockets of workers or shareholders - workers because long-term sustainable businesses pay workers well, and shareholders because excess profits are supposed to accrue to owners.
That means we have to address the bonus system too (it is this that makes our managers so short-term in their behaviour towards workers).
Then we have to address the talent myth (I last wrote about this here: The myth of talent). The talent myth boils down to the idea that CEOs have some kind of rare and special talent worth tens of millions, when they just don’t.
My point, then, is not about taxing away the millions in ill-gotten gains at the top of our money tree. It is about dealing with the circumstances that allowed them to grab them in the first place.
I still think that is a job for shareholders, not government. Big fund managers have been pretty quiet for most of the financial crisis – at least in terms of their role in causing it via their foolish acceptance of performance-related pay and the talent myth. It is time for them to accept the long-term moral and financial duties that go with their work.
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(24 January 2012, 11:36AM) Complain about this comment
"The average big bank makes more in profit than a business in any other sector could ever dare to dream of".Based on which time scale? If you consider the massive losses recently incurred by many of the big banks (requiring Government bail-outs), and the yet-to-be-declared write-downs lurking in the balance sheets, the 'average' profitability would be more of a nightmare than a dream!
(24 January 2012, 01:07PM) Complain about this comment
SSo the question we should really be asking is: "Why do investment banks make so much money?" I'm sure you know the answer, the cartelisation of money creation into private hands, in the form of FRACTIONAL RESERVE BANKING and many other DERIVATIVES of creative accounting, along with all the other special privileges those in power can bestow upon themselves.The only way I can individually show my disapproval is to remove my money, pension, etc, from the markets altogether and keep it in cash and gold. In cash I would rather take the hit of the theft of my money by FIAT INFLATION than let the overpaid city suits take slices off it at every turn. Unfortunately they have got me beat either way, if anybody has any better ideas I may be interested.
(24 January 2012, 03:43PM) Complain about this comment
It seems to me there has to be almost an existential threat to any organization (private or public) before those running it are forced to cut their take - once it has reached a certain level it's like extracting teeth to get it back down to acceptable levels. In these liberal times when no one can be made worse off by anyone else's action, it makes it even harder to sort out the problem of unjustified pay and requires an even bigger bust (with no possibility of another 'second mortgage') to bring about the realisation these people are not worth their pay and act upon it. Homosapiens are greedy animals and they will take, take, take, until they are stopped.
(24 January 2012, 06:56PM) Complain about this comment
@ 3. EPSo right.If a change in the status quo doesn't come from the top (it probably won't; well, not before the proverbial can explodes) it'll most likely have to come from the bottom - revolution.Either way, it's not going to be pretty.
(25 January 2012, 03:52PM) Complain about this comment
We allow the banks to run riot because most of us are impressed by money (including Moneyweek subscribers) and we do not want to appear stupid by admitting we do not understand the complex, inter-connected transactions they undertake. Certainly many politicians appear to be over-awed by the rich and powerful and when combined with the ethos of personal gain the only place left for the weak and poor is at the bottom of the tree. Perhaps, knowledge and skill (in all their forms) merit this hierarchy.
(25 January 2012, 05:58PM) Complain about this comment
Interesting header Merryn. Because shareholders do "own" companies. It's just that their ownership is massively fragmented. We now see a Marxist triumph. The workers control the means of production. It is the employees, especially in finance , who call the shots and dictate the rewards and the "owners" are powerless.You suggest they should act as if they really own it,when the reality is they do,but cannot co-ordinate themselves to challenge the vaunting ambition of their staff.
(30 January 2012, 10:54AM) Complain about this comment
Whoever guessed that the revolution would start in the Financial Times? It's all becoming clear that we small investors have been and are being mugged by the financial services industry. All of those overpaid directors have had their remuneration approved by the institutions to whom we entrusted out savings. In turn, the managers of these institutions have voted themselves a generous slice of the action. I have watched with dismay as a well known, careful investment trust in which my family has invested for generations has become a high profile organisation with an overpaid management team and the inevitable dismal performance.
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