Laying Off Workers to Please Wall Street
Wall Street’s War on Workers
American workers are working harder than before but have little to show for it. The average worker experiences significant economic insecurity, and 44 percent of U.S. adults still cannot afford an emergency expense of $400. In contrast, the wealth of Wall Street continues to increase and CEOs’ salaries are 271 times greater than workers’ pay. Wall Street’s focus on wealth accumulation for the rich is often by explicit design and comes at the direct expense of American workers. This series of papers will explore in periodic installments the ways in which Wall Street undermines U.S. workers and changes that must be made in the U.S. economy to grow the middle class and restore the value of work.
Chapter 2: Laying Off Workers to Please Wall Street
Chapter 1 explored Wall Street’s opposition to workers’ raises, and in Chapter 2 we will examine why corporations lay off workers to please Wall Street.
Put simply, for the last several decades, companies have sought to please Wall Street so that their stock price will go up in the short-term. They know Wall Street analysts like it when corporations minimize costs to boost profits — even when they’re already profitable — so they lay off workers to show they’re serious about cutting expenses. They also know shareholders want the value of the stock to rise, so they buy back their own stocks, sometimes with the savings they’ve accrued from firing their workers. As a result, Wall Street’s war on workers means not only smaller paychecks but also pink slips for employees.
How did we get to a point where stock prices are more important than workers? It didn’t happen overnight. Over the last several decades, as deregulation took root and Wall Street’s influence over corporate management expanded, there has been a significant shift in corporate priorities and in the way corporate success is measured. Companies used to believe they had to fulfill obligations to all of their stakeholders, including employees, consumers, and the town residents where their businesses were located. Now businesses are focused only on satisfying Wall Street. Corporate executives know that Wall Street analysts will grade them on their short-term performance, specifically their quarterly earnings reports, and they do everything possible, including laying off workers, to make sure their balance sheets and profit margins look as good as they can.
Milton Friedman, a Nobel-Prize-winning economist whose ideas helped shape the shift in economic policy, argued that corporations’ only social responsibility is: “to use its resources and engage in activities designed to increase its profits.” Friedman’s ideas, combined with inflation and increased global competition, changed the nature of doing business in corporate America in the 1970s. By the 1980s, some investors were pursuing hostile takeovers of companies that failed in the investors’ view to maximize profits, proof that Friedman’s ideas had taken root. Corporate executives began to fear takeovers if they did not earn sufficient profits and maintain a high stock price. As a result, quarterly profits and shareholder value became intrinsically linked in the executive offices of corporate America. It didn’t help that the pay packages of top management increasingly became focused on short-term stock performance as well.
By the 1990s, maximizing profits and shareholder value had become standard operating procedure for American businesses. In fact, even profitable companies had started laying off workers to grow their profits even more. A business professor at Southern Illinois University said at the time, “if you lead a major corporation — even if it is highly profitable — in order to maintain legitimacy in the eyes of the important corporate stakeholders, you really almost have to downsize.”
A business professor at Southern Illinois University said at the time, “if you lead a major corporation — even if it is highly profitable — in order to maintain legitimacy in the eyes of the important corporate stakeholders, you really almost have to downsize.”
Take, for example, Xerox, an iconic American company that had never had a major layoff in its history. In 1993, the company announced plans to cut 10,000 workers, despite being profitable. The CEO justified the job cuts as necessary “to compete effectively” and to have a “lean and flexible organization which can deliver the most cost-effective document-processing products and services.” He also said he expected to see higher profits as a result of the layoffs the following year.
Xerox wasn’t alone in embracing job cuts even in times of profitability. In the first 10 months of 1998, nearly 523,000 U.S. workers were laid off, 200,000 more than were laid off for the same period the year before, and that was during a period of economic growth. Diane Swonk, a deputy chief economist at Bank One in Chicago, explained the downsizing tactics this way: “Because of pressures from Wall Street, companies are paying unprecedented attention to their bottom line…Companies are being asked to produce not just good profits but extraordinary profits.”
This corporate trend of putting short-term profits before people grew stronger in the early 2000s. The North Carolina Banking Institute researched the extent of Wall Street’s domination of the economy by looking at Fortune 500 firms’ portion of employment and revenue in the U.S. economy from 1982 to 2005. In the early 1980s, Fortune 500 companies’ percentage of overall U.S. employment and revenue largely tracked together. Starting in the late 1980s, however, these big companies’ share of total revenue started to climb and their share of employment started to decrease. This divergence became the starkest in the early 2000s, when Fortune 500 companies’ share of U.S. employment decreased sharply while their share of revenue increased just as dramatically.
These data tell us that for decades corporations were getting richer by laying off their workers. It’s still true today. Wall Street’s influence on corporate America means corporations continue to focus on short-term performance instead of long-term growth. And workers are getting the short-end of the stick.
Wall Street’s influence on corporate America means corporations continue to focus on short-term performance instead of long-term growth. And workers are getting the short-end of the stick.
A look through four layoff announcements in 2016 and 2017 for profitable Fortune 500 companies reveals how commonplace it is for companies across all sectors of the economy to issue pink slips to boost profits and shareholder value:
· Tyson Foods announced layoffs in 2016 as part of its “Financial Fitness” plan, despite having a good quarter in beef sales. In November 2017, the president of Tyson said that the company “generate[d] exceptional financial results” for the year and attributed part of that success to the Financial Fitness plan’s cost cutting. He also cited the company’s ability to buy back $650 million of its own stock as evidence of Tyson’s strong performance.
· Similarly, Sysco announced a three-year plan in February 2016 that included a “productivity plan” that would reduce its workforce by about 2 percent and also included a stated goal of increasing its operating income growth target. That might have made sense if the company had experienced a year of sluggish sales in 2015, but the opposite was true. In 2015, Sysco’s sales increased by five percent and the company generated $1 billion in cash flow. They were also able to pay $700 million in dividends to the company’s shareholders. As if the large dividend payout the year before wasn’t generous enough, Sysco’s CEO said one of the goals of the the three year plan and layoffs was to “maximize shareholder returns.”
· Humana announced in 2017 that it was eliminating 2,700 jobs, either through layoffs or buyouts, despite making more than $13 billion in revenue and reporting an increase in net income last year. The job cuts were expected to generate “hundreds of millions of dollars” in savings. The CEO justified the layoffs as a way to “create capacity…We’re looking for productivity improvements across the company.” In the same call, Humana’s CFO said he and other executives would receive an increase in total compensation.The CEO made $19.7 million in 2016, nearly double his compensation package of $10.3 million in 2015. The next month Humana announced it would spend $3 billion to buy back its shares.
It’s no surprise that cost-cutting measures typically include layoffs but rarely if ever include scaling back executive compensation. And in each of these examples, the company decided to cut costs; they fired workers but somehow found the cash to buy back millions of dollars, sometimes billions of dollars, worth of their own shares. The coordinated timing of layoffs and buybacks isn’t a rare occurrence; it’s happening regularly throughout corporate America. In the third quarter of 2015, U.S. companies announced 205,759 job cuts, but over that same period of time U.S. company stock buybacks reached their highest levels in 10 years.
Is this short-term approach to running a company, including through layoffs, even good for the company long-term? There’s a lot of evidence to suggest that it’s not. Even Larry Fink, CEO of BlackRock, the world’s largest investor, is critical of companies making decisions in the short-term that hurt them in the future. He says “companies…expose themselves to the pressures of investors focused on maximizing near-term profit at the expense of long-term value.” In addition to hurting companies, short-termism damages the overall economy. William Lazonick, an economics professor at the University of Massachusetts-Lowell says that the focus on stock price and maximizing shareholder value has “concentrated income at the top and has led to the disappearance of middle class jobs. The U.S. economy is now twice as rich in real terms as it was 40 years ago, but most people feel poorer.”
So if it’s not in the long-term interests of the company or the U.S. economy, why do corporate executives make these decisions just to please Wall Street? The answer is simple: CEOs make decisions with a focus on the short-term performance of their company to boost the stock price because they’ll get richer. A study on short-termism found that “when executive compensation varies according to current-year earnings or stock prices, it creates incentives to maximize short-term results even at the expense of longer-term considerations.” Stock buybacks, specifically, are also timed to increased CEO pay. In an investigative report titled “The Cannibalized Company,” Reuters found that CEOs’ motivations to buy back stock are clear: “Buybacks return profits to shareholders — and often enhance executive pay — even when a company hits lean times and is laying off workers.” Making short-term decisions pays off — if you’re already well-paid. In 2016, CEOs received their largest average pay increase in three years and nearly twice the raise that average full-time workers received.
So next time you or someone you know loses a job at a profitable, publicly traded company, it’s possible the layoff was part of a cost-cutting measure to please Wall Street and to make CEO paychecks bigger. As long as Wall Street analysts pressure corporations to continually cut costs, workers are at constant risk of losing their jobs. If CEOs get paid based on stock price instead of a company’s long-term success, workers will keep getting fired at profitable companies. If our workers keep losing the war to Wall Street, our middle class will suffer and our overall economy will stagnate.
We need to break this cycle of greed between Wall Street and CEOs. We need policies that restructure our economy so that workers share in the profits they create and Wall Street doesn’t determine when workers keep their jobs or how much is in their paychecks. In the coming chapters we’ll be talking about the other ways Wall Street is waging a war on workers and discussing policy solutions that will help workers fight back and win.
