Why Many Capitalists Believe That We Need To Fix Capitalism
The idea that this inbred, profits-at-all-costs system would not operate in ways damaging to its employees and customers is ridiculous to say the least.
By David Grace
When immensely wealthy and talented capitalists like Henry Blodget, Ray Dalio, Warren Buffett, Jamie Dimon and Marc Benioff all start talking about fixing capitalism, it’s time, and actually past time, for the rest of us to pay attention.
American Capitalism Today
Here’s the system we have today:
The Top 1,000 Corporations Generate 84% Of All Corporate Revenue
In 2018 the total revenue of all U.S. corporations was approximately $17 trillion dollars. Of that amount, the U. S. Fortune 1,000 companies generated almost $14.3 Trillion dollars or approximately 84% of all U.S. corporate revenue.
Boards Of Directors
The average size of a board of directors is approximately nine members. 15–20% of directors are on the boards of two or more corporations. Some people simultaneously serve on the boards of five, six or even seven corporations.
Less Than 9,000 Individuals Control Almost All American Business
So, while the 1,000 largest U.S. corporations theoretically might be controlled by about 9,000 directors, probably 6,000 or fewer individuals comprise the boards of directors of the top 1,000 U.S. corporations.
Since boards operate by majority vote, that means that in practice 4,000 or so individuals have functional control of the companies that generate 84% of all U.S. corporate income.
If you add the 1,000 CEOs to this pool, you would get about 5,000 or so people who have the power to control almost all (by dollar volume) of American business.
Who Picks Them?
Even if you’re a shareholder in one of these public companies, you’re only presented with a pre-chosen slate of directors. Like voters in Communist countries, you’re only given the option of voting Yes or No.
In actuality, these five or six thousand directors are people most people have never heard of and have no say in picking.
Who Are They?
The vast majority of these five or six-thousand directors are male, over forty, white, educated in the same twenty or fewer colleges, members of the top ½%, and share a similar upper-class cultural heritage and outlook.
Most of America’s businesses are controlled by about the number of people that would fill Madison Square Garden, about 5,600 or so middle-aged to old, white, culturally similar, Ivy-League-educated, one-half-percenter males.
The senior executives these directors hire to run their companies are themselves overwhelmingly middle-aged to old, white, upper class, very rich, Ivy-League-educated, males.
I think it would be an excellent project for some graduate students to create a demographic database of the directors of the Fortune 1,000 companies — age, race, income, education, gender, ethnicity, religion, political affiliation, etc.
My intuition is that those demographics would give the Trump voters who thought Hillary Clinton represented the “elites” a shocking surprise as to who really runs this country and what political party most of them belong to.
They Are Paid Based On Increases In The Stock Price
While the salaries of these 1,000 CEOs are in the millions, their real compensation, tens to hundreds of millions of dollars, comes from increases in the short-term trading price of the company’s shares that are awarded to them under executive stock-option plans.
The wealth of these executives vastly increases when the stock price rises. Their job performance is often gauged by the increase in the company’s stock price over the term of their service.
In addition to having a huge financial incentive to do anything and everything possible to increase the short-term stock price, they have been inculcated with a philosophy that, above all else, their prime moral imperative is to increase the stock price.
They call it their fiduciary duty to increase “shareholder equity.”
What Board Members & CEOs Believe
These board members and the executives they control firmly believe that
- They have a fiduciary obligation to continuously increase profits by any and every means that is not clearly illegal
- They have a fiduciary duty to continuously increase the stock price every year if not every quarter by any and every means that is not clearly illegal
This fiduciary duty to increase the share price supersedes any countervailing considerations for the well-being of
- Their customers
- Their employees
- Their suppliers
- Their communities, or
- Their country
Why Is Anyone Surprised By Corporate Excesses?
These directors and executives are not only paid to do whatever it takes to increase the short-term share price, they are told that they have a fiduciary obligation to do whatever it takes to increase the short-term share price (what they call “shareholder equity”) no matter how much loss, pain and damage their actions may inflict on their customers, employees, suppliers and communities.
The only restraint imposed on them is that they are not supposed to break the law. But that is a limitation that could be more clearly stated as: They are not supposed to break the law in a way that they will likely be caught.
For examples of this rule in action, we could point to Volkswagen, Enron, Arthur Anderson, PG&E, Wells Fargo, the generic drug industry, Purdue Pharma, etc. etc. etc., that is, to companies that elected to break the law, but just miscalculated on the how likely it was that they would get caught.
The idea that this inbred, profits-at-all-costs system would not seriously and repeatedly operate in ways that are damaging to its employees, customers, suppliers and communities is ridiculous to say the least.
Attempts to control corporate misconduct by regulations, legislation, and litigation is to engage in an eternal game of Whack-A-Mole. It can never, ever work. You cannot frighten them into ignoring the profit motive.
Is it any wonder why Blodget, Dalio and so many others are talking about the need to fix capitalism?
What If Every Driver Was Paid By How Fast They Drove?
Suppose that 84% of all vehicles on American highways were owned by only 1,000 companies and that those thousand companies were controlled by only about 6,000 people.
Suppose that the 6,000 people who controlled those hundreds of millions of vehicles using the public roads all believed that their primary duty was to continuously reduce point-to-point travel times, a duty that trumped any concerns for the safety of their own drivers, other drivers, pedestrians, fuel economy, pollution and everything else.
Suppose that the amount of money those 6,000 people received was directly tied to the average speed their vehicles traveled — the higher the average speed, the shorter the average travel time, the more they were paid.
Yes, the companies would spout all kinds of platitudes about “Safety is our prime concern” and “We are saddened by the tragic loss of life on our highways,” all the while demanding that each year, each quarter, their drivers turned in faster and faster and faster times.
Now, think about how those corporate-owned vehicles would be operated. Think about what it would be like to share the highways with those vehicles whose drivers were incessantly being given the same order — faster, faster, faster. More, more, more.
That’s how the managers of American businesses think about profits and share prices.
Personally, I think they’re wrong. I don’t think “shareholder equity” should mean the short-term stock price because there are, in fact, different groups of shareholders. Policies that increase the short-term stock price only please executives with vested options and traders.
Those policies can and do damage different groups of shareholders who are interested in the long-term health of the company.
See my column: “Shareholder Value” Isn’t What You Think It Is
And you wonder why Wells Fargo, PG&E, Volkswagen, etc. operate the way they do?
This Is Why People Think Capitalism Needs To Be Fixed
Again, is it any wonder that definitely non-socialist, pro-capitalist people like Blodgett and Dalio, Buffett and Benioff are sounding an alarm?
Is it any wonder that in the absence of fixing this mess, calls for the failed socialist system are again being heard?
Look, fire is a wonderful, powerful, useful tool, but you have to be a moron to advocate letting it run wild.
Antibiotics have done a great deal of good, but you’re an idiot if you think that everybody should be able to buy them at the 7–11 and swallow them like Tic Tacs every time they get a sniffle.
Capitalism is a powerful tool, but unrestrained, it’s as damaging as uncontrolled fire or antibiotics use or nuclear power.
If we don’t fix it, our version of runaway capitalism is going to provoke a killing response. Nothing exceeds like excess.
And the fact is that it can be fixed relatively easily if its proponents would get off their anarchism soap box and just let us do it.
How To Fix Capitalism
For the specifics of how we can fix capitalism, see my next column, Seven Ways To Fix Capitalism, but in bullet-list form they are:
- Enact a corporate excess-profits tax
- Eliminate memberships on multiple boards of directors
- Require shareholder approval for executive compensation plans
- Give voting rights only to investors who purchased their shares from the corporation or who hold their stock for a long vesting period
- Allow shareholders to nominate, elect and remove board members via Internet voting
- Enact tax incentives that encourage increases in worker compensation and decreases in executive compensation
- Establish fiduciary standards that place the importance of benefiting the company’s customers and employees above the importance of increasing the share price
— David Grace (www.DavidGraceAuthor.com)
