We’re not in the business of defending capitalism. We’re in the business of gradually replacing it with something better.
That said, we want to set the record straight on an often-repeated meme: that “corporate profits” are bad.
Instead of these monies going into the hands of workers, they go into the greedy profiteers’ pockets some think.
This is a muddled topic. As usual, there are valid perspectives on both sides. However, ire raised by “thieving corporate profiteers” tends to be misguided.
The majority of shareholdings in public companies are “institutional investors”: organizations that invest money on behalf of their constituents, usually retirement portfolios, i.e. 401Ks and other savings and wealth-building instruments.
That means, the “greedy profiteers” benefitting from “profits going to corporations” are actually people like your mom, my mom and other folks trying to invest in or benefit from their retirement savings.
Dividends from these investments are what our parents and others are living on. “Dividends” are the same as corporate profits. They are money left over after all expenses are accounted for in a corporation.
So when a company reports profits or net income, that money is going into the hands of the company owners, which usually are workers….who have invested their wages in hopes that the corporation will be profitable thereby providing a retirement income stream for everyday people.
People like you and me.
That applies to public companies. What about private ones?
Well, that’s not so different.
Since they are private, we can’t really know where the net income is going. However, we do know institutional investors tend to make up the largest group of investors even in the private corporate investment sector.
In other words, it’s not accurate to claim “greedy one percenters” are pocketing all the profits and thus screwing workers and the rest of us.
In 1997 there were about 6,000 public companies in the US. As of 2017 there are only 3,000 or so. This article does a good job explaining the decline, including explaining that the decline in public companies results from things like mergers and such, leaving existing corporations larger and thus more profitable, which again, benefits the people, who are corporate owners through their wage-investments. An interesting point from the article:
Control of private companies falls into fewer hands, but that’s also true of some public companies with dual-class share arrangements. In both public and private markets, the biggest shareholders include institutions — such as mutual and pension funds — that represent broad swathes of the investing public. The most important difference is disclosure: Public companies provide a lot more financial information, valuable in assessing both their performance and that of the broader economy.
So even super-large companies generating massive profits still are distributing those profits to your parents and mine and others through institutional investors.
One thing I found particularly interesting is just because a company goes private doesn’t mean it is more profitable. The ratio of income between public and private corporations tends to hover right around 1:1 (see below).
I didn’t know that. Did you?
So go ahead and rail against capitalism if you want. But for goodness sake, don’t make a fool of yourself and claim that capitalism allows corporations massive profits. The people benefitting from those profits are not boardroom masters, but the ordinary people in society who look just like your grandma.
https://www.wired.com/story/elon-musk-tesla-tweets-struggles/
https://www.nytimes.com/2018/08/16/business/elon-musk-interview-tesla.html
Elon Musk might be pushing himself too much. I’m reading them now.
I don’t really know enough about it.
https://www.bbc.co.uk/news/business-45118393#
Tesla board says there are buyout talks with Elon Musk
Yeah. We think that’s a great thing for Tesla. What do you think?
What about share buybacks?
https://www.nelp.org/publication/curbing-stock-buybacks-crucial-step-raising-worker-pay-reducing-inequality/
The money used for share buybacks could pay employees anywhere from $2000 to up to $18,000 more per year!!!
This is a hedging and securities strategy boards enact for various reasons. Here are some things to consider. You may know this already, so I don’t want you to think I’m talking down to you.
1. Net income is money left over AFTER operations. That includes investment in (as the report says “for other productive purposes, such as corporate investment, job creation, and raising wages.” So it’s not necessarily accurate to say that because a company participates in share buybacks they aren’t doing these things. In fact, in the report, they talk about how companies ARE doing these things. Is it enough? That’s a judgement call. And at this point, you have to ask yourself what is the selfish motive for such an agency as this to make such claims? Do their livelihoods benefit from calling out such alleged malfeasance?
2. The three industries this report is looking at are NOTORIOUS for very low margins. I wouldn’t doubt that buy backs are necessary to induce further new and continued investment. So these buybacks could be an investment strategy allowing continued and new investment. It is not necessarily a strategy to enrich certain populations.
3. Net income is discretionary. It is therefore up to the board to do with it what they will. This is the way the law is designed. Not an excuse and not an attempt to gloss over the situation, but it’s just the way the rules are laid out. So there’s nothing illegal about it. Another reason to change the game entirely.
4. The report (the actual report, not the summary) says:
“but recognize that addressing the rise of open-market share repurchases alone will not lead firms to improve employee compensation or invest in long-term productivity. Corporations could divert profits out of the firm through increased dividends, or they could hoard larger piles of cash. However, ending the ability of companies to engage in stock buybacks closes one major channel through which billions of dollars currently exit the nation’s public companies and productive circulation. While we do not draw a causal relationship between the rise of buybacks and worker compensation, we hope this illustrative picture of the magnitude of buyback spending to worker compensation exposes the extent to which workers are not receiving their fair share of corporate earnings.”
So this organization admits it is making a lot about one aspect through which companies manage profits….and, that this one aspect will not lead to the solution they claim they are focused on. Which brings me to…
5. Companies which generate large profits have to pay taxes on that. So using profits to purchase back shares MAY limit their tax exposure. I don’t know this for sure. I’m speculating… Note also that a “buy back” is a benefit to the shareholder: the money the company pays goes to their owners (shareholders). Yes, the remaining stock is concentrated (un-diluted) thus leading to a higher price per share, but no one is harmed in this transaction that I can see. I get the point about long-term shareholders potentially being harmed, but hey, people are still investing in all the companies cited.
Unfortunately I don’t think we’re going to see limits placed on CEO pay. Especially to the degree that workers get to absorb any roll-backs.
There’s a lot of nuance in the report, indicating to me that it’s not as black and white as the report is making it seem.
The bottom line for me is being a worker (an employee) is the WORSE occupation for a human being for many, many reasons I could go into, but this already is a very long response (sorry). So rather than trying to squeeze more from big business, I would suggest people try to change the game’s rules (a la Copiosis or some other such idea) or become a business owner, which in some cases can be done for as little as $67 and has the potential of making a person a multi-millionaire.
There is plenty opportunity in the world for people to leave the land of “employee” behind. But many don’t realize this, so all they do is complain, while being complicit in their misery.
Finally, the amount claimed companies could pay employees is complete speculation. Just because this report makes these pay increase claims, doesn’t mean that’s what employees would do, even if this agency or some other were successful rolling back the buyback leniency.
This post was mostly to clear up a false argument some folks make about profits going to greedy profiteers. I would say such people exist. But there are a LOT of everyday folks who get financial benefit too from profitable corporate operation.