Saturday, August 25, 2018

Silly Season is Upon Us

The election is almost here, and politicians are all trying to outdo each other in desperate attempts to garner press time and the hoped-for votes that such exposure is supposed to bring.  Several of the potential bills being tossed around have no real chance of being passed, but are intended just to shock the voters.

Politicians talk about closing agencies, balancing budgets, providing new jobs, and lowering expenditures constantly.  During campaigns, these problems are made to sound like dire emergencies, but after the election, the two-year snooze button is hit and discussion of those crucial problems all but vanishes—at least until the next election. 

Both parties are guilty of this charade, and there are no indications that it will ever change.  Voters obviously have extremely short attention spans and no long-term memory.

Occasionally, the politicians' claims rise to the level of such absurdity that the ideas are worth a little attention, if only for the sake of amusement.  This is precisely why I spent a little time this week listening to speeches by Senator Elizabeth Warren as she proposed what she calls “Accountable Capitalism”.  This is not actually a totally new idea:  what Warren has done is take “Conscious-Capitalism” (the idea that consumers will favor businesses that are socially conscious in their operations) and inject it with socialist steroids.

One provision in particular struck me:  Senator Warren wants laws forcing all corporations with annual revenues of over $1 billion to have at least 40% of their boards of directors elected from the employees.  Calling them "stakeholders" (as opposed to current-day "shareholders", who actually own shares of company stock), Warren believes that the corporations 'owe' their employees….something. 

This policy is actually something that was frequently accomplished by collective bargaining, but as the power of the unions is waning, Warren wants to pass legislation to accomplish the same thing.

This contradicts just about everything that Milton Friedman wrote, including that the chief goal of directors should be to guide the company into making profit, and that a successful company—and this implies that a company also should be responsive to the political and social desires of its customers—will in the long run be doing the best for its employees by remaining competitive and by continuing to provide stable jobs for its employees.

There seems to be a common belief that "heartless businessmen" do not care about the welfare of their employees.  (Certainly, Senator Warren seems to believe this).  This is a complete mischaracterization of every businessman I have ever known.  My brother and I used to have telephone conversations about this very subject, as we agonized over decisions that would set the path for our respective companies.  'What if this decision works out wrong, and I have to lay off employees?'  I not only knew the names of my employees, I knew the names of their children.

The most common problem among businessmen that I have known is the recruiting, training, and retention of good employees.  Anyone who says differently—and this certainly includes the senator from Massachusetts—has never run a business.  Anyone who has ever signed the front of a paycheck knows it's impossible to keep good employees working for you if you are a bad boss.

Nor is Warren's plan in any way practical.  Imagine the business that currently has $900 million in revenue.  What incentive does the company have to expand and grow larger?  The potential devaluation of its voting stock?  A larger and more fractious board?  It would be far more likely for the company to either move offshore or break up into small divisions—spinning off companies with a shared ownership.  This would raise the overhead, resulting inevitably in the hiring of fewer employees. 

For the thousands of companies in America whose revenues already top $1 billion annually, this change in management and the restructuring of preferred stock would mean an immediate drop in the stock price, hurting all of the shareholders and making the companies less competitive in a global market.  It is hard to see how anyone would benefit from such an arrangement. 

Senator Warren argues that over half of America own no stock.  True, but almost every American is financially involved with a pension fund, a bank, or an insurance company—all of which do own stock and would be seriously harmed by this legislation.  How would your city and state meet current pension obligations if their investment accounts were wiped out?  How much would your taxes have to be raised to cover the deficit?

If current stockholders thought that Warren’s bill had any chance of being passed, there would be unprecedented capital flight out of US-backed stocks, triggering a massive bear market.  I can’t help but wonder if there would be any surviving corporations large enough to come under the new legislation. 

Nor is there any evidence that corporations with employee participation in the boardroom are more profitable, competitive, or even capable of hiring more employees.  There is a long list of corporations that have experimented with such employee stakeholder plans—and failed.  Ben and Jerry stopped making ice cream long enough to announce just such a plan, promising to pay its top executives no more than five times the average worker salary.  After sales slumped, the company quietly hired a head-hunting firm that eventually secured the services of a highly-paid executive who had formerly been employed in the firearms industry.  Ultimately, the corporation sold to Unilever. 

The Container Store started in Dallas, growing quickly by opening new stores across the country.   After taking the company public, the stock rose to just over $40 a share.  After announcing its new policy of sharing management, the company lost 87% of its value and its expansion of new stores stalled.

There are undoubtedly success stories of companies in which management decisions are voted on by the employees.  I’m sure there must be—I just don’t know of any.  (But, I also know that the decisions of what to do with a company should be left solely to the owners of that company).  Taking that right from them even by legislation, Senator Warren, is theft of property. 

The largest corporation in the world as I write this, is the Apple Corporation.  Apple's competitive business is highly complex, requiring massive amounts of capital to achieve its remarkable innovations and sales.  Currently, investors have loaned the company a staggering $1,044,000,000,000.  That’s a trillion dollars.  The profit that Apple made last year is just as staggering, but by the time you divide it among the investors, the yield is only a return of 1.36%.  That isn’t much for the risk those investors are taking. 

I have a suggestion, let’s test the theory.  We’ll let Senator Warren start a company where all the management decisions are shared equally.  We can wait a while and see how it works out.  She should start small, perhaps a bus company where every passenger on the bus gets his own steering wheel.  Just don’t let it run on the streets where I live.

1 comment:

  1. Thank you for this great piece! One of your best. Every voter should read this AND Friedman's' "Free to Choose".

    I look forward to your blog every Saturday A.M.