The System is Rigged
In today’s system of publicly-held and private equity-held companies, shareholders elect the Board of Directors, and the Boards hire CEOs to run their companies. By the numbers most shareholders are passive Individual Investors and live on Main Street. However, by dollars most shareholders are active Institutional Investors or Fund Managers that live off Wall Street.
Wall Street investors actively promote the selfish objective of shareholder profits first. The most aggressive of these shareholders are the Activist Investors. Because “shareholders profits first” is a policy choice, not the law, activists take the law into their own hands, as enforcers to protect their policy of entitlement. They shout loud and fight hard to elect Board of Directors that will give incentives to CEOs to maximize their short-term profits.
CEOs, under pressure from agressive Wall Street shareholders, take an easy and fast route to maximize short-term profits. To save their job, they exploit the U.S.’s “at-will” employment labor laws to destroy American jobs by…
- Outsourcing jobs and moving plants to low wage countries,
- Eliminating jobs to justify or bail-out a merger, acquisition or highly leveraged company, and/or
- Eliminating jobs to adopt a new technology, embrace automation or employ robots.
CEOs are compensated for destroying American jobs at the expense of their employees—for breach of a covenant-of-good-faith. In fact, too many Chief Executives take home far more than 20 times the average pay of their employees; which is excessive and outrageous.
CEOs leverage their advertisement spending with the media to mute its “watchdog” voice. Meanwhile, Wall Street shareholders and their CEOs fund politicians to promote and protect this system.
Thus, at a minimum our companies are rigged to eliminate and export American jobs. More deviously, our companies are rigged for CEOs to take income from American jobholders on Main Street and give profits to shareholders on Wall Street. The “watchdog” media keeps quiet. Today’s system for running companies is a “great deal” for the Wall Street and an “unfair and unbalanced bad deal” for America jobs. The system must be changed!
The System Wasn’t Always Rigged to Put Shareholder Profits First
In the Harvard Business Review’s May-June 2017 Issue, Adi Ignatius, HBR’s Editor in Chief, asks “Are We Giving Shareholders Too Much Power?” Ignatius notes “the idea of shareholder [profits first] is relatively recent and is rooted in the agency theory laid out by academic economists in the 1970s in articles in the HBR and elsewhere.” He further concludes, “more than 40 years ago, academic writing changed [the system for] how modern corporations are run.”
We have witnessed in the last 40 years how putting shareholders profits first “forces [CEOs] to focus excessively on the short term, weakening companies’ long term prospects and damaging the overall economy.” The Chief realizes the system must change.
The System Can Change to Put American Jobs First
Peter Drucker said “the purpose of business is to create a customer.” We ask, why do we need businesses? The why is obvious, but overlooked. We need businesses, because people need and want jobs. We don’t need businesses because shareholders need profits, contrary to what activist investors want everyone to believe.
To change the system, Boards and CEOs must change their mentality and policy from putting shareholder profits first to putting American jobs first.
If the Boards and CEOs won’t change their policy, then Congress and the President must change the rules of the game—change the system.
Congress and the President have a history of changing the system. For example:
- America Was Founded as a Protectionist Nation. It is no accident that after Independence, a tariff was the very second bill signed by President Washington.
- President Ulysses S. Grant issued Proclamation 182 in 1869 that guaranteed a stable wage and an eight-hour workday, for government workers. This let the private-sector workers to push for the same guarantee.
- Congress passed the Adamson Act in 1916 to establish an eight-hour workday.
- Congress passed the Fair Labor Standards Act in 1938 to establish the forty-hour workweek and allow workers to earn wages for an extra four hours of overtime.
- Congress passed the Tax Reform Act of 1986 to limit deductions for passive activity losses and limits on passive activity credits to prohibit many tax shelters, especially for real estate investments.
Without changes for the good, the system will continue to destroy American jobs and dreams.