Why investors are to blame for labor’s woes
February 2010, nobody’s celebrating.
Workforce participation is stuck near historic lows, six million people are part-timers but want to work full time, and wage growth remains subdued.
Both presidential candidates have talked a good game about jobs and the economy, but neither addresses the real problem. The U.S. job-creation machine—once the envy of the world—is broken, because American corporations cannot create steady, well-paying jobs here in the USA while also providing maximal returns to their investors, who are really in charge.
So says Gerald Davis, a professor at the University of Michigan’s Ross School of Business, who has studied these issues for years. I’ve read many books and articles on this subject, and I find Davis’s arguments among the most cogent.
A short piece he wrote late last year for Brookings and a new book, “The Vanishing American Corporation,” trace the big changes in American corporations from the job-rich giants of the post-World War II era to job killers now, because the mission of the corporation has changed radically.
Corporations’ new, exclusive emphasis on shareholder value—enforced by executive-compensation packages in which equity comprised 62.2% of S&P 500 CEOs’ total compensation in 2015, according to Equilar—has pushed top executives to replace humans with robots, send jobs overseas or bring in lower-paid immigrants to do them here, hire part-time or temporary workers (or glorified day laborers and Uber “contractors”) instead of full-time ones, and lay off thousands of employees even when profits are soaring.
Cutting labor costs boosts earnings, which tends to push stock prices (and executive compensation) higher, and frees up cash for more “important” things like dividends or share buybacks. As of March, S&P 500 companies had bought back more than $2 trillion in stock over the last five years, making buybacks the biggest source of demand for stocks since 2009, HSBC estimated.
That makes big pension funds and “activist” investors like Carl Icahn happy, but it’s bad news for the millions of Americans who still yearn for well-paying middle-class jobs that offer career advancement, decent health-care coverage, and retirement security.
“Under our current conditions, creating shareholder value and creating good jobs are largely incompatible,” Davis wrote in his Brookings piece. “Corporations are ‘job creators’ only as a last resort.”
“Companies do not exist to create jobs. You don’t get rewarded for creating jobs,” he told me in a phone interview last month.
Read:America’s biggest economic problem: Nobody is investing for tomorrow.
It wasn’t always that way.
In the glory days after World War II, giant corporations dominated the U.S. economy. The landmark of the postwar era was the Treaty of Detroit in 1950. General Motors, which had just reported the most profitable year ever for an American corporation, gave United Auto Workers members full pension rights and health-care benefits.
It was, wrote Davis, “the Magna Carta of the postwar employment relationship,” and became the pattern for other industries. “An entry-level job with a major corporation that had a strong commitment to promotion from within was a ticket to the middle class.”
But in the 1980s, corporate raiders like Icahn, Ronald Perelman, Saul Steinberg, and T. Boone Pickens seized control of one of every three Fortune 500 companies. Meanwhile, the rapid spread of 401(k)s and the long bull market gave millions of Americans a personal stake in the stock market. By the 1990s, shareholder value advocates had triumphed, leading to “a substantial reorganization of the corporation.” Smaller was beautiful. The bloated, paternalistic American company of yesteryear was dead.
Opinion Journal: Stagflation Ahead? Business World Columnist Holman Jenkins Jr. on why a strong July jobs report may not presage strong economic growth. Photo credit: Associated Press.
Now, globalization and the internet and mobile technology make it easy for companies to hire people when they need them, dispensing with massive permanent workforces. The second-biggest U.S. company by market value in 1982, AT&T(T) had 822,000 employees; the biggest in 2012, Apple(AAPL) had 76,000.
“Hiring full-time employees is increasingly a costly indulgence,” wrote Davis. “The corporate career...was replaced by the job, and now the job is being replaced by the task.”
And start-ups? Davis studied 1,600 companies that went public over 14 years beginning in 2001. He found that the median IPO company increased its employment by 51 people. That’s not a typo, folks.
“Entrepreneurship aimed at creating shareholder value is unlikely to create many jobs in the U.S.,” he wrote in the Brookings piece. “If anything, listing on a stock market creates pressures against creating employment: market participants seem to reward the lean and mean, and punish the job creators.”
Those “market participants” include you and me, through the mutual funds and pension funds that manage our money, as well as the venture capitalists, private-equity funds, hedge funds, and “activists” who invest it and are under intense pressure to produce higher and higher returns.
That puts the screws on CEOs and corporate managers, who are very, very well paid to do what shareholders want. “It’s not a terrible deal. But they don’t really feel that they have a lot of choice in the matter,” Davis told me.
I won’t shed tears for people who make $19 million a year on average, but the total victory of shareholder capitalism has left top executives dancing to investors’ tunes. For the rest of us, the music is off-key—and nothing being proposed by either presidential candidate or political party will change the corporate mindset in which job creation is a low priority at best and may even be antithetical to investors, who now completely run the show.