The company can get two easy concrete benefits out of this situation.
First, if the share price is going up it makes it much easier for the company to do business, since it can point to the high share price as a sign that someone (the investors) have confidence that it’s doing a good job - this will make it easier to, say, tender for large contracts (if it’s a company that does that kind of thing) or get a loan on good terms from the bank.
Secondly, the ability of John to sell his $100 of shares to Jane for $120 a couple of years down the track is the very thing which persuaded John to invest $100 in the company in the first place. The company doesn’t actually get any of his $20 profit, so they don’t benefit financially at that point - they benefitted earlier. They got his $100 initially. They have to abide by the terms of the deal and let him sell his ownership onwards for more money if he gets the opportunity, otherwise nobody would invest in them.
Having said that, I agree that corporations in today’s society are far too share-price and shareholder oriented. But I’m not sure how far that is to do with the attitudes of the shareholders themselves. It seems to me that shareholders don’t have to do any “jumping up and down”, and I’m not sure if they do do so- corporate boards simply assume that the number one priority of all shareholders is to screw as much money out of their investment as possible, and bugger the ethics of how the company goes about that. And that may or may not be true. It could be that if you got all the owners of a company in a room - the real human beings behind all the managed funds and corporate investors - and put it to them “Well, we think we can probably get another 5% in dividends for you if we lay off half the workplace and make the remaining poor sods work 60 hour weeks with half an hour off for lunch and cancel the Christmas Party on top of that - what do you think?” they might not actually want the company to do that. But usually nobody asks, because it’s so much simpler to just assume that the only thing anybody cares about is the maximum dollar rate of return.
And of course it’s likely that the Board and the Directors (who, after all, make all the decisions) themselves own shares. So if a company is making decisions on the basis of short-term shareholder greed, there’s probably not far to look…
Precisely. That’s my point. The default situation is that you’re responsible for your debts. For the totality of your debts. For instance if I borrow 1000 000 to buy a house, that I, say, loss my job and can't reimburse the loan, and that due to the current situation the house is now only worth 600 000, I can’t just sell the house and call it a day. The bank will go after my car, my furniture, etc… until it get its million back. It will also be true for a non-incorporated small business. You, on the other hand, can sell your company for 600 K and call it a day.
You’re protected, as you said, by a “shield”.
I’m not ignoring the value of your shares. Indeed, it will hurt. But you’ll lose only that. It will stop there. The home-owner I used as an example previously will lose his house. It will hurt. But it won’t stop there. He’ll lose everything else. That’s why you can’t say that a business, or shares in a huge company is the same as any random asset.
You own the business, you can manage it in any way you feel like, you can take the money your business makes, but, even if you’re an abysmal failure as a CEO/member of the board, you won’t ever be held personally responsible for the losses. You won’t even have to give back the money you made during the previous years if your business goes under. Even if you leave huge debts. You have for the most part all the benefits of ownership, but not all the responsibilities.
You can lose your house for any number of reasons. For instance because you incurred a completely unrelated and unavoidable debt (say, medical bills). And not paying for your house can, again, result in losing more than just your house. You can lose your business because you mismanaged your personal finances when you bought a house, you can’t lose your house because you mismanaged your business. As a house-owner, your responsibility is unlimited (if, say, you’re sued). As a business owner, it is strictly limited to the value of your shares.
And mentioning the odd example where it doesn’t apply (some law in Texas protecting a specific asset) really doesn’t change the general rule.
Nope. If you screw up your personal life, you lose your personal assets, your business assets and your investment assets. If you screw up your business life, you lose only your business assets.
Really, it’s quite straightforward. And it’s no secret that business owners (except people owning businesses in their own name) and stockholders have been granted a special protection. That’s the very reason why you choose to invest in an incorporated company, remember.
Yes. That’s exactly what I mean. If the usual rules applied, that’s what would happen. You made a decision and incurred debts as a result. Nobody else but you is responsible for those decisions. Now, it’s time to pay back these debts.
But it’s not what will happen. Even though the debts are your responsibility, you won’t be liable for them. You won’t even be liable to the extent of previous gains, so you could perfectly have previously made millions with your business and keep your millions. Because a special protection has been extended to shareholders.
As I wrote above, you seem to be so accustomed to the concept that you don’t realize that this privilege exists (or don’t realize that it’s a privilege, like your indebted Texan home-owner who can keep his house), even though most of the modern economy rests on its existence.
That’s why I stated in my first post that the reasons why it exists are obvious. But it nevertheless exists, and it certainly doesn’t follow logically from the concept of a free market. Stockholders have been deliberately shielded from risk in order to encourage investments (or, if you’re cynical, stockholders have managed to be protected from the consequences of their mistakes at some point in the past and it stuck).
Even though you could argue that it’s for the best, and beneficial to society at large, it’s still arbitrary and an artificial protection of a specific category of economical actors. So, someone else could perfectly argue that with special protection can come special obligations. Or that since you’ve been protected from the consequences of your actions, other actors have a right to double-check these actions (for instance workers who might lose their unpaid salaries or contractual benefits if your company goes bankrupt, and won’t have any recourse against you, or investors who lent your company money). Or that some other category (Home-owners, workers, whatever) should also benefit from some special privilege or another on the basis that this also would be best for society at large.
I think the company’s credit rating, which is more based on fundamentals than the stock price, will count for far more. Some investors invest just because of a rising stock price - and that’s how bubbles happen.
And why does John think this? Wishful thinking? Fortune teller? No, it is because John will examine the business plan that comes with the IPO, and make a decision based on that. And yes he can sell them - that is the definition of an IPO. Founders hold illiquid shares before the IPO.
Yeah, “give me all the money now!” is not usually your best long-term bet for growth. That doesn’t mean it should be illegal. This, I think, is my essential disagreement with the people advocating for this.
A profitable company doesn’t need you (the hypothetical you) to fund them anyway. They’re already making bucketloads of cash, and even without shareholders they’d still be making bucketloads of cash. And the staff wouldn’t be doing twice as much work for less money just to keep the Shareholders- most of whom have no real interest in the day to day operations of the company- happy.
INTC currently pays a 3.6% dividend. Up significantly because of the drop in share price. Not sure when the dividend started, but I think at least a decade ago.
Nonsense. Companies fund growth through additional sales of shares, the value of which are based on value returned to shareholders. Without owners, the companies WOULD NOT EXIST.
If you don’t want to take care of shareholders, then start your own company and just borrow the money. You can pay your flat rate to the bank and give every other penny to the staff if you so choose.
Personally, I prefer a model where you build a firm through equity investment. It costs less than debt, you can miss a payment, and you can re-invest your profits into growth.
As for employees, a smart owner treats them well and gets double the work out of them.
Let’s get back to basics to illustrate what an incredibly bad idea the OP is expressing.
The drive for profits is the drive to make products better and cheaper than your competitors do. A corporation or any other business does not exist to be a welfare agency or to be a source of jobs. It exists to take ideas for products and implement and sell them to people who want to buy them. That it needs to pay people wages and give them careers and benefits is a result of the invisible hand, and not the prime motivation of the business.
Imagine how this would work in practice. You notice your market share falling. If you are focused on profits, what do you do? You perhaps redouble your efforts to regain market share. But maybe you’re just not good enough - your competitors have superior products or superior processes for making them, and people are increasingly choosing those products over yours.
The drive for profit leads you now to downsize. You can’t make profits supporting a workforce sized for a market share you no longer have. So you lay them off. You close offices, you shrink and regroup and rebuild and try to improve starting from a more sustainable corporate footprint.
Is this a bad thing? Not on your life. Not for society as a whole. Those workers you laid off were not productive in the job they held, and now they are free to seek other, more productive work. Other businesses with ideas can hire them and add value to the economy elsewhere. Ultimately, this is good for the workers, because when workers are employed in jobs where they are more productive they tend to earn more money and be more satisfied. But most importantly, all of this churn drives the economy towards the Pareto-optimal path. This is why capitalism is so good at building the wealth of nations.
In practice, if you decided you were going to favor the workers over profits, you’d soon find you have neither. Other businesses would out-compete you. Other businesses would be more attractive to investment. Customers don’t care about your employee’s retirement plan - nor should they. They care about maximizing the value of their own dollar and buying the best products they can with their money. And it’s best for society if they do that. We need customers to discriminate objectively on the merits of the goods they buy, if we want to send signals to corporations that they must provide the best products they possibly can to find a market.
Now let’s suppose you passed a law forcing all business to ‘put the employee first’. What would be the result? First, it would be impossible to manage and police. But let’s say you could. Businesses are now all protecting their employees and putting profits last. What would be the end result? Inefficiency. People employed in jobs where their skills are not utilized to their best advantage. Products would be shoddier and more expensive. The general standard of living would decline. It would be difficult to find investment money when you’re essentially asking investors to give to charity.
Just how much room do you think there is in ‘profits’? How much more generous can companies be? Let’s take a look at Wal-Mart, which some would accuse of being the most rapacious, bottom-feeding corporation out there. Surely they’re just swimming in money, right? They could easily afford to treat the employees much better, right?
In the last quarter, Wal-mart made $3.14 billion in profit. That represents 77 cents per share, and with a share at $56, that represents a whopping 1.4% of return on the money. An annualized rate of 5.6%. There is just not a lot of room in there to ‘take money out of profits’ before your company becomes completely unattractive to investors. But let’s say you did. Let’s give all $3.14 billion to the employees. How much do they get? Well, there’s about 2 million of them. That’s about $1500 each. $6,000 per year. And if the company did that, it would have no profits at all and cease to operate.
Corporations don’t run lean ships because they’re greedy - they run lean ships because they have to. The pressures of the market drive profits down to the point where the return on investment is slightly greater than the cost of the additional risk taken on by investing in something less stable than government bonds. Companies that make ‘excess profit’ usually find themselves being eaten by other companies more willing to work for a little less. So we’re currently not far from exactly where we should be with respect to overall corporate profits. Anything less, and corporations would become less viable.
And of course, we live in a global economy. Unless you can get the whole world to play this game, the result would be a decline in American competitiveness, and ultimately a much lower standard of living as consumers increasingly turn to exports to find value. Are you going to erect trade barriers to prevent that? If so, kiss another 20% of GDP goodbye.
Finally, if you’re talking about forcing businesses to do this, guess what that makes you? A fascist. The difference between fascism and communism is that communists want to own the commanding heights of the economy and run them, while fascists are content to let a private corporate sector retain ownership of the means of production - so long as they do everything the government directs them to do.
How is an IPO different than stock purchased from an investor as a function of ownership? If an investor can’t sell the share value with the same risk/reward benefits then nobody would buy it. If stock could not be resold then it would not be purchased in the first place.
But why isn’t a profitable business obliged to reward its owners? Before you seemed to make some distinction between original investors and investors who bought ownership from the original owners. Now are you saying that profitable companies don’t owe any profit even to the original owner anytime there’s no need for follow on investment?
Oh and for the record, if a company was making buckets of cash and the employees got together and told the owners they were going to do it without them, they’d soon find themselves unable to make buckets of cash. The owner would say “Ok, go ahead. Now get the fuck out of the factory I own. And good luck making deliveries without all the inventory I own. I don’t know how you’re going to build a new factory without all the cash I own. Oh, and you know all the designs for the widgets we make that run better than everyone else’s widgets? Those belong to me too.” So no, the employees would be utterly unable to make even 1 bucket of cash without the owners.
Just to be clear here - because a lot of people don’t get this - Wal-mart made .77 a share last quarter - that does not mean the shareholders got .77 a share in dividends. The annual dividend in Wal-Mart is $.88…about a quarter of total profit. Three quarters of the profit is reinvested in the company.
Dividends aren’t really tied to profits…they tend to be fixed - i.e. WalMart will most likely continue to pay $.88 a year until they either decide their company is profitable enough to raise it or are forced to lower it (GM stopped paying a dividend). Corporations don’t like to lower their dividends.
I already raised this issue and the OP replied that the system would only work in practice if all companies were doing the same thing. Which reminds me when it was pointed out how badly communism worked out in practice and some people used to say that communism could only really work once the entire world was communist.
In other news, I would be the #1 marathon runner if all those other people would just stop running faster than me. It is a little-known fact which is strictly true.
The housing situation is completely different here in Australia than it is in the US. But thanks for sounding like my Mum, who really does think money grows on trees and that my wife and I should be able to spend our weekends in Fiji, and that we can pull $400,000+ out of thin air to buy a house and not have to live on 2 minute noodles for the rest of our lives to make the repayments.
You’ve made some very valid points, Sam, and I see what you’re saying. Note I never said that I thought the idea was workable, just that it would be nice if things worked that way. And yes, I’m well aware of the parallells to Communism (looks great on paper, doesn’t work in practice). But, if I ever found a company, I’ll be making sure it’s spelled out in the company’s constitution that the company will look after the staff first, and that if the company isn’t going to meet it’s profit expectations then the shareholders will have to deal with that, and that the company will not be slashing wage budgets if it’s making plenty of after-tax profit.
FWIW, I’ve been called a Fascist often enough for me to think there’s probably some truth in it. Just be glad I’m not in charge of a country.
An opinion based in economic theory, rather than moral theory. 2) A transfer is neutral in at least two interesting ways. One, taking $100 from you certainly upsets you, but it pleases me greatly. No net benefit or cost: neutral. Two, if the overall economy was operating efficiently, a one-time transfer will theoretically not permanently reduce efficiency. No net benefit or cost: neutral.
