The analogy works–but only to prove that the system affects the morality of those in it. As you admit below, exec pay is too high. Their perqs are too generous, and their way of consuming the assets of a corporation too exuberent. The C-notes are not in the safe, they’re lying around the house.
As I always say, there is no such thing as “capitalism.” The term was not even invented until the early 20th century. There is the status quo, and there is the desire to improve it. I, for one, am desirous of improvements. As for Jack Welch, although I have no doubt he was competent, I agree with you that he was grossly overpaid. Overpayment = shareholders ripped.
I think that there is an improvement to the corporate structure: the corporation minutely controlled and well taxed by government. Get the alpha males to compete! compete! compete! and let government skim the cream of their exploitative efforts. Wealth redistribution follows, and the CEOs can still brag about their gross pay. Win-win.
Hey, if you’ve run the numbers, more power to you. But looking over the WSJ’s yield figures, most companies don’t pay jack.
To complicated to sum up in one sentence. My point stands that 5% growth on the part of all listed companies would quickly deplete the resources of the planet. It’s simple math. A 5% growth rate on the part of all economic entities multiplies the world economy 10x within just 50 years–clearly unsustainable.
Economic Darwinism. Of course, the “fittest” are defined as “those who survive,” yielding a nice tautology. I’m not so optimistic.
There’s a simple argument that I got from www.prudentbear.com. Simply that, if equities provided such a better return vis-a-vis risk versus bonds, then people would soon invest in equities to the point where the return was equal or even lower than that of a bond. There are plenty of data to bear this out: for example the return on the S&P 500 was essentially negative (taking inflation into consideration) from the late 60s to the early 80s.
But we didn’t used to have the SEC. Now we do. And, probably, in the future we’ll have more regulations to control crooked execs.
Then companies that give to charity aren’t maximizing their profit, eh?
I’m sure you are missing my point. A legal construct is a set of rules. It is not guaranteed that sets of rules are neutral, or encourage neutral behavior. Thus it is not obvious that a corporation is morally neutral just because it is a legal entity.
If that’s all it was, we wouldn’t need corporations, we’d just have good buddies get together.
Almost all of us will be presented with tests of our integrity. I have ample opportunity to cheat my customers. (I work for myself) Yet, I understand that over the long term, being a thief will cause me harm. If CEO chooses to be a thief, he will often go to jail. The system largely works. And it’s better than every other system in the world, all things considered. Andy Fastow, Martha Stewart and others are in disgrace and will go to jail. CEO pay is being assailed by shareholders, and while I’m not entirely sure that it will be solved, the system is still better than the alternative.
The shareholders allowed this to happen. The problem is with the shareholder, not the CEO. Jack is severely overpaid, but he’s not a crook. To the extent the shareholders were “ripped” that’s their problem for letting it happen.
You absolutely have to be kidding. Governments “minutely” controlling businesses? Are you perhaps a communist? Despite abuses occasionally, American companies by and large, have been the best run, competitive companies in the world. And companies do compete, and they are taxed. This comment is baffling.
They pay, in the form of dividends, the portion of earnings that are in excess of the earnings needed to sustain the business and invest for future growth. Occasionally a company will pay more than is prudent and erode the capital base of the company. Other times, a company will not pay when they proably should. Microsoft is a good example as they are holding something like $50B in cash. It should be paid to the owners.
I have a sense that you are young, inexperienced in business or both. Growth is driven by demand. Historically 5% growth has been attainable (in the US anyway). I highly doubt that you can cite this, in an objective way. In any event, that is not the* function of the corporation. If the call on the world’s resources is too great, that is a matter for conservation, population control, legislation etc etc. Corporations simply meet the demand in the market place. They’re the suppliers. If you wish to conserve, go to congress. Go the the demand side of the equation.
‘Darwinism’ isn’t pretty. But the economies of eastern Europe showed that controlled ecomonies don’t work. It may be merciless, but it’s shown to be the best model to harness productivity, allocate capital and provide the greatest opportunities for the greatest amount of people. Can you show me a model that works better?
I think you need to rethink this paragraph perhaps. A bond is a call on a companies assets, and therefore it is a superior position than the shareholder. A bondholder is a creditor to the shareholder, and therefore has a right to claim a part of the shareholders assets in the event of a default. Even among bonds, the quality of the underlying assets will determine the interest that the bond will need to attract investors. GE is able to borrow money (via issuing bonds) at a much lower rate than MCI or K Mart because of superior collateral and the perception that GE’s business is in a better position to pay back the bond. (and therefore lower risk) An investor in bonds invests based on this knowledge and appetite for risk. A risk averse retiree buy GE bonds, a young person might be able to assume more risk and buys a higher yielding stock. (and assumes more risk)
And so, a bondholder has a safety net of sorts. He has a claim on the company’s assets. While not risk free, it is a better position than that of the shareholder, who has no such safety net. In the event of the company’s failure, the tax man and bondholder get paid first, and only then does the shareholder get anything. (Usually through the sale of the business or assets) Usually the shareholder gets little or nothing in the event of a failure.
If I want to invest in GE I can buy bonds, essentially loaning them money and becoming their creditor. Or, I can buy their stock and become an owner. As an owner I face greter risk in the event GE fails and so I would require a higher return than an investor holding GE bonds. That;s pretty much basic stuff. while there have been brief periods where bonds have outperformed stocks, in general stocks have produced higher returns, commensurate with their higher risks.
When business conditions persist in such a way that bonds outperform stocks, investment will flow into bonds.
At the end of the day, risk is fundamental to investing, and the expected returns are driven in large part by perceived risk. (perceived risk of course coming from financail statements etc)
Maybe. Maybe more regulations, maybe betrer enforcement of those on the books. Either way it’s a good thing IMO.
On of the byproducts of the corporate system is that the “shareholders” that you speak of are just a few who own the controlling interest. And in many cases these few shareholders scratch each others’ backs, sit on each other Boards of Directors and play golf at Augusta with each other on a routine basis.
As to your point about cheating your customers being damaging to you in the long run. True, and you must worry about the long run. However the top executives of huge corporations deal in such large numbers that just a little damage to the corporation “in the long run” doesn’t bother them. In just 4 or 5 years they can amass enough wealth through shoddy though legal practices that they can walk away and let someone else clean up their mess.
Well, if corporations are essentially psychopaths, then they can’t be any more inherehtly evil than your average psychopath. Some are evil, some are not.
What is evil is a government policy toward psychopaths that says: “The best way to handle the psychopaths as a whole is to let them run free in the streets with no oversight. Those psychopaths that prove to be the most evil and harmul will be put to death by a vengeful citizenry. The death and destruction they cause to that citizenry before they themsleves are destroyed are necessary sacrifices to make in the name of increased liberty for all of us.”
Not a good policy for psychopaths or corporations, IMO.
There is. It’s called don’t do business with them.
Growth is a necessessity in a world where the population is ever increasing. To maintain a standard of living and even begin to think about improving the standard of living for those who aren’t as well off, production must increase at a faster pace.
The economy is not zero sum game but it is not an infinite sum game either. We don’t expect all companies to succeed and consistantly achieve rapid growth. Companies that are not impriving eventually stagnate and either fail or are absorbed into other, growing, companies.
It is ok for companies to fail. Contrary to popular belief, layoffs and downsizings are not “unethical”. They are a natural part of growth, freeing resources to perform other work. Yeah it sucks having to find a new job, but most people recover from it.
That is a little bit of a stretch. Maybe you could provide some specific examles how Starbucks, Walmart, or General Electric controls our lives?
I should point out that when you made your statement in response to my statement, the part of my post that you chose to quote was:
I didn’t add the qualifier after you made your point. I made a statement about a specific type of corporation and you made a general statement about all corporations, then I re-iterated that I was speaking about a specific type of corporation, then you accused me of trying to “shift the burden of proof”.
My original statement is perfectly correct, although the parentheses may be unnecessary.
As for making some point about “profit” not being the equivalent of “maximized return”, I view this as pedantic hairsplitting and choose not to bother challenging it.
That’s a not-for-profit corporation, and I was curious about for-profit corporations.
I don’t think the system “works,” at least not in the US. Yes, it largely works to prevent people from egregiously breaking the law, but it doesn’t prevent execs from ripping off the shareholders, which is what they do on a regular basis.
The system–legal, cultural, sociological–is what lets execs get away with this type of over-self-compensation on a regular basis. Shareholders don’t “allow” it–they don’t have any power anyway. (In the case of GE, however, you are probably right that, owing to the Cult of Jack, there was probably very little resistance to this extravagance.)
No, I’m a socialist.
It’s simple: the executive class grabs too much, both legally and illegally. They have too much political power as well. This needs to change, and only government can change it.
Wait, remember how I said that the vast majority of companies go for growth? No one wants to be CEO of a $1M corporation when he can be CEO of a $10M corporation. Every CEO knows that if the company grows, whether in a healthy manner or not, he will get a bigger salary (bigger company = bigger salary!), so every damn CEO out there is looking to build his empire.
Or they could buy back the shares, which would make it a capital gain and avoid the double taxation on dividends. Then they can split and start over. But hey, $50B can sure buy a lot of empire. Why give that up?
I gather that you’re old, brainwashed by libertarian or conservative think tanks, or all three. Hey, don’t ad hominems suck?
As I was saying, we need more control.
Yes, great idea!
And Russia’s sinking QOL and life expectancy proves, apparently, that “capitalism” doesn’t work either, right?
Sure–the social democracies of the Nordic countries. Finland is awesome. The CEO of a subsidiary there of a co I used to work for made about 60k a year. But the people there live well, eat well, and generally seem healthy and happy. It’s a true civilization.
Lecture on bonds snipped! I know how bonds work, chief.
Gee, what are we having this debate for? We agree perfectly!
I’m sure you’ve noticed that humanity is beginning to plan for a steady-state future. Most Euro countries are not growing, some like Italy are seeing declines in population. The population of Japan will decline by 10s of millions in the next 50 years, and birth rates even in “undeveloped” countries are declining. The US would be stable were it not for immigration.
At the same time, the species is making small but steady efforts not to destroy the natural environment. The result of population stabilization and global sustainability will be a steady-state economy. Sure, there can be qualitative increases in consumption that result from higher productivity and better technology, and living standards will continue to improve. I, for one, am sanguine about our prospects. But the upshot of all this is that the investment model of the corporation will become untenable. Taking the place of this model will be one in which the corporation is rightly seen as a locus of production and culture. People will demand higher quality of life within their jobs.
I agree–they’re not unethcial. But there needs to be a better safety net for people.
That is a little bit of a stretch. Maybe you could provide some specific examles how Starbucks, Walmart, or General Electric controls our lives?
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Quite so. I didn’t think the qualifier in your original statement made it any more true. It was in the original quote.
Your exact response, which was definitely shifting the burden of proof, was
This was, of course, a method of avoiding the small fact that a for-profit corporation has no essential burden to maximize return. The notion of providing charity was mentioned later, which is now “nitpicking”. I’ve also given examples like treating employees better (which, being an overhead cost, will affect profit) like some companies definitely do (without the push of unions, mind). I suppose it is no big deal to you to compare a company that treats its employees like they were disposable and a company that treats its employees like they’re essential for business, or a company that feels like it is part of the community and should contribute to charitable causes rather than ignore them all to “maximize” shareholder return. I didn’t consider such things nitpicky, and I felt like such things definitely got in the way of “maximizing” shareholder return. So I said as much.
I don’t see any practical difference between pursuing profit and maximizing return, though. Consider the burden shifted to you to demonstrate a significant difference.
I didn’t even mention charity. That was someone else. What are you talking about?
There’s an awful lot of this “I suppose you believe” bullshit being thrown around in this thread. It only suggests you’d rather maintain your preconceptions than listen to my opinions.
I could be wrong, though. I wouldn’t presume to suppose what you believe.
Actually, treating employees well can maximize return, if it’s reasonable to believe that treating them badly will lead to more employee turnover, dissatisfaction, poor public image and other things that could hurt the corporation.
In any case, if employees are (or feel they are) treated like dirt, they can seek employment elsewhere. A corporation is under no ethical, moral or legal obligation to make the worker’s lives emotionally fullfilling; they’re only obliged not to make the working conditions unecessarily harsh.
None of this comes remotely close to proving corporations are by definition evil, by the way, though I’ll stipulate that some people working for some corporations have done evil things.
Well…This thread has outlived it’s usefullness I guess…(for me anyway…)
At first I just figured that our difference were jus the differences between a socialist and a caplitalist. And that’s probably the bulk of it.
But comments like corporations ending humanity (or something like it…) or comments about dividends, or the comment that the relation of risk and return was a fallacy, or even the comments about Jack Welch* all indicate to me IMHO that you don’t know you’re talking about.
*Jack Welch is overpaid, as are much CEOs. In relation to the value he was responsible for creating it presents another perspective. During his tenure GE’s capitalism increased by over $400 billion. CEO pay is a problem, and needs to be addressed. Nonetheless it is not a reason to scrap caplitalism. Far from it. Almost all investors would accept Jack, and his paycheck, if he accomplished for them what he accomplished for the investors at GE.
The references to the Finnish companies would be more compelling if the Finnish companies were more able competitors in the world marketplace. I’ve read more than once about the high quality of life in Finland, and I’d like to visit there. It’s hardly a world leader in business though.
Not to speak for erislover, but my understanding is that “maximize” is the key word there. One can seek to profit (that is, come away with more than you started with) without maximizing your return. If there are countervailing concerns (legal, ethical, long-term, or otherwise), the optimal path is not necessarily the one that yields maximum gain. And as long as there’s some profit, it’s still economically rational.
A completely stupid example. Someone draws a chalk circle around me and says that for every minute of the next hour that I stay with its boundaries, I’ll be given a dollar. Maximum possible return: $60. Halfway through, I see a nun about to be hit by a bus. No one else is around. It’ll take me eight minutes total to rescue the nun, allow her to thank me effusively, and make it back within the circle. If all I cared about was maximizing my return, I’d let her be hit. But I can profit (to the tune of $52) while still behaving in a way that evinces a consideration of other factors than short-term monetary gain.
Man, you’re acting like this has been some horrible, bitter exchange. I don’t get it. Mild stuff for GD. I didn’t appreciate the “you’re young and ignorant” comments, but, hey, no hard feelings.
First, Gadarene has it in one; but personal addressing requires personal responding.
A profit is simply a penny more than cost. A maximized return is every penny possible over cost. Surely you can see that, except in very tortured circumstances, there are a lot of pennies between the two, so much so that it hardly constitutes nitpicking.
I wasn’t aware I attributed the mention of charity to you at all; I only used it as an indication of companies failing to maximize return.
Well, I understand there is usually a give and take in debate, a quid pro quo if you will. So I have explained my contention that maximized return is not inherent in the corporation, and with examples like treating employees better and charity already up for grabs in the thread, and your contention that these differences were nitpicky, I felt it perfectly reasonable to assume that, indeed, you found no real difference between the behaviors I mentioned. Now, there are a few approaches to that. One of them is to clarify your use of nitpicking. Another is to simply suggest that I am in error and leave it at that. While the latter is not very satisfying to me, you are perfectly within your bounds to let it lie there.
Between one cent and a thousand dollars are ninety-nine thousand, nine hundred ninety-nine pennies. Surely you can see that there are more attitudes towards employees in heaven and on earth than are indicated in this quote. For example, what is treating employees well? Is it good benefits? Better pay than the competition? Actually avoiding a maximum profit solution to treat employees better? Or is it just average pay for average work, and if they don’t like it they can find someone else? I won’t presume you think this last is “treating employees well,” but I think you’ve shown us you find it to be perfectly acceptable behavior (to wit: In any case, if employees are (or feel they are) treated like dirt, they can seek employment elsewhere).
Let me ask you, then, if you find such behavior moral, immoral, or neutral? The corporation cannot exist without employees, and the employees cannot exist without work. Yet it apparently strikes you as perfectly acceptable, by which I understand “proper” or “permissible,” for no moral obligations to exist on either parties behalf: the corporation (or its officers) can treat employees however, and the employees can treat the corporation however, so long as neither party breaks any law in doing so (though of course I presume that you find it wrong to break the law, if I am in error then I apologize in advance). Now, I don’t know about you, but anyone I interacted with that treated me so… well, let’s just say that “morally neutral” would not be a word I chose to describe such a person. Perhaps this is where we begin to disagree…?
I thought the employees could just leave if presented with such conditions?
Now it is my turn to suggest I’ve said no such thing.
