Many people love to bash corporations, but for the wrong reasons. If we are looking to do this and want to make more sense, we need to attack their actual weakness.
It’s not even that clear why so many people hate big public corporations, as opposed to smaller ones or even the actual small businesses. They all share the same basic characteristics, with the difference representing more or less of a plurality of ownership than anything.
We would think that we would prefer the big ones, and if we believe that we should all share in the wealth of business, as everyone does, the fact that even people of very modest means can share in this is something we should all find appealing.
Even if we are not among the vast number of fractional business owners, we should still believe in this in principle, and if not, we are letting jealousy or confusion get the best of us, because that’s all there is left of our argument.
Corporations are natural persons under the law, but the popular view has taken this a step further as they have put a face on these companies, and not one that is very flattering. Corporations are fictional entities though, just like the firm is in a partnership, and only the partners are actually real.
Contempt arising out of jealousy can go a long way though, and for many, is what drives their rage against the machine. This results in our thinking and behaving erratically, as strong emotions tend to do. We cannot decide this with what amounts to grandiose delusions of power where people want to enforce their own preferences upon big companies.
If big is bad, we have to at least provide a reasonable explanation of why this is alleged, and this is where the rabble with their leftist leaders fall on their faces. When you strip away the pompous claims, there is nothing of substance left to object with, where we are down to the level of mere preference, with shareholders having the rights to theirs.
If we really want to understand how big corporations differ, we need to look at the differences, and with public companies, the only real difference is how liquid ownership is. It turns out that this does lead to something that we at least may wish to object to, and one that would be much harder to argue against than just being spit upon.
The measuring stick that we’ll be using here is the collective good, which means overall and not just looking to those on the lower fringe. As it turns out though, everyone’s welfare is improved when we improve economic welfare, as long as we confine ourselves what is actually possible and avoid the world of fantasy that requires the power of a king.
This would still leave us open to arguments that this conception of good isn’t defensible, if you have to accept its first principle to make it work, as we can just reject it instead and all they could then throw at us is their discontent. However, if those who do embrace this as the goal can be persuaded by an argument against public corporations, that should convince a great many people indeed.
An efficient economy is definitely a collective good, as it seeks out the greatest economic value, making a given quality of good or service cheaper. Big corporations do this extremely well, and the bigger they are, the better they do it. This is why they have grown so large in the first place.
This is not something that we want to just keep throwing punches at, as if they do land, we will end up being sorry. If we do want to throw one though, we actually need to aim for their head and not just pepper them with body punches they don’t even feel much.
We need to start this by understanding that an organization’s ownership structure has nothing to do with their degree of efficiency, which is a separate matter altogether. Apple would sell the same hardware and services if they were owned by countless people or by just one. Owners do get to decide how the money is spent though, and this is how public and private companies meaningfully differ.
If there really was a Mr. Apple out there, he would be far more disposed to take care of the future of his company than if it were owned by millions. He would want to leave a legacy for his descendants, and is also much more grounded in the success of his business while he is alive, because you can’t just sell a trillion-dollar company to anyone and is invested for the long-term whether he likes it or not.
Directing the course of a business is much like directing the course of our own lives in the sense that we have the opportunity to discount the future to various degrees. We can carefully plan for a comfortable retirement for instance, or we can stay in hawk for all of our working years and be left bankrupt and poor in our retirement years.
Mr. Apple is pretty serious about the long-term health of his company since his success depends on it, and even though he may be planning on selling once he retires, he still needs to choose a path to there that seeks value over this longer-term.
There is a real relationship between what we’re calling ownership liquidity and how companies discount the future, because illiquidity forces us to take a longer-term view, and more liquidity permits us to sacrifice the future for shorter-term gains.
Public Ownership Turns Stock Prices into the Holy Grail
Whether or not companies recognize this as a big reason why private ownership benefits from going public, this is a real element with real effects. It starts with the idea that private shareholders can sell their stock anytime they want, and then rather naturally gravitates to looking to milk their cows harder.
Mr. Apple decides to take his company public, and the shares of his company then become distributed among the public, with him keeping a good share of this for himself, as is typically the case with these things. He wants to be around for the runup as well, when the company starts to discount their future to cash in more now, and he will get paid handsomely along with everyone else who owns shares.
He no longer has to worry about focusing so much on the long-term growth of Apple, as the focus moves from this to the growth of its stock price. His executives are now commanded to make their stock price their priority, and given plenty of stock for themselves to make sure that they have a personal incentive to go along with the greater job recognition promoting this goal will provide.
This is what the shareholders want to see as well, so now we have the ownership clamoring for a greater focus on the near future and the executives fully on board. Those who are not are simply replaced.
Many of the new owners are not even in it for the long haul, and don’t care a whit about where the company may be 10 or 20 years from now, and no one cares about the company health beyond the period that they expect to hold the stock. The shorter-term people are the ones that are really behind the wheel, jumping and staying on when the company does well on this time horizon and quick to jump off and drive the stock price down instead when they don’t get their way.
This turns the focus from the traditional model of seeking long-term value to one that is much more focused on the nearer term. It is the fact that people can jump in and out of the company massively easier now than they could when their shares weren’t traded publicly that is behind this transformation in focus, from the far greater liquidity of ownership that is now present.
There are plenty of people that still prefer the longer-term, but they are now on the sidelines watching, holding their stock and watching all this play out. Whether or not they realize that their view is being discounted or not doesn’t even matter, but they are happy enough to see the value of their shares go up, just like everyone else, and tend to turn a blind eye anyway.
Even if some do see through this, the goal wouldn’t be to sell now since the sun is fully out right now, and this game could go on for quite a while and it would be foolish to abandon ship now when the sailing is so smooth and nice. If the performance of the stock ever gets to the point where they may want to jump off, they can do this very easily, although they are the last people to become spooked and will even hold terrible positions long past the point where it would ever make sense to.
Those who don’t know a lot about how stock prices work might wonder how pursuing long-term business growth and near-term stock price would differ that much, but this does result in a fundamentally different way that companies use their profits.
Traditionally, profits would be reinvested in the business, and we are seeing a lot less of this now, where a lot of money is now used to directly influence the price of a company’s stock, in a way that clearly trumps long-term business growth. If you reinvest your profits, this will benefit future shareholders more in time, driving future earnings further.
If we instead pay out more of it to shareholders, whether that be by putting the money directly in their pockets through dividends or using it to put the price of the stock up through buybacks, this gives up the longer-term return on investment that these funds would provide if the money was invested in the company instead, milking the cow more now and lowering future milk production from where it would have been if this mattered to us more.
This is very similar to our example of how many people live it up now and don’t care so much about tomorrow, with one key difference, and this also is a manifestation of the greater ownership liquidity this provides. We can live it up now with our stock positions and don’t even have to worry about tomorrow because it does not even have to be our tomorrow, even though the business may need to worry about it.
This is where the real effect of this plays out, where we have replaced the natural vested interest in the future that private business owners have with one where the future need not even matter to the ownership, and it certainly matters a lot less under public ownership.
When you can sell your stake in a business with just a click of a mouse, and even hold a position in it for just seconds if that’s your thing, this is very far away from the traditional way that people invested and divested.
Throwing a Company’s Future Under the Bus is a Real Problem in the Future
While public stocks have been around for a very long time, they have undergone some big changes lately. The first is how much easier it is to trade them. We’ve gone from visiting your broker’s office and their very expensive commissions to getting instant executions commission-free now.
The biggest change by far is just how much public companies are focused on short-term stock growth, which is especially driven by the huge role that stock plays in executive compensation. All eyes are on the stock, and we do check how the business is doing as well, but only care about how this can be made to further our stock goals.
What this causes is our taking money away from real investment and to use it to milk stock prices, which in the end leads to a less developed economy over time. This isn’t any real secret, but the folks who criticize this effect usually don’t get how big of a deal this really is or they would be banging their cups on the table more loudly than they do.
The stock market does not serve to promote any innate goals other than to allow for the efficient exchange of value among market participants. The market itself is wholly neutral and isn’t even biased on the long side, although shareholders and companies may be. Companies do not serve any other goal but to promote the interests of their shareholders, and objecting to this comes down to trying to replace their preferences with ours where they have standing and we do not.
We could look to fight this with regulation, where we just step in anyway regardless of whether we are going too far in interfering with the free decisions of shareholders. Both buybacks and dividends are what is behind this milking the future, and dividends aren’t just on this list, they are the worse of the two.
Buybacks involve taking equity off the table, not unlike a company paying back a loan, and this can be re-borrowed back later as needed. Some dividend payouts are reinvested as well, which makes them like buybacks, but a lot gets taken right off the table in in shareholders’ pockets, and these profits can never be reinvested and are gone forever.
We don’t want to interfere with a company more than we need to, and there may just not be any better place to park cash then to buy back your stock. If we do anything here, we need to focus on restricting dividends and getting rid of them altogether would be the ideal solution period, as this both restricts growth when the money could otherwise be wisely invested and restrict stock price growth as well.
We cannot forget that the whole point of companies is to benefit their owners, and given how much so many people have on the line with stocks in their portfolios, and given that with public companies the stock price isn’t the most important thing, it’s the only thing, we need to be very careful with ordering around companies to the point where people get hurt on a net basis.
Dividends should be subject to market forces as well. The goal should always be to promote and not diminish our overall goals, although this is one case where the popularity of dividends arises out of pure ignorance and ends up diminishing efficiency and the ultimate interests of those who are subject to these handouts.
Teaching investors that there is no upside to dividends at all and plenty of downside would be the best approach, and if they can be made to understand that this both hurts them, hurts the company, and hurts the economy in the long run should do the trick if they can be made to understand this, where they would then throw a CEO out of office for paying this money out.
The principle of minimum impairment always is in play, and if we can achieve our goals by way of free choice, that’s always better than by using the force of law to get them to comply.
This does leave the matter of executive compensation and this one could benefit from some regulation, because this really does create a real conflict of interest between the long-term interest of the companies they manage and their own bank accounts. We have all sort of stock trading restrictions already, and placing some limits on company stock being used for compensation is in line with this and quite reasonable provided that we understand what the implications of doing nothing about this problem really is.
Paying bonuses based upon stock prices is a problem in itself, but when you force them to take your stock as the bonus, they would have to either be a saint or stupid not to put their own interests first, especially since financial compensation is why they devote their lives to their duties.
Prohibiting stock compensation would also serve to make the left-wingers happy, as these are the cats that they are angry with, as well as make those whose goals are to promote free economies and do not wish to see companies steal from the future as much as they do.
Both restricting buybacks and dividends don’t really have a basis in a free economy. Regulating how a company’s stock may be dispersed among employees is already a tactic that we’ve pretty comfortable with, and one that you can at least make a good argument for since this does ultimately affect both the economy and its stock in a negative way over the long run.
This can even make sense to those of us who only wish to interfere with free choice when it is truly needed. The executives won’t like it of course, but sometimes the longer-term greater good should take priority.