Op-Ed: Why have U.S. companies become such skinflints?
Here’s a depressing statistic: Last year, U.S. companies spent a whopping $598 billion — not to develop new technologies, open new markets or to hire new workers but to buy up their own shares. By removing shares from circulation, companies made remaining shares pricier, thus creating the impression of a healthier business without the risks of actual business activity.
Share buybacks aren’t illegal, and, to be fair, they make sense when companies truly don’t have something better to reinvest their profits in. But U.S. companies do have something better: They could be reinvesting in the U.S. economy in ways that spur growth and generate jobs. The fact that they’re not explains a lot about the weakness of the job market and the sliding prospects of the American middle class.
Why have U.S. companies become such skinflints? In the usual telling, business is simply more risk-averse after decades of globalization and technological disruption. But that’s only part of it.
The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society. We saw this before the 2008 crash, when top U.S. banks used dodgy financial tools to score quick profits while shoving the risk onto taxpayers. We’re seeing it again as U.S. companies reincorporate overseas to avoid paying U.S. taxes. This narrow mind-set is also evident in the way companies slash spending, not just on staffing but also on socially essential activities, such as long-term research or maintenance, to hit earnings targets and to keep share prices up.
It wasn’t always like this. From the 1920s to the early 1970s, American business was far more in step with the larger social enterprise. Corporations were just as hungry for profits, but more of those profits were reinvested in new plants, new technologies and new, better-trained workers — “assets” whose returns benefited not only corporations but the broader society.
Yes, much of that corporate oblige was coerced: After the excesses of the Roaring ‘20s, regulators kept a rein on business, even as powerful unions exploited tight labor markets to win concessions. But companies also saw that investing in workers, communities and other stakeholders was key to sustainable profits. That such enlightened corporate self-interest corresponds with the long postwar period of broadly based prosperity is hardly a coincidence.
That mind-set lost favor in the late 1970s. Economic chaos, sparked by soaring oil prices and foreign competition, upended an American economy grown flabby and complacent. As profits tumbled, investors demanded that companies protect shareholder value by cutting anything that threatened share prices, including a socially integrated agenda. Indeed, for conservative economists, the best way for companies to help society was to ditch the idea of corporate social obligation and let business do what business does best: maximize profits.
And to lock in this more narrowly focused business model, companies began paying their executives largely in company stock. At a stroke, managers became investors, which meant that corporate strategy would be aligned not with labor or government or even nation but with the stock market.
The effects of this narrower conception of corporate interest have been mixed. Since the 1980s, profits, share prices and overall economic output have marched steadily upward. But because management is so focused on share price and because share price depends heavily on current company earnings, strategic focus has grown ever more short term: do whatever is needed to hit next quarter’s earnings target. And since cost-cutting is a quick way to boost near-term earnings, layoffs and other downsizing once regarded as emergency measures are now routine.
And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling.
In a startling 2004 survey of more than 400 chief financial officers by researchers at Duke University and the University of Washington, nearly four out of five CFOs said they would cut R&D to make the next quarter’s earnings target.
How do we revive a more enlightened corporate model? Certainly, some pressure for change must come from the top. Congress could outlaw the more blatant short-term gimmicks, like buybacks. Lawmakers could also blunt the obsession with short-term earnings by making it harder to pay executives in stock options.
But true reform can come only from within the corporate mind, and it must be driven not simply by a fear of government regulation but by the recognition that a narrow corporate focus on quick, self-serving gains isn’t sustainable. Sooner or later, markets punish such myopic behavior. Companies that neglect innovation run out of things to sell. Companies that demoralize workers see performance lag.
No surprise that firms bucking this trend — such as Google, which invests heavily in long-term basic research and in supporting its employees — are besting firms such as IBM and Hewlett-Packard, which are cutting everything in sight and covering the holes with billions of dollars in share buybacks.
But enlightened firms are the exception. Without a more socially engaged corporate culture, the U.S. economy will continue to lose the capacity to generate long-term prosperity, compete globally or solve complicated economic challenges, such as climate change. We need to restore a broader sense of the corporation as a social citizen — no less focused on profit but far more cognizant of the fact that, in an interconnected economic world, there is no such thing as narrow self-interest.
Paul Roberts is the author of “The Impulse Society: America in the Age of Instant Gratification,” to be published in September.
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