Soulless system has many victims

Shareholder capitalism incapable of long-term thinking

Could it be that the days of shareholder capitalism are numbered? Not in actual days, but perhaps in years? With every new round of job cuts, accompanied by dividend payments and share repurchases, it becomes apparent the system’s winner-take-all attitude is incapable of the nuance, flexibility or long-term thinking needed in a democratic economy.

It is procyclical in the extreme. When growth is on the up it encourages ever more spectacular growth rates, the sort that invariably end in bubbles and tears. When growth trends reverse and economies start to shrink, shareholder capitalism encourages that shrinking as jobs are cut to reduce costs and protect profits.

Company executives think as isolated entities and feel forced to do whatever it takes to protect their bottom lines. So when Pick n Pay, Edcon and the JSE Limited (to mention a few) cut jobs, they ensured short-term protection of their bottom lines, just as they ensured the recession would be more severe and last a little longer. There is no malice in these cuts; it is what the system demands.

The only things that count are earnings growth and share price appreciation. Everything is sacrificed to the “shareholder capitalism” god in the hope of enhancing earnings and share price. Because there is no delayed gratification in a market place that responds in nanoseconds, only immediate earnings and share-price performance are of concern.

Eventually there is a handful of CEOS left, watching as the last costs are fed to the market god. Those left standing have become rich as a result of years of rewards for their cost-cutting, which is the primary function of a corporate executive during recession. The luckier ones among their victims eke out a living, hoping for signs that government will shake off its ineptitude and launch a countercyclical spending programme. They know there’s little hope that tech businesses will break the vicious low employment/high profit spiral.

This is not just an SA malaise. And it is kept on track by the global fund management industry. This is the industry that welcomed news that dividend payouts to shareholders had surged. They claim to be better allocators of capital so it is right they should have the cash and decide how to deploy it. This is no doubt why profitless technology companies enjoy stratospheric ratings.

Paying dividends is a critical function of the shareholder capitalism model. But when a payout to shareholders, either in the form of dividends or share repurchases, becomes the measure of executive performance, there can be little hope for growth. In the UK, payout ratios have risen from a long-term average of 50% to about 80%-90%. This means there is minimal cash available for reinvestment, which means executives see little prospect of growth. The executives are so well rewarded for this passive management style it makes no sense to risk a growth strategy.

Essentially, decades of investment in the global economy are now being harvested for the benefit of a few. This can’t continue much longer.

Everything is sacrificed to the ‘shareholder capitalism’ god in the hope of enhancing earnings