Carey Center for Democratic Capitalism
February 9, 2007
Harvard Business Review
Re: The HBR List, Harvard Business Review, Feb 2007
We’ve entered into the post-capitalistage in which the wage earner is a prime source of capital but we have not yet aligned the rewards of capitalism with this new reality. Paradoxically the trillions of dollars of mandated pension funding was used to pressure companies to sacrifice long-term growth for short-term earnings in an environment in which rules are written for the benefit of the handlers of the money, not the owners. The institutional investors have assisted in this process in contradiction to their fiduciary responsibility to the wage earners.
An example of this domination by finance capitalism is the effect on dividends that historically provided one-half of the return from capitalism. Now they are demeaned because finance capitalists do not make money on dividends and prefer to keep the money in the company to either buy back stock or attract a deal. This mind set was demonstrated in # 8 of the HBR List with the observation that paying out cash in dividends “effectively signals that management has run out of promising new growth ideas.” The author’s alternative was to go find a deal.
To benefit the new owners of capital dividends should be repositioned as a valued part of capitalism with 6% dividends, not the 1-2% of recent years, and portfolios untouched for six years, not churned every one-two years. When Mr. Merrill founded Merrill Lynch he insisted that brokers be on salary to prevent this churning. Where did Mr. Merrill go?
Companies should be valued both on their ability to grow sales and profits rapidly as well as produce large amounts of cash for dividends. This alternative would also relieve companies from the pressure for annual profit improvement because many long-term investments lower earnings first.
Motorola’s distribution of surplus policy is an example of favoring the handlers of capital over the owners. They are apparently conditioned by finance capitalism to commit $2 billion a year to stock repurchase but that’s not enough for Carl Icahn who has bought 1.4% of the company and is demanding a bigger buy back. Motorola should be celebrated for its cash management that has accumulated $11 billion in cash with the expectation of adding $3 billion a year. They could return an incredible $20 billion to shareholders and the economy in the next five years and still have billions of dollars in reserve. This economic stimulant can be compared to the less than one-half billion dollars in dividends returned to the wage earner and the economy by Motorola last year. The institutional investors should be pressuring the company for such a pay back consistent with JP Morgan’s comment “Don’t talk to me about return on capital, tell me about return of capital.
Peter Drucker identified the emerging post-capitalist society: “Every few hundred years in Western civilization there occurs a sharp transformation.” He identified one now in which “ In developed countries pension funds increasingly control the supply and allocation of money.” This transformative event has yet to bring the rewards of capitalism to the wage earner because the capitalism that traditionally exploited the wage earners’ labor has now learned how to exploit their capital, an intolerable contradiction that cannot continue.
Imagine the benefits to world economic growth if the trillions of dollars wasted on stock buy backs and non-strategic acquisition during the last quarter century had been returned as a “capital wage” to these new owners of capital. Capitalism would have been “democratized” and the “ownership society” arrived. With the help of the institutional investors this way to a world of peace and plenty is still an exciting opportunity.
Ray Carey, MBA ‘50