There are many ways of influencing share price, of which increasing productivity and long-term profitability is only one. Cutting or postponing expenditures that are geared to the future rather than the present will increase profits immediately even if it imperils them over the long term. Buying and selling businesses is another favored strategy. It is a far quicker way to boost your balance sheet and share price than relying on organic growth and, for those at the top, can be much more interesting. The fact that most mergers and acquisitions do not, in the end, add value has not discouraged many executives from trying.
One result of the obsession with share price is an inevitable shortening of horizons. Paul Kennedy is not alone in believing that companies are mortgaging their futures in return for a higher stock price in the present, but he may be optimistic in sensing the end of the obsession with shareholder value. The stock option, that new favorite child of stock market capitalism, must also shoulder a large part of the blame.
Executives, not unnaturally, want to realize their options as soon as they can, rather than relying on the actions of their successors. The stock option has also acquired a new popularity in Europe, as more and more companies go public. To many Europeans, however, hugely undervalued stock options seem like just another way of allowing executives to steal from their companies and their shareholders. Europeans raise their eyebrows, sometimes in jealousy but more often in outrage, at the levels of executive remuneration under stock market capitalism.
Why, some wonder, should business executives be rewarded so much better financially than those who serve society in all the other professions? The suspicion, right or wrong, that business takes care of itself before it cares for others only fuels the latent distrust. Europeans continue to look at America with a mix of envy and trepidation. But they worry now, as they watch their own stock markets follow Wall Street downhill, that the flaws in the American model of capitalism are contagious.
The American disease is not just a matter of dubious personal ethics or of some rogue companies fudging the odd billion. This was the culture that enraptured America for a generation, a culture underpinned by a doctrine that proclaimed the market king, always gave priority to the shareholder, and believed that business was the key engine of progress and thus should take precedence in policy decisions.
It was a heady doctrine that simplified life with its dogma of the bottom line, and during the Thatcher years it infected Britain. It certainly revived the entrepreneurial spirit in that country, but it also contributed to a decline in civic society and to an erosion of the attention and money paid to the nonbusiness sectors of health, education, and transport—a neglect whose effects haunt the current British government. Continental Europe was always less enthralled by the American model. Stock market capitalism had no place for many of the things that Europeans take for granted as the benefits of citizenship—free health care and quality education for all, housing for the disadvantaged, and a guarantee of reasonable living standards in old age, sickness, or unemployment.
Nevertheless, the accusations from across the Atlantic of a lack of dynamism in Europe, of sclerotic economies bogged down in regulations, and of lackluster management began to hurt, and even on the Continent the American way of business started to take hold. We can now see, with hindsight, that in the boom years of the s America had often been creating value where none existed, bidding up the market capitalizations of companies to 64 times earnings, or more.
The level of indebtedness of U. Add to this the erosion of confidence in the balance sheets and boards of directors of some of the largest U. That is the contagion that Europe fears. Capitalist fundamentalism may have lost its sheen, but the urgent need now is to retain the energy produced by the old model while remedying its flaws.
Better and tougher regulation would help, as would a clearer separation of auditing from consulting.
Corporate governance will now surely be taken more seriously by all concerned, with responsibilities more clearly defined, penalties spelled out, and watchdogs appointed. But these will be plasters on an open sore. They will not cure the disease that lies at the core of the business culture. We cannot escape the fundamental question, Whom and what is a business for? The answer once seemed clear, but no longer.
The terms of business have changed. In light of this transformation, we need to rethink our assumptions about the purpose of business. And as we do so, we need to ask whether there are things that American business can learn from Europe, just as there have been valuable lessons that the Europeans have absorbed from the dynamism of the Americans. It would, however, be more accurate to call most of them investors, perhaps even gamblers. They have none of the pride or responsibility of ownership and are, if truth be told, only there for the money.
Nevertheless, if management fails to meet their financial hopes, the share price will fall, exposing the company to unwanted predators and making it more difficult to raise new finance. We need to eat to live; food is a necessary condition of life.
But if we lived mainly to eat, making food a sufficient or sole purpose of life, we would become gross. The purpose of a business, in other words, is not to make a profit, full stop. It is to make a profit so that the business can do something more or better.
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Owners know this. To many this will sound like quibbling with words. Not so. It is a moral issue. To mistake the means for the end is to be turned in on oneself, which Saint Augustine called one of the greatest sins. Deep down, the suspicions about capitalism are rooted in a feeling that its instruments, the corporations, are immoral in that they have no purpose other than themselves. To make this assumption may be to do many companies a great injustice, but they have let themselves down through their own rhetoric and behavior. A second and related hangover from earlier times is the idea that a company is a piece of property, subject to the laws of property and ownership.
This was true two centuries ago, when corporate law originated and a company consisted of a set of physical assets. Now that the value of a company resides largely in its intellectual property, in its brands and patents and in the skills and experience of its workforce, it seems unreal to treat these things as the property of financiers, to be disposed of as they wish.
This may still be the law, but it hardly seems like justice. It gets worse. The employees of a company are treated, by the law and the accounts, as the property of the owners and are recorded as costs, not assets. This is demeaning, at the very least. Costs are things to be minimized, assets things to be cherished and grown. The language and the measures of business need to be reversed.
It is ironic that those countries that boast most stridently about their democratic principles derive their wealth from institutions that are defiantly undemocratic, in which all serious power is held by outsiders and power inside is wielded by a dictatorship or, at best, an oligarchy.
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Corporate law in both America and Britain is out of date. It no longer fits the reality of business in the knowledge economy. The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians, and directors, is not an association recognized by law. The association which the law does recognize—the association of shareholders, creditors and directors—is incapable of production or distribution and is not expected by the law to perform these functions.
We have to give law to the real association and to withdraw meaningless privileges from the imaginary one.
Nothing, it seems, has changed. The countries of mainland Europe, however, have always regarded the corporation as a community whose members have legal rights, including, in Germany for instance, the right of the employees to have half, minus one, of the seats on the supervisory board as well as numerous safeguards against dismissal without due cause and an array of statutory benefits. Since one could argue that a subset of the Establishment wing path to the nomination has been created by Barrack Obama who crafted a unique coalition of voters and who relied less on large donors until he secured the nomination.
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The establishment candidate has won the nomination in , , , , contested incumbent and Incumbents ran uncontested in and when they were the de facto establishment candidates. Until the centrist Democratic Leadership Council candidacy of Bill Clinton in , the progressives were the establishment, with compromises made to placate the Southern wing of the party.
The progressive wing has not won the nomination for 28 years since Dukakis in , but it was a major driving force in the last campaign when Hillary Clinton and Senator Bernie Sanders squared off in Sanders may have lost the nomination, but his ideas have now become the standard under which almost every candidate will run in Setting the rules is the very definition of the establishment. These candidates do not run against Washington and the federal government, as is the case with many Republicans; instead they stress the innate goodness and common touch that was once also the stereotypical view that Americans once had of themselves.
Table 1 below classifies 35 potential candidates by the party wing that they belong to you may argue with how specific candidates have been classified, but it is the analytical framework that is important. Projected future frontrunners are indicated in bold. The process of discarding candidates from the race is rapid and unforgiving.
One false step and donors, party influentials, and press coverage evaporate very quickly.