Capitalism (3rd)

A prominent dogma of capitalism is that companies should be run in the interests of the owners, (shareholders).  Supporting discussion runs something like this:  Whereas all other stakeholders get paid fixed wages for work, fixed prices for supplies, fixed interest payments for monies lent, etc., the shareholders get no fixed returns on their investment in the company.  Therefore their risk is greatest.  If the company fails they lose everything. But all the other stakeholders get at least a bit.  So the company should be run for the shareholders’ benefit.

This line of reasoning ignores the fact that, (primarily small), shareholders are the least committed of all stakeholders.  A shareholder can simply sell shares and buy others. They prefer management strategies that maximize short term profits over long term survivability.  On the other hand, employees, who stand to lose pay/pensions/other benefits should the company fail, are much more firmly committed to the company’s long term survivability, likewise suppliers who may have fine tuned their businesses to meet the company’s specific needs, and also bankers who obviously want their money back.

To keep shareholders happy, ruthless cost cutting of labor, inventories,  managers, investments, (for example R&D, new technology to keep the company competitive), anything else possible, is the play of the day—anything to maximize short term profits.

Stock buybacks, another way of maximizing profits of shareholders, drain retained profits which could help the company to weather an economic downturn, (2008 for example), further damaging a company’s long term survivability.

Conclusion: Companies should be managed in the interests of the long term survivability of the company, not the shortsighted $hort term interests of fickle shareholders.

Recent experience proves the two are not synonymous.

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