Among a large segment of the population, there seems to be a firm consensus regarding exactly who’s at fault for the decline of America: big, profit-driven corporations. Your mega-corporations like Wal-Mart (WMT), Apple (AAPL), or Exxon Mobil (XOM) are poisoning the environment, destroying the middle class, shipping jobs overseas, and a whole slew of other terrible stuff…all because they’re driven by profits. Each worships at the altar of the almighty dollar and knows no other God.
Honestly, I get it. There’s definitely a serious issue in this country (and across the planet) with large businesses taking actions that hurt people but support their bottom line. However, there’s another side to that greed that often gets overlooked. After all, the same system that drives a corporate behemoth like Apple to outsource the manufacturing of its iPhones to a Chinese manufacturing firm with an extremely dubious track record in regards to labor relations can serve the general public in a variety of ways that are frequently overlooked.
At the end of the day, a deeper understanding of the corporate system can help us address both its successes and its failures in a more productive way. Rather than painting the issue as simple greed, digging a little deeper might ultimately produce actionable, functional solutions.
Econ 101: What Exactly is Public Ownership?
Most of the biggest companies in the country all have one thing in common: public ownership. What does that mean? It means ownership of the company has been broken up into millions or even billions of pieces of stock (something you can read about in more detail here). Sure, but what does this really mean? It means these giant companies are actually serving to level the economic playing field.
In any publicly traded company, the company’s stock trades on open, public markets. Each share of that stock represents a partial piece of ownership in the company. You buy a share of Wal-Mart’s stock, you own one 3.22 billionth of Wal-Mart (the company has 3.22 billion outstanding shares). You have one of the 3.22 billion votes for the board of directors (the people who make all the decisions about the company, including hiring the CEO) at the annual shareholders meeting. You’re entitled to one 3.22 billionth of the company’s profits that are distributed to shareholders. Anyone can plop down their money to buy a share, be they an investment banker or an anarchistic Burning Man enthusiast.
I don’t mean to paint a picture of perfect democratic control. One individual can control millions of shares/votes and wield the sort of electoral power that renders the ownership of others obsolete in terms of decision making. The Walton family, for instance, owns more than 50% of Wal-Mart’s stock, so, provided they agree with each other, your actual participation in the decision-making process is largely ceremonial.
However, even if your voting rights don’t mean actual control, your ownership does carry with it certain rights that even a majority owner holding every share but yours is legally obligated to respect.
Distribution of Profits Creates Opportunity for All
Democratic control of corporations exists to some degree but remains largely symbolic for those individual investors buying shares in bunches of 10 or 20 rather than millions. However, the more important part of this system is the distribution of corporate profits to shareholders. Most of this is done in an indirect fashion, but it’s still a very real and a crucial part of the entire corporate system.
Sometimes a company’s expansion means rising share prices, increasing the value for the person who owns them. Other times, companies with extra cash spend it on buying back shares, which increases the share price both by creating demand for shares in the market and by reducing the total number of outstanding shares (and increasing the amount of ownership each share represents). Finally, plenty of older companies offer a dividend, which is simply a cash payment made directly to shareholders on a per-share basis.
The real point is, when a public company has a great quarter or sells some assets, the cash sitting on that balance sheet belongs to the shareholders. Whatever it’s going to be spent on, the people making decisions have to be able to argue that it’s for the ultimate benefit of the shareholders. There’s often disagreement about the best way to do that, but there’s no question about the motivation.
So, while the picture of unchecked greed isn’t too far off, to some degree it’s the greed of the masses. Because it’s not just wealthy billionaires holding big chunks of shares, it’s pension plans and mutual funds as well. Ensuring that the Waltons can cash in also means ensuring millions of others can share the benefits of a successful enterprise.
An Opportunity for the Average American to Build Wealth
There’s another benefit to putting profits first: it’s a good way to prevent fraud. Sticking to whatever’s best for the shareholders is one way to ensure that anyone investing in your company can have some reasonable expectations about the decision they’re making. This allows for a system in the United States where people can take their money, participate in our corporate economy, and be reasonably confident they’re getting a (relatively)1 fair shake.
The benefits here are actually two-fold. The average American can scrape together their savings and be (relatively) sure that investing in stocks is a solid long-term choice for their future. They can grow what little money they can save over time to help pay for a house, college education, or retirement to Florida in a way that past generations couldn’t.
Meanwhile, growing companies in search of capital to fund their ambition for greater business success can likewise benefit by being able to tap into the collective wealth of the American public. That sort of free-flowing capital helps small firms with big ideas turn into major companies employing tens of thousands of people. It’s a key driver for economic growth and wealth creation for pretty much everyone whether they’re active investors or not.
Want to Decrease Economic Inequality? Invest your Capital
In his best-seller Capital in the Twenty-First Century, Thomas Pikety explores the way our capitalist system creates income/wealth inequality over time because r, the average rate of return on capital, is greater than g, the rate of growth of the economy. In short, those people making money from working hard don’t make as much as those people who make money from already having money. It’s an important discrepancy and I’m of the opinion that Pikety is largely right.
But isn’t it possible that at least part of the problem can be alleviated by expanding the population that’s investing capital and taking advantage of that r? Public ownership doesn’t just create an economy where companies are more responsible, it also allows for those other than the wealthiest people to participate in capital formation and the access to profits that follows.
Admittedly, public stock markets can hardly be viewed as the only solution to the current state of inequality as they’ve clearly been around while the income gap has been growing. As Pikety points out, returns from investments made by the wealthiest 1% tend to be higher than the general investing public because of more-efficient money management and the ability to absorb more risk. Still, without our system of public corporations it’s easy to see that discrepancy growing rather than shrinking.
One might even say that participating in our economy is as much the responsibility of every good liberal as voting. That’s a stretch, but maintaining this piece of real estate for Main Street on Wall Street could easily be an important part of any serious effort to reduce income inequality.
Flawed, but Not Irredeemable
In short, corporations may be bad, but it’s by design. Their single-minded pursuit of profit is actually a key feature of a broader system that has bigger implications than people screaming bloody murder about Monsanto (MON) may realize. Despite the outrageous abuses of some of these corporate giants, the system itself works in a simple, direct way that has a lot of benefits.
I’m as concerned as anyone by the way certain corporate practices are ruining the environment or destroying economic opportunities for the average American, but I’m also confident that with the right approach to the legal code and regulatory structure we could make that same system work to our benefit. Should we simply stand by while corporations ravage our environment and ship jobs overseas? No, certainly not. But should we also assume that corporations are always going to be a part of the problem rather than a part of the solution? Pretty sure that would also be a really bad idea.
1 Because of Enron, I’m obligated to observe that there are still at least some companies that break the law and screw their shareholders despite it being illegal.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer