LFP092 – A Seminar on Innovation Economics, Deconstructing Shareholder Value & Equitable Growth w/William Lazonick Professor UMass Lowell

This week a bumper-packed Tour d’Horizon/Tour de Force. William Lazonick is best known for his iconic “2014 Harvard Business Review’s best article” Profits Without Prosperity: Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off

His essential insight is that “shareholder value” has become an ideology of value extraction entirely lacking a theory of value creation. In past decades Financialisation as a whole has led the US from being a “retain and reinvest economy” to a “downsize and distribute economy”.

We dive into not just the ideology of shareholder value which has turned out to damage society and help create massively increased inequality but also Bill’s theory of the Innovative Enterprise and how we might fix the broken system to produce more equitable growth. To quote wiki:

Much of his current work focuses on how the financialization of the U.S. industrial corporation, manifested in massive distributions of corporate cash to shareholders and the explosion of stock-based executive pay, results in employment instability and income inequity, while undermining the innovative capability of the U.S. economy.

Bill’s work, over nigh on five decades, has been most recently funded most recently by INET (whose Chairman Lord Turner was start of the show in LFP065). It covers three important super big-picture pillars for Fintech – innovation, solid economic growth, and how corporates (ie incumbents) have changed in recent decades. It also adds in the surely socially vital angle of inequality. No point a tiny few of you Fintechers achieving mega-wealth if in a decade or two the dispossessed start burning down your chateaux.

There is more than plenty discussed in the show. Topics include: 

– Bill’s work with the Gatsby Foundation & SOAS

– 1968/9 at the LSE and student revolution (the LSE buildings were closed down for a couple of months)

– the zeitgeist of changing the world at that time

– Bill’s experience of the differing tribes of economic thinking at the time and their weaknesses

– Bill’s situating his economic work in the context of inter-disciplinary study and making it accessible to the well-informed citizen

– Professor Richard Gombrich retirement speech and advice on getting a job

– Bill’s career journey and relationship with Harvard Business School and end of that with a controversy over the unrestricted ideology of shareholder value in 1992

– managerial capitalism

– in 1984 no-one at HBS was talking about shareholder value, by 1986 everyone was talking about it and buy 1990 it was the dominant ideology

– this as the time of a huge shift to a financialised economy

– “most of the professors there at the time didn’t believe this stuff but just followed the money”

– my quote (source forgotten) “man is not a thinking creature, man is a believing creature” also attachment to institutions

– “a theory isn’t an end in itself but an engine of research to dig deeper into the data”

– catching up with history

– UMassLowell and the rise and fall of Bill’s program on regional economics and social development

– how research has changed

– Shareholder value

“one of the first critics of the destructive ideology that companies should be run to maximize shareholder value.” Wiki:

Since the late 1980s, the dominant ideology of corporate governance in the United States has been that, for the sake of superior economic performance, companies should “maximize shareholder value” (MSV). As promulgated by agency theorists, however, MSV is an ideology of value extraction that lacks a theory of value creation…. The most fundamental error is the assumption that public shareholders invest in the productive assets of the corporation. They do not. They allocate their savings to the purchase of shares & are willing to do so as liquidity means they can sell. [Apple only capital raise 1980 cf “returning capital”]

– what makes an economy productive?

– investments made by governments – infrastructure and knowledge

– investments made by households (in US ~80m family households) in the future labour force (your kids) and yourselves

– these are investments in the broadest sense (eg education/health/fitness) cf portfolio investments; direct investment in productive capacity, in societies. In our ability to take resources and turn them into something else.

– businesses need not just to transform inputs into outputs but to produce the highest possible quality at a decent price and ideally doing things we havent been able to do before (ie innovation)

– in lowering unit prices they can pass some of the higher profits on to:

– customers in terms of lower prices,

– employees in terms of job security and higher wages for being involved in the process

– to the govt for providing them with the infrastructure

– to shareholders who just buy and sell shares in the company (as dividends)

“a startup needs to put together a learning organisation, else how do you find out what works?”

– keeping that organisation together

– the importance of strategic control

– financial commitment – “once you get past the initial stage, retained earnings is the most important form of finance”

– Case Study of Apple

– Xerox

– the only public funds it ever raised were at IPO $97m; this wasn’t that important re growth as cashflow was already highly positive; the main purpose, then as now, was to allow the VC to get their money back (with a mega-return)

– “Anybody who bought shares since 1980 never invested a dime in Apple’s productive capacity

– NB the massive difference with the providers of the original finance

– Carl Icahn and corporate raiding

– share buy-backs as stock price manipulation and naked self-interest by management who are massively rewarded by options

– under the new rules Apple can do $1.5bn of share buy-backs per day (!!) and no one even has to know they are doing them (!)

– “distribution to shareholders has become an obsession”

– this process as being a massive conduit for increasing inequality

– In the decade 2007-2016 there have been 461 companies continuously-listed in the S&P500 – 55% of their profits went to buybacks ($4trn), another 39% went to dividends ($2.9trn)

– this is 94% of profits! And don’t forget the profits squirrelled away in foreign domiciles

– many companies are borrowing to do buybacks and laying off workers in order to do more buybacks leading to the downward mobility of the working class

– the net result of this is concentration of wealth at the top – this is not the only mode but is a prime mode by which this happens

– whatever you call it – corporatism/facism/the asian model (Zaibatsu + state) – this is not serving the people

a fundamental error of economics is that the market allocates resources whereas actually companies allocate resources and the markets are really the outcomes

– Prescription for solving:

  1. Ban buybacks (which were never ratified by the US Congress and are still illegal in some countries)
  2. Recognise portfolio investors are savers not real investors creating capacity
  3. Governing companies – include representatives of workers and society
  4. Remuneration (top 300 execs 84% of remuneration was stock based)
  5. Recognise that companies are not just run for the benefit of shareholders
  6. Spinning off businesses from BigCos

– investigating new metrics for remunerating execs rather than the highly manipulated shareprice

INET and The Academic Research Network

“Share buybacks are the centre of a corrupt system”

– the upcoming blog on the Buyback Economy

– increasing political interest in the US in this – eg Joe Biden, Sen Tammy Baldwin, Elizabeth Warren

– FTSE CEOs many of whose views on these topics are more like those of the Occupy movement – there are folks within the system who see the need to change it

– will we end up with revolution or will the system that is fueling inequality be changed before to avoid that?


And much more 🙂

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