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Hacksaw Bob Capitalism

Stakeholder capitalism proponent Robert Reich assumed the role of Hacksaw Bob (presumably a shout out to "Chainsaw Al" Dunlap of Sunbeam infamy) to demonstrate the legal/economic role of today's global corporations. Speaking to his audience of presumed directors, he outlines a plan to raise earnings and stock price--the only thing that really counts is maximizing profit. Cut the workforce by 60%, send operations overseas for cheap production costs and move most US operations to non-union states. Cut pensions, healthcare and other benefits of employees, while raising same for top executives (where the real talent is). As I demonstrated in my last blog Trump is a master of Hacksaw Bob capitalism, as are the majority of global corporations. The major reason seems to be incentive structures for CEOs and top executives. Pile on stock options and restricted stock paying off if the stock maintains double digit annual increases and massive cash bonuses for rising earnings and the motivation is clear: short-term thinking and incentives for earnings manipulation; stock buybacks to maintain stock price; acquisitions giving the impression of growth (even when they make no economic sense). A CEO doesn't even have to do a good job. Getting fired means a massive exit package; stock price might go up simultaneously, everyone wins.

Successful high tech superstars used a different model. Jeff Bezos created an online superstore as a very long-term project, built with little or no profit for years (while many of us predicted failure early on). He succeeded and competes with Bill Gates and Warren Buffet as the world's richest person. Apple and Google, with similar long-term perspectives, compete for the biggest corporation in the world based on market value.

Robert Reich describes the concept of stakeholder capitalism that was more common from the 1950s-70s, giving due consideration for employees, customers, and the public [the theory being that making all stakeholders happy is needed for long-term success]. The Great Depression followed the corruption and manipulation of the Roaring Twenties. Under FDR's New Deal, the Securities and Exchange Commission regulated securities markets and mandated both public financial reports and audits--stressing the importance of financial transparency. The SEC also required reporting of top executive pay (after it was discovered that a few CEOs made substantial sums while others paid no income tax). During World War II many executives worked as "dollar-a-year men" for the government, while raises were limited for executives. Throughout much of the early post-war period, executive pay remained fairly low, a period called the Great Compression, as middle class incomes rose substantially. This was also the period Reich identified as stakeholder capitalism. During the 1940s-50s the top income tax rate remained above 90%, creating incentives only for non-taxable benefits such as healthcare and retirement. The top tax rate dropped to 70% in the 1960s, still not a great incentive for super-salaries.

That all changed around 1980 for several reasons. Junk bond king Michael Milken made junk bonds available to corporate raiders and the hostile takeover boom started. Honest corporations with "clean balance sheets" were particularly vulnerable (e.g., the potential for future Hacksaw Bob's operations and accounting). Becoming less attractive meant corporations adopted poison pill provisions and increased long-term debt. Ronald Reagan preached deregulation and tax cuts. As executive pay rose and tax rates fell (initially 50%, then 28%), corporate executives got increasingly greedy. Stock options and cash bonuses meant real money, not big tax days for the Treasury.

Once Fischer Black and Myron Scholes demonstrated that derivatives could be accurately priced, options and futures opened new opportunities for financial America (along with hostile takeovers, junk bonds, structured finance such as mortgage-backed securities, and special purpose entities). Finance academics using agency modeling preached the need to incentivize CEOs (like maze-running rats, incentives must be external according to agency theory) through bonuses and stock options. CEOs and other executives took up the call big time. Suddenly, a billion dollar career (including retirement benefits) was possible. The really successful ones could earn nicknames: in additional to "Chainsaw Al" Dunlap was "Neutron Jack" Welch at GE, who could eliminate employees while leaving the buildings intact.

These incentive structures don't bode well for a return to stakeholder capitalism or the Great Compression (it's now the Great Divergence--the income and wealth gaps are widening). A somewhat similar concept, social responsibility, will be the subject of a future post.

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