Shareholder vs. Stakeholder.

One of the best explanations I've seen of what has gone wrong in the American social economy is in this article by Michael Lind at Salon.com. He says that American capitalism before the Reagan years (at least in the 20th century) was run on the idea of generating value for companies' stakeholders. In the 1980s, this was superseded by a shareholder value model.

The results have been devastating for the middle class, the environment, and our society as a whole.

Orthodox economists recite the dogma that if productivity goes up worker compensation will follow. But according to the economist Alan Blinder in a Wall Street Journal Op-Ed titled "Our Dickensian Economy" last year, since 1978 productivity in the nonfarm business sector has grown by 86 percent, while real compensation -- wages plus benefits -- has grown only 37 percent. Take out the increased benefits, which tend to be eaten up by cancerous health insurance costs, and the real average hourly wage has not increased in 35 years.

Where have those missing gains from productivity growth gone? To a small number of rich American shareholders, CEOS and highly paid professionals, thanks to "shareholder capitalism."

Shareholder capitalism is the doctrine that companies exist solely to make money for their shareholders. It is frequently contrasted with stakeholder capitalism, which holds that companies exist for the benefit of their customers, workers and communities, not just for ever-fluctuating number of mostly remote and unengaged passive investors who just happen to own stock in them, often without even being aware that they do.

Only in the English-speaking world, with its tradition of radical libertarian ideology, could a head of state like Margaret Thatcher declare: "There is no such thing as society." According to a 2007 article in the Journal of Business Ethics, 31 of 34 corporate directors, each of whom served on an average of six boards of Fortune 200 corporations, agreed that their duty to shareholders would require them to cut down a mature forest or allow a dangerous, unregulated toxin into the environment, if that increased shareholder value. 

Because they never wholly accepted the shareholder value ideology, other capitalist nations have not seen fit to follow the Americans and British in steering most of the gains from economic growth away from workers to CEOs and shareholders. In Europe, average CEO pay is half the American level. The average European CEO makes 25 times as much as the average employee in the same company. The ratio in the U.S. is 100 to 1.

 And it hasn't even worked as a means of increasing shareholder value.

Shareholder value capitalism in the U.S. since the 1980s has even failed in its primary purpose -- maximizing the growth in shareholder value. As Roger Martin, dean of the Rotman Business School at the University of Toronto points out in a recent Harvard Business Review article, between 1933 and 1976 shareholders of American companies earned higher returns -- 7.6 percent -- than they have done in the age of shareholder value from 1977 to 2008 -- 5.9 percent a year.
For his part, Jack Welch has renounced the idea with which he was long associated. In a March 2009 interview with the Financial Times, the former head of GE said: "Strictly speaking, shareholder value is the dumbest idea in the world."

I really recommend reading the whole article. Understanding is the beginning of change.

P.