Thirty-five years ago I was a newspaper reporter covering events surrounding the United Steelworkers Union and the American steel industry in Wheeling, W.Va. and Pittsburgh. Steelworkers had physically demanding, dangerous jobs, but their union was powerful and extracted (especially in today’s terms) very attractive wages and benefits for its member-employees.
But, in my opinion, looking back at what happened in the early 1980s, the membership became too powerful and too greedy, and demanded ever more money each time an employment contract ran out. This culminated in, among other things, the bankruptcy of Wheeling-Pittsburgh Steel in 1985 and the subsequent loss of probably about 8,500 high-paying union jobs in the Wheeling area alone.
This was an era that marked the high point in union membership nationally, which rose over the decades in large part because of excesses elsewhere in the Ohio River Valley, carried out near the beginning of the 20th Century by Consolidated and other giant coal-mining companies against their own employees. Workers were forced to live in bare-bones houses in “company towns,” and were paid in “company script” instead of dollars, which could only be spent in company stores that charged inflated prices for basic goods.
It’s no wonder that humans rebelled and eventually formed unions for protection against such corporate excess, just as it’s no wonder that major heavy industries fell apart in the face of such inflexible union demands in the 1980s.
The pendulum of excess swings only so far one way, then eventually swings back. And apparently, now, we’re back at the other end of the spectrum again, only corporate excess has taken on a different form.
Union membership has declined by millions since the ’80s, mostly concentrated now among public government employees and teachers, whose right to organize is even now being whittled away in states such as Wisconsin. American corporations long ago moved most of their heavy manufacturing operations off-shore to escape the unions and drastically lower their cost of employment. As a result, today’s American workforce is concentrated much more in service industries and secretarial and lower-management-level white-collar corporate occupations.
On the corporate finance side, here’s a condensed look at the last 30 years of history, according to economist William Lazonick, writing in the Harvard Business Review:
In the early 1980s permanent plant closings were triggered by the inroads superior Japanese manufacturers had made in consumer-durable and capital-goods industries. In the early 1990s one-company careers fell by the wayside in the IT sector because the open-systems architecture of the microelectronics revolution devalued the skills of older employees versed in proprietary technologies. And in the early 2000s the offshoring of more-routine tasks, such as writing unsophisticated software and manning customer call centers, sped up as a capable labor force emerged in low-wage developing economies and communications costs plunged, allowing U.S. companies to focus their domestic employees on higher-value-added work.
These practices chipped away at the loyalty and dampened the spending power of American workers, and often gave away key competitive capabilities of U.S. companies. Attracted by the quick financial gains they produced, many executives ignored the long-term effects and kept pursuing them well past the time they could be justified.
A turning point was the wave of hostile takeovers that swept the country in the 1980s. Corporate raiders often claimed that the complacent leaders of the targeted companies were failing to maximize returns to shareholders. That criticism prompted boards of directors to try to align the interests of management and shareholders by making stock-based pay a much bigger component of executive compensation.
Given incentives to maximize shareholder value and meet Wall Street’s expectations for ever higher quarterly EPS, top executives turned to massive stock repurchases, which helped them “manage” stock prices. The result: Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation.
Here’s what Lazonick’s rearch has revealed: Of those companies making up the S&P 500, 449 have been listed on public stock exchanges from 2003 through 2012. During those years the board members of those 449 companies voted to use 54% of corporate earnings to buy back their own stock, almost always on the open market. Those same companies spent another 37% of their earnings paying dividends on stock shares.
So you have America’s major corporations spending more than 90% of their profits on their own stock, leaving less than 10% of their profits for minor things such as research and development, technology investment, facility expansion or employee pay increases.
Why would these board directors take such action? “In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets,” Lazonick states. And let us not forget that many board directors receive stock awards for their service to the corporations.
Among the 10 corporations devoting the most resources to stock buy-backs, most (Microsoft, IBM, Cisco, Proctor & Gamble, Hewlett-Packard, Intel and Pfizer) actually spent more than 100% of their respective profits on the repurchases. How? They went into debt to do so. Because what price is too high when you essentially are rewarding yourself?
So bottom line, as of Sept. 1, 2014, the chief executives and board members of most of America’s biggest public companies are not busy trying to create wealth through innovation or service or technological or manufacturing know-how. Instead, they are busy trying to extract wealth as quickly as possible from some of the greatest business innovators of America’s past.
If you’re still puzzled as to why your family income seems to be stuck in place while the price of everything continues floating upwards, perhaps the above may provide a moment of clarity.
Happy Irony Day, peasants. Have a beer on me.