Corporations should invest in workers – not just shareholders

Recent coverage of the collapse of Sears – the mid-20th century retail giant that filed for Chapter 11 bankruptcy in October – pointed to the major shifts in corporate treatment of their employees in the United States. Sears harkens to a time when it was understood that large corporations should share profits and benefits with workers, not just shareholders. This flashback comes at a moment where companies like Amazon are growing at an extreme pace, while its employees must choose between a living wage or access to small stock options.

In Sears’s time, corporate management inside large firms treated workers as valuable contributors to corporate productivity, and unions had the bargaining power to negotiate stable living wages and robust retirement packages. But during the Reagan administration, government regulations and reforms made shareholder primacy the norm in corporate governance and began a sustained attack on collective bargaining. Some companies focused on shareholder payouts, while others focused on profiting more and more off of financial activity, but executives agree that shareholders are most important to the success of a company and deserve as much corporate wealth as possible. One method used to reward shareholders are stock buybacks – when companies buy back their own shares on the open market, thus boosting the dollar value of each remaining share. Companies in the United States are on track to spend US$1 trillion on buybacks this year alone.

Before the 1970s, American corporations paid out roughly 50 per cent of profits to shareholders, while retaining the rest for investment and workers. Now, shareholder payouts for non-financial corporations are as much as over 100 per cent of reported profits, because many firms borrow in order to lift payouts even higher.

For example, from 2015 to 2017, the restaurant industry spent 136 per cent of total profits on stock buybacks. Not only is this an example of risky borrowing to pad shareholder pockets, restaurant workers are some of the most vulnerable members of the labour force. If the top five corporate spenders on buybacks in this industry chose to redirect funds to employee compensation, they could pay the median restaurant worker an average of 25 per cent more each year.

This shift in priorities has created a direct trade-off within companies between shareholders and workers; both are competing for a share of profits, and workers are losing out. It is well-known that workers’ wages have been stagnant even while corporate profits have skyrocketed, but it’s shareholders who have captured an increasing share of those profits for themselves. For example, since President Trump’s Tax Cuts and Jobs Act of 2017 reduced the US corporate tax rate from 35 per cent to only 21 per cent, companies have used their newfound wealth to mainly reward shareholders. Massive spending on buybacks used to be considered possible market manipulation by the Securities and Exchange Commission, but now goes almost completely unchecked in the United States (other nations have much stricter laws regulating the practice).

The bigger picture

When companies claim that they cannot afford to maintain and create jobs, provide living wages and benefits to their workers, or invest in innovation, they are not telling the whole story. They’d just prefer to spend their money – and borrowed debt – on stock buybacks and shareholder payouts. Since the Trump tax bill passed, Wells Fargo has authorised US$40.6 billion in spending on stock buybacks and at the same time announced plans to lay off 26,500 employees over the next three years. Clearly excess capital exists, though it will decidedly not go towards saving tens of thousands of jobs. CEO Tim Sloan confirms: “Is it our goal to increase return to our shareholders and do we have an excess amount of capital? The answer to both is, yes.”

In the bigger picture, more money spent on shareholder payouts and stock buybacks is based on the notion that companies should count short-term spikes in stock value as their primary measure of success, while investment in the necessities of long-term growth – workers, capital, innovation – falls. The relentless search for short-term profits has actually changed the way workers are hired and paid. Companies are forcibly transforming employees into independent contractors to avoid paying benefits or pensions, and outsourcing work to contracting firms that compete to pay lower and lower wages.

Not only are workers left out of the productivity gains they help to create, the work they do is becoming less and less secure.

Contract workers must compete for their hours, and often find themselves earning below minimum wage. Amazon Flex workers, for example, must constantly refresh an app to find nearby delivery jobs. These drop-offs are set to a tight deadline, and Flex workers that show up late can be booted off the app completely. There is a manufactured sense of urgency that incentivises workers to take what they can get. Fuel, tolls, and wait time are not compensated, so when you do the math these contract employees often make only US$5-6 dollars per hour.

Large corporations are prioritising their workers less and less. This is evidenced in how firms have spent their ‘excess capital’ on massive buyback initiatives, how cost-cutting results in large scale layoffs, and how the nature of work is shifting to an outsourced, contract-based model that leaves workers unsupported and underpaid. This trend is not sustainable; firms cannot prosper in the long term without smart investment in innovation, capital, and workers. We are in need of new rules that help bring us toward a corporate model that builds off of legacy firms that got it right, and that tame the mega firms of today that are getting it decidedly wrong.