Editors Note: This is a part of the larger post on Hedrick Smith’s lecture to the NH AFL-CIO about his new book ‘Who Stole The American Dream’. You can read the entire post here.
Stakeholder Capitalism vs. Shareholder Capitalism
There are two very different perspectives about how a business should be run. On one hand there is the view – best described by Henry Ford – that a company is there to produce something, and pay people a wage high enough that they could become your customers. This is commonly referred to as ‘Stakeholder Capitalism’.
“There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”
On the other hand, there is the current business philosophy that companies are only there to make their owners and shareholders money. This is called ‘Shareholder Capitalism’.
This difference is a major focus in Hedrick’s new book. He spent a majority of the time during last week’s discussion talking about the differences between these two views – and how ‘Shareholder Capitalism’ has led to the decline of the middle class.
Hedrick explained that ‘Stakeholder Capitalism’ drove the American economy after World War II. From 1945-1970, the productivity of American workers went up by 96%. At the same time, the average median income grew by 94%. “Growth in productivity lead to shared prosperity,” Hedrick observed. Everyone from the poor to the wealthy prospered during these years – in fact, those at the bottom of the wealth spectrum benefitted even more than those at the top.
Then, beginning in the 1970s, businesses moved into ‘Shareholder Capitalism’. Productivity continued to rise by leaps and bounds, yet workers’ wages stayed flat. The added revenue the company received from the higher productivity had to go somewhere – and it went right to the executives and shareholders. This is why the average CEO’s salary is now 380 times higher than the average worker’s salary. [Read Citigroup’s report “Plutonomy: Buying Luxury, Explaining Global Imbalances” here.]
Through the 1970s, CEOs knew that shared prosperity was good business. “The job of the CEO was to balance the needs of all the Stakeholders,” Hedrick explained. That means balancing the wages of the workers with the cost to consumers, and the need to turn a profit for the shareholders. This was the job of the CEO. Some of those needs were very simple. The workers needed money.
The middle class had been the major consumer in our economy. Middle class Americans are spenders, not savers: they spend 90% or more of what they bring home. For the majority, the only savings they accrue is paying off their mortgages. If the middle class does not have money to spend (like our current situation) then the economy is very slow to recover from any economic downturn.
In 1948, the United Auto Workers (UAW) and the CEO of General Motors Charlie Wilson signed the first collective bargaining agreement that included a lifetime pension. This means that after you put in your many years of service to GM they would pay you a salary for the rest of your life. This trend continued in union and non-union companies for the next few decades. GM became the model for industry and labor relations throughout the country.
By 1980, 84% of all companies with 100+ employees had a full pension for their retired workers; 70% of them had full healthcare coverage for retirees as well.
Now that ‘retirement security’ has all but disappeared. Only 30% of companies with 100+ employees offer a pension; and only 18% offer retiree healthcare. Those numbers go down every year, as workers who retired with these ‘outdated’ pensions are passing away.
“GM used to be the template for a successful industry, now Wal-Mart is the template,” said Hedrick. Wal-Mart is the modern day success story in the world of ‘Shareholder Capitalism’: they have experienced massive growth and high stock returns. Just disregard the fact that they do not offer healthcare to the majority of their employees, or pay wages that would keep their workers out of poverty.
In ‘Shareholder Capitalism’ the stakeholders (consumers, shareholders, and workers) are in conflict with each other. The shareholders are the only people the CEO cares about: business is all about profits and stock prices. This is also why corporations like Wal-Mart buy back their stock to continue to drive up stock prices.
“The middle class is not getting their share of the pie,” said Hedrick. “The system (economy) will not work until the middle class get more of the pie”