Dear Friends,
It seems to me, the way business is done today flies in the face of true capitalism, undermines our standard of living and creates a false idea of what capitalism is. The modern paradigm where firms are owned by stockholders and run by the new class, has created a set of incentives that inevitably lead a business to maximize profits, by making chumps of the shareholders, lowering the wages of employees, poking the customers in the eye at every chance, enriching the new class out of proportion to their worth… while at the same time, providing as little actual value as possible for those profits. The new class has embraced the socialist system for corporate governance. This has led people to negatively associate capitalism with all those bad things, which is a total perversion of real capitalism, such low esteem for capitalism that is produced by the modern corruption of the capitalist ideal can only lead to a lower standard of living, now and in the future.
Economists call this predicament the Principle Agent Dilemma. The shareholders are the principles and the new class CEOs, and management are the agents. In the modern system of corporate governance, the agents have no real oversight by their employers, the shareholders, and so they serve themselves at the cost to shareholders, customers and labor. That is the crux of the dilemma. The principles are not served by the agents but in fact the value of the shareholder’s investment is eroded by the self serving new class that run businesses today.
Examples of the new class poking their own customers in the eye are legion. Walmart has ordered their employees not to say Merry Christmas during the Christmas season, to placate people who hate their business anyway, despite the fact the overwhelming majority of their customers are Christians. United airlines incompetency is legendary and is magnified by the rudeness of their service desk. As I discovered first hand on a recent trip. These are just two examples of the many that we find in our own lives.
A cursory look at the way profits are distributed in a modern corporation is telling of the incentives of those who run them. The shareholders get a pittance for their investment of hard earned dollars, while the CEO gets rich running the company into the ground. This is one of the reasons investors eschew dividends for growth. They understand that the CEO and top management will take the lion’s share of the profits as wages, stock options and bonuses, while paying out nothing to those who own the company… the shareholders, which makes the only way to get a return on investment, to invest for the short term, since the company will be run into the ground eventually by the new class, making dividend investing a loosing proposition, since that is a long term investment strategy.
Maximizing profits today while minimizing value is the name of the game. Companies run by the new class seek to provide as little value to the customers as possible, even as they poke the customers in the eye, while raiding the wages of the employees. Employees are not seen as assets but as liabilities and are treated as such. This creates incentives for employees to job jump, ignore customer needs, and have no emotional investment in the company they work for. Today it is common knowledge, that a kid entering the job market will work for perhaps a dozen firms in his or her lifetime, because there are no long term jobs out there where the company provides a pension to those employees who have been with he company for decades. The new class run companies wage war against their employees, stockholders and customers, to maximize the CEO’s profits over the short term.
If you look at the old way businesses were run, and today where companies are run by their founders, entrepreneurs, and even a few shareholder companies where the CEO has an investment in the company, the paradigm is far different. Almost all companies in business today were started by entrepreneurs, once the entrepreneur became too old, infirm, was pushed out or needed to cash out, the business was moved to the modern corporate system, which as often as not, bankrupted the business. Not because of a flawed business model, changing economic circumstances or recession, but due to the malfeasance of the agents. Apple is one such example.
Entrepreneurs provide maximum value to the customers, adore the business and cherish their employees, while a CEO doesn’t have any investment at all, not even an emotional one. That was the business model of the eighteen hundreds and still is today in a few companies. IBM was called the worst run company in the world, when Watson ran it, he valued his customers, and laborers and they all knew it. When the new class took it over they ran it into the ground, almost bankrupting it at a time when the digital revolution was at full swing, the employees that had been cherished by Watson and had terrific esprit de corps under him, are now miserable and hate their jobs, because it is made clear they are not valued, but are mere temps, to be replaced the moment a cheaper employee can be found. Their wages are under assault even as the new class management are enriched at cost to the shareholders. Now that IBM has abandoned their core business for cloud computing the end of that esteemed fixture of our economy is at hand.
These things explain why people increasingly are turning away from capitalism to socialism. As your wages are lowered and your job security is eroded, the value of your savings is stolen and the opportunities for your children evaporate, it is human nature to become angry at what you see as capitalism. But it is not capitalism that is the villain, it is the new class’ predilection for egoism and socialism, that is the real culprit. The new class in government pass regulations enabling more corporate malfeasance, by protecting giant companies from competition from entrepreneurs, who are then enriched by the new class agents who run those rising monopolies, creating a feedback loop of corruption, lower standard of living for most people and a hatred of the capitalist system. All of which explains that the principle agent dilemma is far more pernicious than most people realize.
Sincerely,
John Pepin
