Senators Bernie Sanders and Chuck Schumer have proposed legislation that would stop public companies from paying dividends or buying back their shares unless they first meet certain conditions.
The senators aren’t worried about viability (companies are financially stable before they send cash back to their shareholders). Instead, they want to verify that companies have done enough to support employees before they give anything back to investors.
That’s not so subtle code for, “Make sure you redistribute wealth before giving anything back.”
The senators make their case by pointing to last year’s tax reform and how much of the corporate windfall was spent on stock buybacks (almost $1 trillion), even as companies refused to invest, closed locations, and fired employees.
But in making their point, Sanders and Schumer…
Miss the point!
Companies don’t choose to buy back shares or pay higher dividends because investors demand it. They take those actions because they think it’s the best use of investor money. And that’s the crux of the issue.
Who owns the cash? Is it yours as an investor, or do workers have a claim on it, as Sanders and Schumer suggest?
When I save some of my income and invest it in corporate stocks, I’m pretty sure that it’s my money. It doesn’t magically become partially owned by someone else just because I chose to invest.
And these senators are part of the reason that most people must invest in equities. They’re part of the system that increases government deficit spending and eats away at the dollar, all while the Fed holds interest rates near record lows.
We can only get ahead if we can beat inflation, which pushes us to equities, where Senators Schumer and Sanders want to chip away at our cash from a different angle.
As for workers, the senators claim in their New York Times opinion piece that companies and workers lived in a loving, kumbaya world from the mid-20th century until the 1970s, a time of joyous symbiotic goals and dreams between owners of capital and employees.
That’s a load of bull, and it only covers a paltry 25 years (1950 to 1975), which is less time than many politicians have been in office.
They’re Missing the Whole Story
We’ve discussed this at Dent Research many times. The situation wasn’t born of some enlightenment or appreciation for one another’s feelings.
The only reason workers had power in the mid-20th century is because America played an away game in World War II while the rest of the developed world was essentially bombed back to the Stone Age.
When it came time rebuild, the world needed everything from us: factors of production, food, capital, etc. We simply didn’t have the manpower to provide everything the world needed, and our labor force was the bottleneck.
As other nations brought their factories and equipment back online, they didn’t need us as much. In fact, other countries eventually outstripped us in terms of efficiency, which caused us to lose ground in manufacturing.
But this short-sightedness is typical. Everyone looks back to the time when things were best for them, instead of considering how that period might have been just a passing phase.
Back to Sanders and Schumer.
They want to recreate the value proposition of workers from that small window in time, but without any of the other characteristics of the time.
If companies were desperate for workers, they would pay more. If America was the most efficient, growing producer in many areas, we’d need more workers… and would pay more. But that’s not the way it is, so Schumer and Sanders want to force it by simply demanding higher pay, no matter what the business environment.
Companies aren’t closing locations because they’re so profitable, and they aren’t declining to invest because they have so many wonderful opportunities. We’ve had near zero interest rates for almost a decade. If a company saw a great investment, it could access plenty of cash to chase it.
As we noted last year, corporate tax reform leveled the playing field between the U.S. and many other nations in terms of what we charge companies to do business, but it didn’t change economic dynamics. We’re still stuck in a low growth environment.
What To Do Instead
I agree that many public companies are terrible stewards of investor capital, but my beef runs up and down the corporate ladder. I can’t imagine that any CEO is worth $20 million, or even $10 million. And there are plenty of employees who’ve been contributing to corporate profits for years without enjoying the benefits of their company’s success.
It would be much more American to slash executive compensation and put all employees in a profit-sharing pool voted on by investors than to have the government require some minimum level of payment.
Obviously, those at the top would share at a higher level, but everyone would be part of the ebb and flow of business. This is not about stock options, which can be gamed by stock buybacks and other sleights of hand. Profit sharing should be based on true, GAAP accounting profits.
This is a problem created by the incestuous relationship among Corporate America and their boards. Those who run one company serve on the board of another, and they all play the same game of guaranteeing outrageous payouts at the top. If we shook up corporate boards, we might get better results.
I also think we should do the same with politicians, such as Senators Schumer and Sanders.
They’ve been part of a government that has run deficits for many years, and have been part of government shutdowns where they still drew paychecks and have guaranteed pensions.
How about they feel the financial effects of their mismanagement? Or better yet, why not just yield their positions through a term limit system, and forgo their government pensions altogether?
But that’s a topic for another day.