The Philosophy Hammer: Philosophy, Economics, Politics and Psychology Tested with a Hammer

The

Philosophy Hammer

Philosophy, Economics, Politics & Psychology Tested with a Hammer

23 Things they Don't Tell You About Capitalism
By: Chang Ha-Joon
Major Topic: Economics
Minor Topic: Politics

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         Thing 2: Companies Should not Be Run in the Interests of Their Owners

         We are told that ownership is the most important factor in determining the use of property. We are told that ownership gives the most incentive to improve and expend in the long term thus generating the best long term results. However none of this is true.

         While it may be true legally that ownership a right to leadership, it is not true that this is the best thing for a company or a country. Because stockholders are often the people who can get out of the company the quickest, they do not necessarily have the best long term interests of the company at heart. In fact what has happened is that stockholders have demanded the greatest short term value.

         Short term value maximization seems good at first sight but it is very bad for the company in the long run. Often investment in the future may be a multi-year investment that lowers the short term value of a company while only raising it many years later.

         Short term value maximization also causes wages and suppliers to be squeezed as much as possible. This results in higher labor turnover rates which lead to a loss of collective corporate knowledge and employee effectiveness and efficiency. Suppliers will be less inclined to furnish companies with the best equipment and the companies themselves are refuse to spend money to become more competitive. The result is lower product and service quality, lower morale but greater profits.

         Sometimes it may be necessary to squeeze wager earners and suppliers, but there are some common business practices that are always bad for all except the shareholders: stock buy backs. Companies that take profits and “invest” them in their own stock are essentially throwing money at stockholders whose shares will rise. Such actions add nothing to the long term benefit of the company and can even cripple the company.

         The problem is the new class of professional managers who make an unholy alliance with stockholders to maximize stockholder value. There are two ways to do this: the hard way: innovation and development; or the easy way: downsizing and cutting “waste.” Taking the easy way will destroy the company and the country while making it appear that it is becoming more and more profitable.

         Companies should be run for the sake of all the stakeholders not just the stockholders. In fact companies should be run more for the sake of labor and suppliers because they have a greater interest in the long term health of the company.

Added on: 2012-10-05 11:37:13