Welcome to an insightful discussion on the dynamics of corporate profit-sharing in America. In recent years, the focus on shareholder value has transformed how companies operate, often at the expense of workers. This article explores how this phenomenon has unfolded over the decades and its implications for the workforce and the economy. Let’s delve in.
Yves here. We highlighted the pivotal shift towards a greater share of GDP being directed to corporations and profits in our 2005 article, The Incredible Shrinking Corporation. The key takeaway is as follows:
Part of the issue is that companies have not reinvested the benefits of their growth back into their workforce as they did in the past. Historically, during postwar economic recoveries, the majority of national income increases were allocated to labor compensation (including hiring, wages, and benefits) rather than corporate profits, as noted by the National Bureau of Economic Analysis. In the current economic upswing, the share of GDP growth allocated to corporate profits has surpassed that going to workers for the first time ever.
By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
Thomas Ferguson isn’t easily taken aback. With decades of experience tracing the flow of money through the American economy and political system, he has unveiled patterns that individuals like Jeff Bezos might prefer to keep hidden.
Recently, Ferguson, who leads research at the Institute for New Economic Thinking, collaborated with colleagues Servaas Storm and Jie Chen to create a long-term chart illustrating how national income is allocated between labor and capital. This analysis coincided with a period when U.S. worker compensation plummeted to one of its lowest levels on record.
While examining the data, something remarkable emerged. Ferguson anticipated that the most significant changes in worker compensation relative to GDP would emerge during the economic turmoil of the 1980s or following the China shock post-2002. However, he noticed an unexpected decline occurring in 1999.
The timing intrigued him; it occurred before the influx of Chinese imports, which many economists later proposed as the cause of substantial wage pressure on American workers. Ferguson speculated that trade agreements like NAFTA had to contribute to the prevailing headwind against workers; however, they did not seem sufficient to account for the drastic change he observed.
He considered an aspect that might not be entirely apparent to most: a phenomenon his colleague William Lazonick had studied for many years.
1999 coincided with a dramatic increase in stock market valuations, peaking in early 2000 during the height of the dot-com explosion. In this period, it seemed that the traditional rules of business had been completely rewritten. The controversial concept that a company’s primary purpose was no longer merely to grow, produce goods, and create jobs gained traction; companies began prioritizing the upward trajectory of stock prices and channeling gains to those who, by and large, were not directly responsible for the company’s achievements.
Ferguson believes this timing is not coincidental. The stock market boom mirrored a more profound shift in corporate priorities—one that progressively alienated workers from the economy’s benefits.
William Lazonick, a respected economist and business historian who critiques the “shareholder value ideology,” argues that this transformation in American business focuses primarily on profits at the expense of workers. According to him, this shift has suppressed wages, degraded job security, harmed innovation, eroded the middle class, intensified inequality, and led to financial misconduct that has ultimately weakened American businesses across various industries.
Today, the prevailing notion that a company’s foremost obligation is to boost its stock price and enrich shareholders seems almost second nature. It has become the air we breathe. Yet, this was not always the case. For much of the postwar era, many Americans would have viewed this approach as a significant betrayal of the corporate purpose.
To comprehend why American workers have become more productive while others reap the rewards, the obsession with shareholder value is a critical element of the story. I recently spoke with Lazonick about how we arrived at this point and what the future may hold.
It turns out that few concepts have exerted a more profound impact on the current economy while remaining unnoticed by the very individuals most affected. Even many staunch critics of capitalism underestimate its significance. Unless serious corporate governance reforms are enacted, Lazonick cautions, the AI boom will only exacerbate existing issues.
A Dangerous Idea Takes Hold in America
By asserting that enriching shareholders takes precedence, American executives openly adopted a belief many privately held but hesitated to verbalize.
Imagine a hospital director claiming their primary obligation is to satisfy lenders. Or a school administrator stating their chief responsibility is to generate profits for bondholders. Such notions sound counterproductive when the focus should be on fulfilling their respective missions.
But wait, isn’t that the purpose of corporations? Isn’t that different?
Not entirely. Not so long ago, society viewed corporations as both public institutions and private enterprises. Their responsibilities were believed to extend to treating customers well, fairly compensating workers, supporting communities, and contributing to society through taxes. The corporation’s charter was granted as a public privilege, carrying with it a set of obligations.
As corporate America expanded in the late 19th and early 20th centuries, concerns arose over whether these powerful private entities were becoming too influential. The 1929 crash and subsequent Great Depression revealed that unchecked corporate power could destabilize the entire financial system.
Consequently, societal expectations regarding business underwent a transformation. By the time the New Deal, wartime mobilization, and postwar prosperity reaffirmed public consciousness, most Americans accepted that while companies should pursue profits, they also had a responsibility to the society and individuals whose labor, resources, and trust enabled those profits.
In a renowned 1951 article in the Harvard Business Review, Frank Abrams, Chairman of Standard Oil of New Jersey, echoed this sentiment. He asserted, “None of the great, recognized professions is without a strong sense of responsibility to the community,” emphasizing that management professionals should “maintain an equitable and workable balance among the claims of the various directly interested groups.” This included not just shareholders but also “employees, customers, and the public at large.”
Abrams contended that stakeholders deserved only “fair” and “reasonable” profits, with a well-compensated workforce serving as a crucial metric for corporate success—not merely a dollar value reflected in a balance sheet.
These assertions came from one of the nation’s leading business figures, not a progressive activist.
This philosophy flourished for several decades, from the GI Bill and expansion of the interstate highway system to the Summer of Love and the introduction of personal computers. Workers shared more in national prosperity as secure jobs and defined-benefit pensions enabled many to build stable middle-class lives—and to enjoy televised landmarks like the moon landing.
Shareholders enjoyed healthy returns through dividends and stock appreciation. While some became quite wealthy, maximizing shareholder wealth was not regarded as the company’s primary objective.
However, not everyone was satisfied. Free-market economists like Milton Friedman contended that shareholders deserved more, asserting they bore the risks. This perspective overlooked the laborers who risked their time and livelihood to create successful businesses, the communities that formed around local industries, and the taxpayers who funded the infrastructure and research upon which businesses relied—only to bear the consequences when these entities failed.
Shareholders typically comprised people and institutions trading company stock on the open market—analogous to trading baseball cards—often without any involvement in building the business, developing products, or serving customers. For years, the notion that they were entitled to company success benefitted them the most would have seemed erroneous, if not unethical.
However, beginning in the 1960s, circumstances shifted. Enormous conglomerates began acquiring dozens or even hundreds of companies based on the questionable assumption that skilled managers could run nearly anything. For instance, under Harold Geneen, ITT transformed from a telecommunications company into a vast empire of hotels, insurance entities, and manufacturing firms. Initially, this strategy appeared victorious, but it ultimately collapsed, forcing ITT to divest its acquisitions.
The downfall of these conglomerates in the ’70s and ’80s fueled a new criticism of corporate America. Observers argued that management had become too fixated on empire-building rather than shareholder wealth enhancement. Consequently, a new philosophy centered on shareholders began to gain momentum.
In the 1980s, this perspective found powerful allies on Wall Street. Aggressive financiers like Michael Milken employed risky “junk bonds” to facilitate takeovers, allowing corporate raiders to acquire companies, lay off employees, sell assets, and boost shareholder returns—sometimes even when these measures hindered the company’s long-term viability. Simultaneously, Wall Street transitioned away from financing productive endeavors to prioritizing profits derived from trading and financial engineering—a transformation identified as financialization. With the emergence of markets like NASDAQ and decreased stock trading costs, Wall Street began to resemble a casino, focusing less on business building.
The Reagan Revolution and the exuberant ‘80s propelled this market-first mindset into mainstay consciousness. Corporate America increasingly assessed success by Wall Street metrics such as rising stock prices and expansive deals.
By the mid-1980s, American corporations discovered yet another powerful method to channel funds to shareholders: open-market stock repurchases, commonly referred to as stock buybacks. Instead of reinvesting profits back into the workforce or the business itself, companies could spend vast sums on buying back shares, artificially inflating stock prices. Executives approving these buybacks often had acute insights into when stock prices would surge, allowing them to profit from selling their stock at inflated prices. Before 1982, such practices were generally met with regulatory skepticism. However, the SEC eventually shifted its stance, implementing the controversial Rule 10b-18 and granting companies legal leeway to engage in what had long been deemed market manipulation.
Lazonick and his colleague Ken Jacobson denounce this transformation as a “license to loot.”
America was swiftly pivoting from “stakeholder capitalism” to a stance focused on shareholder value. This transformation gained further momentum in 1985 when economist Michael Jensen appeared at Harvard Business School with a provocative notion that corporate managers were hoarding too much cash and needed to “disgorge” it to shareholders. This terminology suggested that unallocated capital within a company was not a resource for future growth but rather funds being improperly retained by managers. Jensen’s contrarian stance, fueled by his passionate rhetoric, posited that executives faced insufficient pressure to reward shareholders appropriately.
In 1990, Jensen and his colleague Kevin Murphy helped popularize executive compensation tied to stock performance, aligning their incentives directly with the company’s share price. With buybacks, frequently amounting to hundreds of millions or even billions of dollars annually, acting as a swift means for CEOs to enhance their wealth, some executives prioritized boosting stock prices—whatever the consequences for employment or investments. The incentive structures were clear: what elevated the stock price also bolstered the CEO’s wealth.
The buyback trend effectively turned corporate treasuries into cash streams for shareholders. Lazonick analyzed over 2,000 large American companies that remained in the S&P 500 from 1981 to 2019, including notable firms like General Electric and Apple. He found that buybacks constituted just 4% of net income during the early 1980s; however, over time, they surpassed dividends to become the principal means of returning capital to shareholders. By the late 2000s, buybacks consumed 62% of corporate earnings—resources that could have been invested in higher wages, enhanced benefits, job security, or in developing the next generation of products and technologies.
Corporate boards adopted the new doctrine of maximizing shareholder value as it provided a straightforward metric in stock prices. CEOs supported this shift as it justified increasingly lucrative stock-based compensation packages. Shareholders welcomed it as their interests overshadowed everyone else’s. Soon, consultants, legal advisors, and business school educators were all espousing the same philosophy. Concentrating on stock prices emerged as the strategy to steer companies. Jensen became one of America’s most influential economists, characterized by a Bloomberg writer as “the high priest of the greed-is-good era.”
The 1990s delivered yet another boon to Wall Street. As corporate America began to move away from funding traditional pension plans, millions of workers were funneled into 401(k) plans, directing their retirement savings into the stock market and inadvertently becoming shareholders regardless of their willingness to participate. Nevertheless, the new shareholder economy failed to be equitable. When buyback booms materialized, the most significant rewards accrued to those already holding the most stock: executives and wealthy households owning substantial shares. Unlike dividends, which benefit all shareholders, buybacks primarily advantage those positioned to capitalize when stock prices rise, often including executives involved in determining the timing of buybacks.
Consequently, workers’ retirement investments contributed to a substantial influx of funds into the stock market, yet the most significant benefits flowed to the already-wealthy. Meanwhile, buybacks incentivized layoffs, wage stagnation, and cuts to essential investments. Hence, it is no surprise that today’s average 401(k) balance falls short of what is necessary for a comfortable retirement, despite years of contributing to the stock market.
In the Wall Street casino, the house always wins.
In conclusion, at the dawn of the new millennium, the principle that corporations should serve any constituency beyond shareholders was cast aside, and working Americans faced a similar fate. The slowdown in worker compensation that Ferguson and his colleagues identified in the late ’90s was the natural consequence of a new operational system prioritizing corporate success according to shareholder wealth. Corporate leaders focused on elevating stock prices often at the expense of investing in and rewarding the employees who drive business success.
The Price of Prioritizing Shareholders
As the shareholder value model took root, executives discovered they could inflate stock prices without enhancing company performance—allowing them to walk away with lavish rewards while externalizing the costs onto everyone else.
The early 2000s ushered in numerous companies where Wall Street figures appeared favorable even as the underlying business deteriorated; think Enron, WorldCom, and Lucent. In a 2005 paper, Jensen candidly admitted that inflated stock prices spur executives to manipulate earnings, pursue self-destructive strategies, and even commit fraudulent acts.
Regrettably, the shareholder value machinery persisted. In the years that followed, firms like Motorola, IBM, HP, and Intel may have avoided scandals but expended staggering amounts on buybacks while falling behind in crucial investments that had historically secured their leadership positions.
“When shareholder value prevails, the focus shifts to elevating stock prices at any cost,” Lazonick explained. “You become preoccupied with extracting cash for shareholders. You distribute corporate profits via dividends and stock buybacks, diverting money from reinvesting in the business. Labor costs are targeted; layoffs occur even when valuable expertise is lost and innovation suffers. Ultimately, this leads to self-sabotage.”
The agenda becomes one of extracting value to enrich the affluent while neglecting the future needs of the industrious individuals whose efforts sustain American businesses.
The escalation of buybacks between 2003 and 2007 played a significant role in triggering the 2008 global financial crisis. While the appetite for buybacks temporarily waned during the crisis, it has since rebounded robustly. Over the past decade alone, major U.S. companies have allocated trillions to these buybacks—resources that could have been directed toward innovation, job security, higher wages, or even tax obligations.
Lazonick and his colleagues have scrutinized a range of companies that prioritized stock buybacks while witnessing a decline in their productive capabilities, including Boeing, IBM, Cisco, Intel, General Electric, General Motors, and Apple.
Take Boeing, for instance. From 2013 to early 2019, the company spent approximately $43 billion on buybacks. Much of this occurred while it profited significantly from its 737 MAX aircraft. Instead of reallocating a portion of that money towards engineers, research, worker training, or technological advancement, Boeing opted to invest heavily in its stock price. The principal beneficiaries were executives receiving stock-based compensation and shareholders holding large blocks of shares.
This eventually culminated in tragedy. Two 737 MAX crashes occurred in 2018 and 2019, resulting in the loss of 346 lives. Following the first crash in October 2018, investigations were initiated that revealed serious flaws in the aircraft’s design, Boeing’s safety protocols, and regulatory oversight. Nevertheless, Boeing’s stock price continued its upward trajectory, hitting an all-time high on March 1, 2019. The company continued its buyback strategy until the second crash on March 10 forced the crisis into the public eye, abruptly halting the ongoing shareholder value frenzy.
Boeing’s reputation suffered immensely, and the company ultimately incurred billions in penalties and costs. According to Lazonick, Boeing’s singular focus on stock price enhancement had detracted from necessary investments in both personnel and systems essential for manufacturing safer aircraft.
At this juncture, even Jack Welch, the famed former CEO of General Electric, voiced his disapproval of the shareholder value doctrine, characterizing it as “the dumbest idea in the world.”
Now comes the era of AI, poised to supercharge this troubling system. Make no mistake: this new technology is being directly integrated into an existing framework designed to extract value from workers and direct gains upward. And it is already unfolding.
