Wall Street Is Throwing The Rest Of Us Under The Bus

Source: Spencer Platt/Getty Images

The value of a company’s stock is immensely important to a chief executive. Increasing share values obviously increase shareholder’s wealth, making them happy, and happy shareholders are a good thing. But if the stock is losing value, shareholders start looking for someone’s head to put on the chopping block, and more often than not it ends up being the CEO.

So what is a chief executive to do? Find ways to make sure that their company’s stock price keeps growing at any cost. Devising new ways to bring in new and bigger revenues, buy back stock, cut costs — almost anything is an option, so long as the shareholders keep making money.

The belief that a company’s head executive only has one responsibility — to maximize profits for shareholders — can be traced back to a piece written by Milton Friedman for The New York Times Magazine in 1970. “A corporate executive is an employee of the owners of the business. He has direct responsibility to his employers,” Friedman said. “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

Whether Friedman had the right idea is debatable of course, but a fair question to ask is whether that kind of thinking may actually be destructive instead of productive. Friedman himself points out that fraud and deception violate the rules of the game, but those are two of the main tactics that have been used with little restraint over the past several years to earn Wall Street’s biggest players insane piles of money for themselves and their clients. After all, the ends justify the means, right?

At what point, though, does the desire and need to satisfy shareholders and Wall Street start exacting a toll on those outside Manhattan? Are Wall Streeters actually getting rich at everyone else’s expense? All that money has to come from somewhere, and many unscrupulous executives have become famous for acting unethically in the name of fiduciary responsibility.

An article from The Harvard Business Review published this past summer points to Boeing as a perfect example of a once-great company that has evolved into something much different. At one time, Boeing was willing to stake its reputation on its products, but has instead turned its focus to cost-cutting and financial performance in order to appease Wall Street traders and shareholders, or so HBR says. Of course, things are a bit more complex than that, but that’s the gist of it.

Perhaps the most important element to the HBR piece is that a huge number of corporate financial executives admit that they would be willing to hurt their own companies in order to keep on appeasing Wall Street. “A recent survey of chief financial officers showed that 78% would ‘give up economic value’ and 55% would cancel a project with a positive net present value — that is, willingly harm their companies — to meet Wall Street’s targets and fulfill its desire for ‘smooth’ earnings,” the article says.

Now, not only can that type of thinking destroy innovation and ultimately counteract against the concerns of employees and consumers, but is pervasive of the damaging short-term thinking that is has become pervasive on Wall Street. Many publicly-traded companies — especially following the Great Recession —  have reorganized and focused on getting their stock prices back up and returning value or dividends to their shareholders, instead of focusing on long-term goals and the economic health of their businesses. This has had widespread economic results, including wage stagnation and prolonged unemployment for many job-seekers.

Despite the consequences, it’s safe to say that the returns should be more than enough to satisfy shareholders. The New York Times reports that corporate profits have risen at an annualized rate of 20.1% since 2008, while disposable income has only gone up by 1.4% during the same time period. Not only that, but corporate profits during the third quarter of 2012 made up 14.2% of national income, the highest since 1950. The portion of income that went to employees, on the other hand, was 61.7%, the lowest since 1966.

“There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Dean Maki, chief United States economist at Barclays, told The New York Times.

How do you get to this point, in which three-fourths of CFOs are willing to admit that they would hurt their own businesses in order to stay within the good graces of the shareholders? This is what short-term thinking gets you, and it can be extremely unhealthy for an economy that is still, in some respects, trying to find its footing. It all goes to show that Wall Street continues to have an enormous amount of sway over the economy.

Scrambling to keep financial metrics up, at all costs, can lead to risky or even unethical behavior. Yet that mindset is seemingly embraced by those who benefit from it. Shareholders and Wall Streeters are simply hooked on economic gains, no matter what the consequences might entail in order to achieve them. Another important caveat to address is that executive compensation has routinely become closely tied to stock price, giving executives even more of an incentive to take risky moves.

Does this behavior speak to the self-destructive nature of capitalism, and is it actually manifesting before our eyes? Perhaps the fact that so many executives are willing to be honest and open about the nature of their jobs is a sign that they would embrace a different system, rather than just shooting for predetermined metrics to appease Wall Street? We’ll have to wait and see, but logic would seem to lead us to the conclusion that sacrificing a company’s health — or an entire economy’s health, really — for the sake of short-term gains will ultimately lead to disaster down the road.
Want more great content like this? Sign up here to receive the best of Cheat Sheet delivered daily. No spam; just tailored content straight to your inbox.