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This is closer to where I come from. The objective of capitalism under shareholder primacy culture is to grow shareholder value. Executives are incented to focus on share price through generous stock option compensation. Growing shareholder value can be done through growing sales and profits by producing great customer experience, but it…
This is closer to where I come from. The objective of capitalism under shareholder primacy culture is to grow shareholder value. Executives are incented to focus on share price through generous stock option compensation. Growing shareholder value can be done through growing sales and profits by producing great customer experience, but it can also be done through direct manipulation through stock buybacks. Today virtually all earnings are used for stock buybacks (BB) and dividends, none goes to investment (see table below).
S&P500: Billions of $
Year ERN . . DIV . BB's . .Retained
2018 1119 . 456 . 806 . . . -143
2019 1158 . 485 . 729 . . . -56
2020 784 . . 483 . 520 . . . -219
2021 1675 . 511 . 882 . . . 282
2022 1453 . 565 . 923 . . . -34
2023 1616 . 588 . 795 . . . 232
Avg : 1301 . 515 . 776 . . . 10
In the postwar era, we operated under stakeholder capitalism culture. Stock buybacks were illegal, so one had to focus on sales & profits. Also, higher marginal tax rates meant much larger option grants would be needed to provide the same after-tax income increase. Without buybacks, such large grants would excessively dilute EPS, cratering the stock. Hence large stock option compensation was not a desirable option for boards. CEOs simply got much less compensation that they do today, yet there was no shortage of people willing and able to do the job (and the economy grew strongly so they were doing something right). CEOs were not incented to pay special focus on share price and focused instead on beating the competition by producing better or cheaper products and services than the other guys. That is, they considered the interests of multiple stakeholders (customers, employees, communities) as well as shareholders in forging business strategy.