The Power of Gamblers

Drug PricesI was reading an article about the broken Pharma system – basically about how people like Martin Shkreli can jack up the prices of drugs by 5000% in order to make a fortune at the expense of the people who need the drugs. And how the government – Medicare, Medicaid – is banned from negotiating better prices with the drug companies – again making money for the drug companies at the expense of the people who need the drugs.

And it ocurred to me that in this country we give an incredible amount of power to gamblers at the expense of other people.

By this I mean that companies have many stakeholders – customers, employees, shareholders, the community in which they are located, and more – but give absolute priority to shareholders. The stock price of public companies is pretty much the only thing that counts. The interests of customers, employees, or the community matter only in how they affect the stock price.

GoldenRuleIn their early days, corporations were very different animals. Three examples: 1) a license to incorporate was only given if the corporation was doing something for the public good; 2) corporations were not allowed to make political or charitable contributions or spend money to influence law-making; 3) as well as sharing in the profits of the corporation, shareholders also shared in the losses.

But the people with the gold make the rules, and over time the rules about corporations all changed. Today none of those three examples is true.

StockMarketGamblingShareholders in a public company are not owners in the normal sense of ownership. They simply have a claim on aspects of the corporate assets. Shareholders are gamblers. They buy the stock in the hope that its price will go up and they can sell at a profit.

Unlike casino gambling, the winnings of share price gamblers are taxed on their winnings at a reduced tax rate (for long-term holds). Unlike casino gamblers, share price gamblers can deduct all their losses – sometimes as a carry-over loss to the next year.

Even activist shareholders, who you might think are acting a bit more like owners, are just gambling, but trying to affect the outcome of the gamble. They are like someone who plays roulette and who has taken a file and chisel to the roulette wheel in the hope of improving their odds.

I understand that a focus on shareholder value reduces the chances of hostile takers. Yet I also believe that the shareholder value dogma is hurting America and Americans. I don’t know what the answer is. Do you have any thoughts?

Links and Other Clicks

The article Pharma Bro Goes to Washington: A Congressional hearing with Martin Shkreli reveals the brokenness of the prescription-drug market. Sample paragraph: One reason our drugs cost so much more than they do in Europe is because there, governments and insurers have more power to bargain down prices with drug companies. Meanwhile Medicare, one of the biggest buyers of prescription drugs, is prohibited from negotiating drug prices with pharmaceutical companies.

The article How the cult of shareholder value wrecked American business. This is the best and most articulate article I found about why shareholder value became the dominant dogma. Sample paragraph: The funny thing is that this supposed imperative to “maximize” a company’s share price has no foundation in history or in law. Nor is there any empirical evidence that it makes the economy or the society better off. What began in the 1970s and ’80s as a useful corrective to self-satisfied managerial mediocrity has become a corrupting, self-interested dogma peddled by finance professors, money managers and over-compensated corporate executives.

Another interesting article about shareholder value, focusing on how it has affected IBM. Sample paragraph: In 1970, Nobel Prize-winning economist Milton Friedman wrote an article in the New York Times Magazine in which he famously argued that the only “social responsibility of business is to increase its profits.” Then in 1976, economists Michael Jensen and William Meckling published a paper saying that shareholders were “principals” who hired executives and board members as “agents.” In other words, when you are an executive or corporate director, you work for the shareholders.

Article about the history of corporations in the U.S. Sample paragraph: For 100 years after the American Revolution, legislators maintained tight control of the corporate chartering process. Because of widespread public opposition, early legislators granted very few corporate charters, and only after debate. Citizens governed corporations by detailing operating conditions not just in charters but also in state constitutions and state laws. Incorporated businesses were prohibited from taking any action that legislators did not specifically allow.

 

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4 Responses to The Power of Gamblers

  1. Mark says:

    Many complications as you suggest. Most pension or 401k’s of every middle class wage earner is invested in these stocks. Its not just rich people profiting.
    The “system” is rigged and yet too much apathy remains. Are we all too spoiled to get in a huff? There are things we can do to right the ship. One is to join Bernie and try to chop off the head of corperate greed with a revolution. Big change never hapoens without a revolt of sone kind. And we the voters, dont hold our elected officials accountable. When we do, they weasle out anyway. Creating more apathy. How to fix the world? Same story.

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    • Alec Sharp says:

      If somehow ALL companies had to focus on all the stakeholders, they would then all be in the same position relative to each other. As you say, 401K and pension money has to go somewhere, and it would bid up the prices of stocks, now based perhaps on long-term success rather than quarterly results.

      But we shouldn’t hold our breath. I don’t think we are ready for a revolution. It’s all “bread and circuses” these days. People would rather sit on Facebook than march and face the water cannons and rubber bullets. And Bernie is no salvation because the Republicans are masters of playing on resentments and would crush him in a general election.

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  2. Nancy says:

    I’m staying with Bernie since he’s the only one starting out not beholden to the big corporations and industries. I don’t know what kind of president he’d make, but I’m willing to take the risk rather than go on with business as usual. David listened to a tape set from the Whole foods founder (who has been much maligned but has a lot of really good ideas) that describes the practice of holding multiple bottom lines: shareholders, customers, workers, and the environment (I think). “Conscious Capitalism?” Also B-corporations are a growing thing. They have to include positive impact on society and environment in addition to profit as part of its legally defined goals. It’s obvious that just going for maximization of profit is ruining our country and our world.

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  3. David Myers says:

    I think that if companies gave absolute priority to shareholders that things would actually be better than they are now. Currently, a large chunk of company profits go to insiders and the insiders sit on each others board of directors and vote to further enrich themselves. This model isn’t really consistent with capitalism.

    To me one of the scariest statistics out there right now is that 62 people control 1/2 of the world’s wealth. That concentration doesn’t seem to be declining and I suspect that its actually still increasing. Its that concentration that makes it very difficult for most people to make significant economic progress and I believe it will only get worse. Revolution may come if the concentration goes so far as to put a majority of people into poverty (though given what people believe vs. what’s real may still make it so those who have power retain it). This model seems more consistent with feudalism where a few held power (kings …). Though the kings of those days still didn’t control the kind of wealth that has been concentrated into the hands of a few these days (IMO).

    Bernie Sanders is the candidate that is in closest alignment with my own beliefs. However, I believe he is too far left of center to be elected. But then again, I would say that Trump and Cruz are also too far to the right of center to be elected. But if the matchup is between two extremes then I’d be hard pressed to say who would actually win.

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