Here’s one of the least intuitive claims I’ve read recently. Activist shareholders who want to drive wider societal change through their proxy proposals reduce job creation. From a post at RealClearMarkets from Christopher Iacovella:
For one thing, shareholder proposals are not cheap. On average, responding to each resolution costs a company up to $150,000. To compound the problem, outdated SEC resubmission rules allow the same initiative to be reintroduced year after year, even when it consistently fails to gain support from a majority of shareholders.
While $150,000 is not insignificant, the reality is that most companies typically face 15 or more proposals a year. This diverts as much as $2 million worth of company resources from shareholders. Put another way, when dollars are being allocated to respond to the political proposals of the minority, they’re not being invested to maximize the value of the company for the majority.
This kind of activism also disproportionately impacts smaller companies who have fewer resources at their disposal. Instead of focusing on growing and staying competitive, companies are now devoting more resources to address these immaterial political issues; this directly impacts the bottom line. Public companies are engines of growth and innovation, not Trojan horses masquerading as elected politicians.
Of course, private companies have a way to circumvent the extra red-tape, added cost, and politics; they can decide not to go public. And that’s exactly what they’re doing in record numbers. The scale of the problem is hard to imagine; IPOs are down 84% over the last twelve years, and the percentage of American stocks owned by the average investor has decreased by 60% since 1950. Fewer public companies reduces investor choice and stifles job creation.
I’d like to see some actual data on this. This smells like a red herring to me. Doesn’t the opposite, stock buyers who pile onto value stocks, also “stifle job creation” through deadweight loss?
Shareholders have as much right to let their political or religious views inform their preferences in corporate management as somebody who is focused solely on maximizing financial returns. De gustibus, etc. If that’s what they want to do with their money, they have a right to do it.
These diversionary initiatives may well throttle job creation. However, as you point out, shareholders have every right to do it. Pleading job issues doesn’t trump shareholder rights.
But I didn’t understand this: “Doesn’t the opposite, stock buyers who pile onto value stocks, also “stifle job creation†through deadweight loss?â€
When money that might otherwise be used in more productive ways goes to boost stock values (and wealth) of companies with pretty limited economic prospects instead, it will tend to reduce economic and thereby job growth.
No. If I take $10 out of my pocket or bank and buy a share of xyz Corp, the seller of a share of xyz Corp puts $10 in his/her pocket or bank account. This is true at any share price level. No cash available for more productive uses is destroyed, it is just transferred to someone else. Only new share issuances take in cash (in exchange for potential future value) which could have been alternatively used.
So, if putting money into FAANGs reduces the number of IPOs (as it almost certainly does), it reduces economic activity?
Capitalism is about increasing the production of tangible goods and services. To accomplish this, small amounts of capital are aggregated to allow the purchase and enhancement of the means to increase the production of goods and services.
The free-market is a method to determine the allocation of money based upon individual choice. Free-market capitalism allows the individual to allocate money for goods and services, for direct investment in the means of production, or for financial investment through savings.
In a free-market capitalist system, increasing jobs or return on investment is a byproduct of increasing the production of tangible goods and services. In a free-market capitalist system, decreasing jobs and return on investment are potential outcomes as well (Schumpeter’s Creative Destruction).
Creative Destruction is a mechanism for determining capital allocation. Investment in less efficient means of production and outdated goods and services will be allocated less money, and the more efficient and up-to-date will be allocated more.
To date, this has resulted in more innovative goods and services, more capital available for investment, and more jobs, but this is not a necessary outcome. The reason free-market capitalism has been successful is individual freedom. ‘Human nature’ is the desire for more and/or better stuff.
A financialized system is about increasing the production of financial goods and services through a credit-backed monetary system. (Who did not see that coming?) In a financialized free-market capitalist system, the production of tangible goods and services is not necessary, and this is only possible because the means of production uses the financial goods as the raw material for producing more goods.
A physical machine where the output is used as the input with no loss is called a perpetual motion machine. A financialized economy is an enhanced perpetual motion machine. In a financialized economy, the output is used as the input with an increase.
Using credit-backed money to increase the value of an investment or return of an investment without an increase in the production of goods and services is negative for the economy.
Free-market capitalism is based upon sound money. In addition to the financial/monetary system, there is also crony capitalism, onerous regulations, and intellectual property restrictions that help with the transformation from free-market capitalized system into free-market financialized system.
That is a point I’ve been making here for a long time. Almost every Utopian scheme involves some form of perpetual motion.
Guys
Faangs is just a proxy for saying momentum buying, or speculation.
If you can get past my original arithmetic identity….. then you can deal with “stock buyers who pile into value stocksâ€. As pointed out in Tastys dissertation, only growth or expectation of real growth can permanently change the real economy. If xyz Corp goes from 10 to 12 per share the guy who bought at 10gets a 2 gain and then a neutral 12 for 12 exchange occurs, as I said. But the two dollars is based on real growth in the real business and nothing to do with the slips of paper evidencing ownership being piled into.
On the other hand we can have speculative share price growth. But on the elevator up each trade has a seller exchanging with a buyer in a neutral exchange, so no money is diverted out of the system, it just trades places from person to person. The problem comes if the price collapses, then all the supposed gains to all sellers along the way get reversed, but only at the expense of the guy holding the shares at the end of the musical chairs game. There was no real gain going up, there is no real loss going down. No net change. All you can do is argue the transactions cost losses.
As a technical note, what is being discussed is not what value investing is about, it’s the world of momentum investing. Trading. No piling into value stocks. My wife used to work for the Grandfather of Momentum Investing ( see The New Market Wizards). He tended not to be the guy holding the bag when the music stopped….. not my cup of tea, but some are good at it.
Nearly all of the index growth of the last several years has derived from that. I’m skeptical that results in an optimal allocation of resources as would take place in a rational market.