capitalists arise© 2020, peter georgescu — all rights reserved capitalists arise 5 the fundametal...

CAPITALISTS ARISE

2 CAPITALISTS ARISE © 2020, PETER GEORGESCU — ALL RIGHTS RESERVED

We Must Preserve Free Enterprise Capitalism


FREE ENTERPRISE CAPITALISM

• Made America the dominant economic and military power in the world

• Built America’s Middle Class as the largest economic market in the world (1945–1975)

• Miraculously, lifted hundreds of millions from abject poverty to a more humane standard of living

Our Heritage (1945 – 1980s)


THE FUNDAMETAL BUSINESS GOVERNANCE 1945 – 1982

1. The Customers 2. The Employees 3. The Shareholders 4. The Corporation Itself 5. The Communities/Nation

1980 Chamber of Commerce definition of the role of business includes: • Creating Jobs • Paying Employees fairly • Act as a good citizen


CREDO

We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who

use our products and services. In meeting their needs everything we do must be of high quality. We must

constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced

promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

We are responsible to our employees, the men and women who work with us throughout the world. Everyone must

be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of

security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We

must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make

suggestions and complaints. There must be equal opportunity for employment, development and advancement for

those qualified. We must provide competent management, and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must be

good citizens – support good works and charities and bear our fair share of taxes. We must encourage civic

improvements and better health and education. We must maintain in good order the property we are privileged to

use, protecting the environment and natural resources.

Our final responsibility is to stockholders. Business must make a sound profit. We must experiment with new ideas.

Research must be carried on, innovative programs developed and mistakes paid for. New equipment should be

purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse

times. When we operate according to these principles, the stockholders should realize a fair return.


PROSPERITY CAPITALISM

EARNINGS GROUP 1945 – 1981

TOP 1% 29%

NEXT 9% 103%

BOTTOM 90% 77%

REAL EARNING GAINS BY INCOME GROUPS

SOURCE: IRS.

Contemporary Version of Capitalism Governance

(1980s – Today)


TODAY, THE FREE ENTERPRISE ENGINE IS AT RISK

The Modern American Tragedy The Zip Code America


Income and Wealth Inequality How Real, How Big?


AFTER TAX MONTHLY SURPLUS INCOME BY DECILE, 2017

-$1,386.58

-$771.67

-$635.92 -$356.58

-$159.83

$41.42

$534.00

$914.25

$1,432.25

$4,459.58

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

1 2 3 4 5 6 7 8 9 10

SOURCE: CALCULATIONS BASED ON BLS CES 2017


SOCIAL / ECONOMIC INSTABILITY

SOURCE: CORAK 2011, OECD, CEA ESTIMATES


SOCIO ECONOMIC CONSEQUENCES

• Disastrous Education (Real Estate Taxes)

• Dropout Rates/Poor Preparation for College/Cortisol

• Virtually Non-Existent Early Education

• We’ve achieved complete segregation by income

• Lack of education and low income has lead to breakdown in family structure

• Single Parent Homes

• Lack of support for youth’s ambition and hard work

• Drug/Alcohol Abuse/Gangs/Crime

• Lack of Jobs/High Unemployment

• Anger, dissatisfaction, humiliation even for many employed but who cannot attain a decent standard of living

• The creation of a grossly undereducated citizenry. Bad news for democracy

• Loss of hope. Opiate epidemic. Suicide epidemic.

• Dramatic drop in life expectancy—15 years difference between the top and bottom 1%


• Wage increases for most employees continue at, or under inflation levels (Exception: impact of minimum wage legislation.)

• Total consumer debt (incl. credit card debt)—near all time high

• Education debt over $1.5 trillion

• By 2020 some 50% of US workforce (82 million) estimated to be “contingent” workers

• Medical insurance lost to 8-10 million people; costs up 20% plus

• The top 400 richest Americans pay a lower tax rate than the bottom 90%

• For most Americans, the economy is weak

TODAY FINANCIAL STRESS:


For Most Americans the Economy is in Real Trouble

• Major measurements today do not reflect the health of the nation (2018 vs. 2017)

• GDP growth applies only to the top 25% of plutocratic America

GDP = C + GI + BI + NET TRADE = 100%

CONSUMPTION (70%)

BUSINESS INVESTMENTS (20%)

GOVERNMENT/MILITARY (15%)

NET TRADE (-5%)


FOR MOST AMERICANS THE ECONOMY IS IN TROUBLE

GDP- CONSUMPTION GROWTH BY

INCOME BRACKET (2018 VS 2017)

TOTAL INCREASE. + 3.1%

TOP 25% BY INCOME. +140%

BOTTOM 75% BY INCOME.

* CONSUMPTION AVERAGES 70% OF TOTAL GDP


THE OFFICIAL UNEMPLOYMENT RATE IS MISLEADING

PERCENTAGE OF MALES AGED 25 TO 54 WHO ARE NOT WORKING

THE NEW YORK TIMES | SOURCE: ST. LOUIS FEDERAL RESERVE

Males aged 25 to 54

Official Unemployment

Labor Force

Non-participation


The Stock Market 84% of the value of the U.S.

stock market is owned by the top 10% of the population

MAJOR MEASUREMENTS TODAY DO NOT REFLECT THE HEALTH OF THE NATION


STOCKS ARE WAY UP. FOR MOST HOUSEHOLDS, NET WORTH IS NOT.

CUMULATIVE CHANGES IN THE WILSHIRE 5000 TOTAL-MARKET STOCK

INDEX AND IN MEDIAN HOUSEHOLD NET WORTH, SINCE 2000.

ADJUSTED FOR INFLATION. STOCK INDEX INCLUDES VALUE OF REINVESTED DIVIDENDS. BY THE NEW YORK TIMES | SOURCE: MOODY’S ANALYTICS.


IN SUMMARY

• Middle Class is gone; Upper Middle Class barely hanging on

• An India-style Caste System for the Two Americas

• At the top: A classic plutocracy (20%)

• The Net Result: The creation of grossly unequal opportunity for most of our citizens

• Loss of hope. Gone is the American Dream for most Americans

• Will and Ariel Durant in the 1960s: The Inequality Problem Always gets Resolved:

– Punitive Taxation—Redistribute Wealth

– Social Unrest—or Extremists through the ballot box: Redistribute Poverty

• Business better act now

– It has the financial capacity

– Government paralysis

– Tragically, the major economic indicators for our economic health are totally misleading (GDP growth, the stock market and unemployment rate). They do not reflect the economic reality of 70% of America

Contemporary Version of Capitalism Governance

(1980s – Today)


• Technology (friend and foe: Walmart and Amazon)

• Globalization (friend and foe)

• Poor Education/Support for the Young

• Decades of Unwise Political Decisions

• Loss of Union Bargaining Power

• Failure of Unions to Stay Relevant

• Financial Crisis: Loss of Jobs

• Shareholder Primacy

CAUSES OF INEQUALITY


• Shareholder Primacy becomes the new business governance (maximize short-term shareholder value)

• Shareholders have no legal, practical, or moral obligation to protect/support the interests of the companies in which they invest: — Limited liability — Sell shares at will

• Business and society now totally separated

• Business becomes a major contributor to income inequality

FREE ENTERPRISE CAPITALISM GETS HIJACKED


EVIDENCE OF THE FAILURE OF SHAREHOLDER PRIMACY

CORPORATE PROFIT MARGIN AT ALL TIME HIGHS


PRODUCTIVITY AND WAGES (THE GOOD AND THE UGLY)

GROWTH OF REAL HOURLY COMPENSATION FOR PRODUCTION/

NONSUPERVISORY W ORKERS AND PRODUCTIVITY, 1948 -2011

NOTE: HOURLY COMPENSATION IS OF PRODUCTION/NONSUPERVISORY WORKERS IN THE PRIVATE SECTOR AND PRODUCTIVITY IS FOR THE TOTAL ECONOMY.


LABOR LOSING OUT VERSUS CAPITAL

SOURCE: BUREAU OF LABOR STATISTICS, BUREAU OF ECONOMIC ANALYSIS

CORPORATE PROFITS VS.

EMPLOYEE COMPENSATION 1968–2020


EMPLOYEE ENGAGEMENT (All U.S. Companies)

ENGAGED DISENGAGED SERIOUSLY

DISENGAGED

32 52 16

GALLUP RESEARCH


PRODUCTIVITY GAINS HAVE BEEN SLOW

SOURCE: BUREAU OF LABOR STATISTICS; NOTE: SHADED PERIODS REPRESENT RECESSIONS

PRODUCTIVITY 1956–PRESENT


BUSINESS INVESTMENT (AS % OF GDP)

CONFERENCE BOARD: 40% OF CEOS REPORTED THEY FOREGO R&D,

TRAINING PROGRAM, ETC. TO MEET QUARTERLY EARNINGS

AS OF SEPTEMBER 2014, SOURCE BEA


SHARE OF US COMPANIES PUBLISHING NEW SCIENTIFIC RESEARCH

SHARE OF US COMPANIES PUBLISHING NEW SCIENTIFIC RESEARCH

SOURCE: OECD: DUKE UNIVERSITY


CHANGE IN BUSINESS EXPENDITURES ON R&D 2009–2013

Calculated in constant dollars and adjusted for

purchasing power parity

CHANGE IN BUSINESS EXPENDITURES ON R&D

SOURCE: OECD: DUKE UNIVERSITY


AT A MACRO-LEVEL TODAY’S TSR (earnings/share) IS ENGINEERED

• Stock Buybacks

• S&P companies study (2006–2015) — 54% of net income — $4 Trillion

• Prior to 1982: Market manipulation

• Excessive Dividends — (36% of Net Income)

• Hoarding Cash


SHAREHOLDER ACTIVIST ANALYSIS: POSITIVE ROLE

• A vital governance role to correct under-performing companies

• Work constructively with managements

• Warren Buffet: Our favorite holding period is forever

• In rare occasions: Takeover: Fix and hold


THE NEGATIVE ROLE OF ACTIVIST TERRORISTS (THE BUSINESS TERRORISTS)

Strip and Flip

Message to Management: “Manage Like an Activist”


JUSTIFICATION FOR SHORT TERM SHAREHOLDER VALUE MAXIMIZATION

Shareholders are a

Corporation’s owners and entitled to maximum returns

at any time (Quarterly)


BUT, IS THE SHAREHOLDER AN OWNER?

• Most Shareholders behave like renters

• Shareholders immune from all corporate liabilities

• No law suggests the shareholders are owners of a corporation (they, or course, have rights)

• Preponderance of legal opinion: The Corporation Owns its own assets (Lynn Stout, Joe Bower & Lynn Payne)


SUMMARY SHAREHOLDER PRIMACY CAPITALISM

WORKS FOR SHAREHOLDERS

• 90% plus of operating profit goes to shareholders

• Helped by aggressive tax incentives shareholders benefit disproportionately

• Corporations hoarding cash overseas or on balance sheet, avoiding US taxes

• Hedge fund activists and sell-side analysts terrorize business to drive shareholder value

• 2018 saw share buybacks and dividends at all-time highs

• The last 4 decades saw the greatest wealth transfer in modern times: from the poor to the rich


PROSPERITY CAPITALISM

Source: IRS.

EARNINGS GROUP 1945 – 1981

TOP 1%

29%

NEXT 9% 103%

BOTTOM 90% 77%

REAL EARNING GAINS BY INCOME GROUPS

SOURCE: IRS.


PROSPERITY VS. ENRICHMENT CAPITALISM GOVERNANCE

REAL EARNING GAINS BY GROUP & PERIOD

EARNINGS GROUP 1945 – 1981 1981- 2014

TOP 1%

29% 176%

NEXT 9% 103% 48%

BOTTOM 90% 77%

-3%

SOURCE: IRS.

The Path Toward Inclusive, 21st Century

Stakeholder Capitalism


THE WAY FORWARD FOR BUSINESS

In Order to Preserve Free Enterprise (Market) Engine:

• Change the behavior and culture of shareholder primacy

• Management and board fiduciary responsibility must optimize the interests of all vital stakeholders


BUSINESS ROUNDTABLE August 2019

The Purpose of the Corporation is to Serve Multiple Stakeholders

• Value to customer

• Investing in employees

• Dealing fairly and ethically with suppliers

• Supporting communities

• Generating long-term value to shareholders

EACH STAKEHOLDER IS ESSENTIAL


THE EMERGING BUSINESS GOVERNANCE

STAKEHOLDER CAPITALISM

• Customers

• Employees

• Shareholder

• Corporation

• Environment/Climate Change

• Communities/Nation

A VIRTUAL CYCLE OF MUTUAL SUCCESS


THE WAY FORWARD: EMPLOYEES (The Critical Starting Point)

• In the 21st Century, employees rather than capital are the critical value creators. They drive innovation and productivity.

• They need to be engaged and motivated. They must:

— share in the incremental value of innovation and productivity increases

— make a living wage (by region, based on CPI/other)

— be treated with respect and dignity to reverse the current level of disengagement between employees and corporations

— be empowered and rewarded to “delight” customers


2014 – Today (Russell 1000 Index)

JUST CAPITAL A MAJOR FORCE DRIVING STAKEHOLDER CAPITALISM

Most Just Companies:

13.6% Return

The Other 797 Companies: 9.9% Return


ENLIGHTENED BUSINESSES LEADING THE WAY


SUMMARY

• Stakeholder Capitalism must replace Shareholder Primacy

• Business must act with urgency

• Recognize that employees are today’s value creators

• Paying people fairly leads to increasing economic demand

— Sustained GDP growth

— Rebuild a viable middle class

• Investing in R&D and basic research leads to:

— More jobs

— Increased competitiveness

• Use technology to help people and to create more jobs

— Not just fire people

— Continuous training/retraining of employees


SUMMARY (continued)

BUSINESS IN PARTNERSHIP WITH GOVERNMENT

• Long term education change/improvement:

— Today—Completely segregated by income

— Make available early education from 3 years old for all kids

— Improve all secondary schools to Best in Class in the world!

— Trade schools/college by merit must be available to all

— Learn from other nations’ best practices (Germany)

— Business training/retraining

• Government to invest in future and relevant basic research

— Infrastructure, AI, clean energy, sustainability, nanotechnology, other

— Past successes: Space exploration, healthcare

• Government to use tax policy, enact legislation & regulation to encourage, incent, support, beneficial society efforts by business

© 2020, PETER GEORGESCU — ALL RIGHTS RESERVED CAPITALISTS ARISE 50

A Collaborative Effort to Make Change Happen:

CEOs

Boards of Directors Equity Holders Pension Funds

Enlightened Labor Leaders Media


AN IMPORTANT NEW PRINCIPLE EMERGES:

Business Success and “Community/Nation” success must be connected

The sustained purpose of business growth must ultimately result in an increase in the

quality and availability of solutions to human problems

The Ultimate Goal: Equal Opportunity

“The American Dream”


• Business acts now, with urgency to adopt Stakeholder Capitalism

• Business and Government collaborate to create a more just, more fair, more productive society

• Business stands for human values, morality and truth

• Then, Democracy can be preserved and strengthened

• America’s best days are ahead

THE FUTURE

capitalists arise© 2020, peter georgescu — all rights reserved capitalists arise 5 the fundametal...

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