User:Jhutch2872/Inequality within publicly traded companies

Inequality within publicly traded corporations is a fairly new phenomenon. It was not a primary concern until the United States started to move farther away from manufacturing and labor, and into the finance sector. With this shift, executives of these corporations have put less emphasis on using earnings to reinvest in employees, and the overall well-being of the company, and instead have put more emphasis on boosting stock profits for personal gain. This is done through share buybacks for personal gain, allocation of profits, and lack of accountability. These personal gains leave very little profit to supply higher incomes for employees or invest in future growth of the company.

History

Since the 1970s, the United States has experienced an ever-widening gap between the top one percent of income earners, in comparison to the other ninety-nine percent. As a result, there has been less mobility among social classes as the rich continue to get richer, while the middle class faces wage stagnation.

By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price and can enable the company to hit quarterly earnings per share targets This practice really took off in the 1980s, when critics claimed that corporate leaders were not doing enough to maximize returns to shareholders. This resulted in boards of directors trying align the interests of management and shareholders by increasing the amount of stock-based pay within executive compensation. This is done through an open-market repurchase. From 2003-2012, the top 10 repurchasing company CEOs received, on average, a total of $168 million each in compensation, with 34% coming in the form of stock options and 24% in stock awards. Now, it is expected that stock buybacks will surge by 18 percent in 2015, exceeding $600 billion and accounting for nearly 30 percent of total cash spending.

Allocation of profits has transformed within businesses throughout the years. What used to be value creation has now turned into value extraction. Since the end of World War II and until the late 1970s, businesses used a method known as the "Retain-and-Reinvest" approach. Now, however, businesses use the "Downsize-and-Distribute" approach. The reluctance to boost capital investment in operations, people, and product has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956.

Three decades following World War II, hourly compensation of the vast majority of workers rose 91 percent, roughly in line with productivity growth of 97 percent. However, for most of the past generation (except for a brief period in the late 1990s), pay for the vast majority lagged further and further behind overall productivity. From 1973 to 2013, hourly compensation of a typical worker rose just 9 percent while productivity increased 74 percent.

Policies have been put in place in order to try to combat inequality within publicly traded corporations. The Dodd-Frank Act was signed into federal law by President Barack Obama on July 21, 2010. This act affects the oversight and supervision of financial institutions. It is the most comprehensive financial regulatory reform measure taken since the Great Depression.

Causes

Stock Buybacks

Companies use up to half their earnings to buy back their own stock with dividends taking up to another 37%. In 2012 the 500 highest-paid executives named in proxy statements of the U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock rewards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price and can enable the company to hit quarterly earnings per share targets. From 2003-2012 the top 10 repurchasing company CEOs received, on average, as total of $168 million each in compensation, with 34% coming in the form of stock options and 24% in stock awards.

Allocation of Profits

Allocation of profits has transformed within businesses throughout the years. What use to be value creation has now turned into value extraction. Since the end of World War II and until the late 1970s, businesses used a method known as the “Retain-and-Reinvest” approach. This is where executives would retain the earnings of the company and then reinvest in future capabilities, such as hiring employees that will keep it competitive and supplying employees with higher incomes. This approach helped create sustainable prosperity, or stable economic growth. Now, however, businesses use the “Downsize-and-Distribute” approach. This is where executives find ways of reducing costs, such as implementing pay cuts for employees, and using the freed up cash to promote financial interests. This contributes to the stagnation of economic growth for much of the middle class, causing employment instability and immobility.

Accountability

Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b-18 of the Securities Exchange Act. Under the rule, a corporation’s board of directors can authorize senior executives to repurchase up to a certain dollar amount of stock over a specified or open-ended period of time, and the company must publicly announce the buyback program. After that, management can buy a large number of the company’s shares on any given business day without fear that the SEC will charge it with stock-price manipulation, as long as the amount does not exceed 25% of the previous four weeks’ average daily trading volume. The SEC only requires companies to report total quarterly repurchases, not daily ones, meaning that it cannot determine whether a company has breached the 25% limit without a special investigation.

Policies

Dodd-Frank Act

The Dodd-Frank act was signed into federal law by President Barack Obama on July 21, 2010, at the Ronald Reagan Building in Washington, DC.

It is the most comprehensive financial regulatory reform measure taken since the Great Depression. It affects the oversight and supervision of financial institutions. Numerous government agencies are responsible for regulating financial institutions, and make up the Financial Stability Oversight Council. These agencies include the OCC, SEC, CFTC, FDIC, FHFA, NCUA, etc. The council’s duties include collecting information necessary to assess risks to the U.S. financial system, as well as monitor the financial services market place and identify potential threats to U.S. financial stability.

Dodd-Frank Act Stress Tests (DFAST)

Dodd-Frank Act stress tests would measure how banks hold up under hypothetical economic conditions, where banks are given a pass or fail grade. The stress tests were originally created after the 2008 financial crisis when banks were found to be overleveraged and overexposed to a bubbling real estate market (Touryalai, Halah).  However, now they are being used to their fullest potential. “The tests are now used to check whether the system as whole can handle an economic shock,” says Viral Acharaya, professor of economics at New York University’s Sterns School of Business (Touryalai, Halah). This will apply to what banks do with their capital for shareholders, like offer dividends or buyback stock, etc .DFAST tests whether banks sufficient capital to absorb losses and support operations during adverse economic conditions.

“Pay Versus Performance”

This new SEC rule will be directly aimed at better examining executive pay and where it is coming from, and will require companies to disclose the relationship between executive pay and performance, starting with 2016 annual schedule 14A and schedule 14C proxy and solicitation statements issued prior to shareholder meetings. More specifically, it will require a company to disclose CEO pay and performance both for itself and for companies in a peer group in a table. Unlike other disclosures already required, this rule will require reporting of bonuses and other compensation actually paid out (as opposed to accrued or vested) to a company’s chief executive. These are to be placed in the table alongside the performance of the company and its peers, defined by total shareholder return.

References

Category:Business culture