Limited Liability – Good or Bad for Society? (Part 2)

Business & Management.

I.B. Business syllabus links – 1.2 – Types of organisation (plc´s), 1.2 – Limited Liability, 1.4 – Stakeholders, 1.3 – Profit maximization, 1.3 – Business ethics, 1.3 – Business strategy, 1.6 – Growth & evolution

He-Joon Chang in his popular book “23 Things They Don´t Tell You About Capitalism” (see my previous post) argues that limited liability, combined with how plc´s have been managed recently, particularly in the Anglo-Saxon world of the USA and the U.K., has been bad for society.

He traces the origins of the problem back to 1981 when Jack Welsh, the then CEO of General Electric, coined the term ´maximizing shareholder value´. According to Welsh, this is what companies should do; aim to raise company share prices by increasing profits as much as possible and give as much dividend back as possible to shareholders. Managers were encouraged to do this by having part of their pay in share options. This created what Chang calls ‘an unholy alliance’ (P17) between shareholders and senior executives, both of whom benefit if the share price of their companies rise and rise.

What were the consequences of these policies?  According to Chang ” Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits and wage increases were surpressed …. The suppliers and their workers, were also squeezed by continued cuts in procurement prices” (P18). In other words, the other stakeholders in the business lost out.

Another strategy, moreover,  aimed at maximizing shareholder value became more and more popular – share buybacks. This is when a company uses it’s own profits to buy back it’s shares in order to artificially increase their value. According to Chang, prior to 1980 share buybacks made up just 5% of US company profit spending, by 2007 this figure had reached 90% and in 2008 just as the economic crisis was taking hold, reached 280% (P20)

These policies, moreover,  don’t even make good business sense. Less investment by companies (most of the money is being used to buy back shares or is being given to the shareholders) leads to lower long term productivity. Workers who are forced to accept wage cuts and more temporary or short term contracts, become demoralized and demotivated and consequently productivity falls.

Chang backs up his arguments with some astonishing statistics. Quoting the research of Willam Lazonik, a business economist, he says “…Had GM not spent the $20.4 billion that it did in share buybacks between 1986 and 2002 and put it in the bank (with a 2.5% after tax annual return), it would have had no problem finding the $35 billion that it needed to stave off bankruptcy in 2009” (P20). (GM, the large US automobile manufacturer, went bankrupt in 2009 and had to be bailed out at great expense using taxpayers money by the US government).

Below is a video outlining the story of GM´s bankruptcy:-