A Capitalism of Owners
By Yvan Allaire and Mihaela Firsirotu
(IGOPP, 184 pages, $29.95)
Pity Indra Nooyi. When she won the coveted post of CEO at PepsiCo Inc. in 2006, she indicated she wanted to shift Pepsi from snack foods to health foods and from caffeinated colas to juices.
"It doesn't mean subtracting from the bottom line," she argued: The company would simply bring together what is good for business and good for the world, making money by doing good.
It sounded glorious. But a moment of truth came on July 21, 2011, when PepsiCo had to revise downward its guidance for the year's earnings per share. It had still done well in the previous quarter, with lots of signs of growth. Because of the desire to continue growing, Ms. Nooyi fended off calls to reduce staff in a quest for greater productivity, which she said would leave remaining employees working harder and more likely to face burnout.
But the stock price tumbled and analysts savaged her for failing to attack costs and supposedly neglecting the carbonated products. "Is she ashamed of selling carbonated sugar water?" a bottler told the Wall Street Journal.
Maybe you don't pity Ms. Nooyi, figuring that CEOs deserve all the criticism they get, in return for their gargantuan salaries. But Yvan Allaire, a former senior executive at Bombardier Inc. and now chair of the Institute for Governance of Private and Public Organizations, and Mihaela Firsirotu, a professor of strategy at the University of Quebec, believe the PepsiCo chief's situation epitomizes what's wrong with capitalism today.
In A Capitalism of Owners, they say the judgment against Ms. Nooyi, by the analysts and stock market, was that she "has too much of a social conscience. That may be good for the company in the long run but not for today's and tomorrow's stock price. If she persists, she should be replaced by someone who does not have these qualms."
In an era where companies must be flexible and strive for change, the authors say corporate leaders face a stressful paradox. The more competitive the markets for goods and services, the more businesses need time to adapt, innovating and putting in place new strategies (as Ms. Nooyi was attempting) without speculators breathing down their necks.
"Yet, in these very times of a raging competitive battle, contemporary financial markets, the supposed 'company owners,' pile on widely held publicly listed companies, bullying them for short-term results and then exit the stock en masse, leaving the place to speculators, financial jackals, and buzzards," the authors note.
Note the phrase "supposed" owners. Under capitalism, ownership belongs to the holders of shares. But the authors question whether today's stockholders are share owners or share flippers, speculating on the market. They note that in the 1960s, a share was held, on average, for seven years by its owner. Today, on the New York Stock Exchange, shares are held for less than a year – roughly the level at the time of the 1929 market crash, the authors note. Other major exchanges have seen a similar transformation.
This is a result of the so-called financial innovations of the past few decades – day traders, hedge funds, arbitrage funds, speculative funds, stock derivatives, short-sellers, and high-speed trading. All of these push corporate chieftains to deliver immediate, high results.
"Are these transient share flippers, speculators and game players really the legitimate owners of publicly traded corporations?" the authors ask, noting: "In most decent societies, tourists don't vote!" Nor should they at corporate annual meetings and in takeover battles.
The authors argue that stock holders only be given a vote after owning stock for a year, to dampen the ability of speculators to exercise control on the company.
They also argue that we should look more favourably on the types of companies that have been derided by the champions of neoliberal capitalism. Private companies, co-operatives, employee-owned, and state-owned companies are less subject to the stock market's casino mentality.
In Canada, for example, McCain Foods, Katz Group Canada, Cirque du Soleil, Kruger Inc., Jim Pattison Group and employee-owned PLC Construction are all enterprises that have not needed to go public to succeed. "Indeed, most of them would claim that they have succeeded because they did not go public," the authors state.
They also see value in companies with a dual class of shares, with the founders retaining a controlling block of voting shares to insulate the company from stock markets. They note that many of Canada's industrial champions such as Bombardier, Rogers Communications, Shaw Communications, CGI, Power Corp., Onex Corp. and Telus have dual-class shares. As long as minority shareholders are protected, the authors see value in dual-share protection.
The book picks up from the lambasting Mr. Allaire and Prof. Firsirotu gave capital markets in their 2009 effort, Black Markets … and Business Blues. That book had a number of strong recommendations for reform, but this new book details a more comprehensive agenda for change.
It should be essential reading for directors of companies and senior executives who, like Ms. Nooyi, are under the gun, as well as legislators, regulators and members of the public who are concerned about the situation.
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