In an era when stock market wealth seemed to grow on trees–and trillions vanished as quickly as falling leaves–it’s an apt time to ask where wealth comes from. Does the stock market “create” wealth, as we are told, or capture wealth that rightfully belongs to others?
This is a question investment advisors should ask. Are stock market gains sustainable, or is the market killing the goose that lays the golden egg? A company refusing to clean up pollution, as GE has in New York’s Hudson River, in effect transfers wealth from the community to shareholders. A company demanding longer hours without pay increases transfers wealth from employees to shareholders. A bank engaging in predatory lending transfers wealth from customers to shareholders.
Wealth transfer is not what capitalism is about. It is about wealth creation. But when stock market demands are too great, companies are forced into illegitimate and unsustainable means. Lawsuits, environmental collapse, employee exhaustion or exodus, legislation–there are many ways such illegitimate gains end. When they end, shareholders can be sorely disappointed with their advisors, if they believed stellar earnings would increase indefinitely.
The time has come to ask a fundamental question: Why are shareholder interests primary? Because they take risk, and provide capital for company use? The truth is, most “invested” dollars go from one speculator to another. Stockholder money reaches corporate coffers only when companies sell new common stock. According to the Federal Reserve, common stock sales represent only one of every $100 trading on exchanges.
We say stockholders fund corporations. In reality, corporations fund the stock market. The stock market is not capitalizing companies but decapitalizing them.
The situation is doubly unsustainable. Shareholder interests are served at the expense of employees, the community, and the environment, yet shareholders contribute nothing to justify this. This mirrors the French aristocracy before the Revolution, when the nobility had dropped its productive functions, yet expected dues and fees to continue. The people begged to differ.
Stockholder interests still govern corporations today, just as the interests of the king and the aristocracy governed America before our own Revolution. What Thomas Paine said of that arrangement might be said about stockholder primacy today: “There was a time when it was proper, and there is a proper time for it to cease.”
It is no longer appropriate for corporations to make shareholder interests primary; doing so makes the rich richer–which is not what democratic society is about. Of all financial wealth held by American households, 10% of the population holds 90% of the wealth. It is no longer sustainable for the interests of this tiny group to be served at the expense of employees, the community, and the environment. Genuine creation of wealth is one thing, but illegitimate extraction of wealth from others is something else entirely. The financial community will be ensuring its own future to insist on this vital and valid distinction.
One step advisors can take is to educate themselves and their clients about shareholder activism. Advisors can remind clients that to depend on gains from such illegitimate practices is to build one’s financial house on shifting sand.
In a broader sense, advisors are in a position to openly question the system’s most fundamental bias: the assumption that maximum profit for shareholders takes precedence over all other goals. A courageous lead was taken here by Bob Lincoln, chief strategist at Walden Asset Management, the social investing division of United States Trust Company of Boston. In a client newsletter, Lincoln suggested modest future growth in the stock market, rather than maximum growth, would represent “a healthy change.” As he put it, “There is little doubt that, in the long run, economic growth that is not shared more equitably will prove to be unsustainable.”
If this is a rare voice in the investing world today, here’s hoping it becomes a more common one. The sustainability of the financial community itself may depend upon it.