“Who Will Buy Your Cars?”
An apocryphal story described in a past blog post told of the early introduction of robots in a plant manufacturing Ford cars. According to the story, Walter Reuther, president of United Auto Workers, was taken on a tour of the plant. A company official on the tour asked Reuther how the union was going to collect dues from the robots, to which Reuther responded with a question: “How are you going to get them to buy Fords?”
A retired CEO of global marketing communications firm Young & Rubicam has written a book challenging heads of U.S. corporations to recognize that an increasing segment of the population is seeing their ability to spend eroding, not by automation, but by capitalism’s obsession with increasing stock price at the expense of all other considerations. Peter Georgescu looks at the rise in productivity compared to the flat-lining in wages and concludes that “For the past four decades, capitalism has been slowly committing suicide.”
Georgescu references statistics that show half of all U.S. households have to borrow each month to pay expenses, and a great many will eventually find themselves in bankruptcy. “The reality is that just over half of American households are technically insolvent…. If wealth rises to the highest ranks of our society without circulating back into the system in the form of wages and benefits, then spending inevitably declines or collapses.”
Business managers and investors have made shareholder primacy the guiding principle of U.S. corporations, a change the author traces to early globalization in the 1970s. Foreign competitors with lower labor costs prompted U.S. manufacturers to maintain profits by cutting jobs and wages, when Georgescu said they should have been investing in new industries to grow higher-wage jobs. Equating growth in stock value with economic health and progress led to obsessive emphasis on short-term returns.
He depicts a thriving economy as an interdependent ecology of interests. “It’s an interlocking system in which each element [employees, customers, communities and shareholders] depends on the health of all the others…. It’s the way we did business in America when the country was sitting on top of the world and when CEOs were people who took all these responsibilities seriously.”
Georgescu contends that “only by abandoning short-term shareholder primacy will a company find its path to greater profits down the road, while supporting society, helping to re-create a viable middle class, and rekindling hope in the American dream.” He offers two principles for restoring balance and assuring long-term growth. First, compensate and treat employees appropriately, ensuring that education starts early for everyone and parallels the requirements of employers; and second, invest aggressively in R&D that sustains innovation.
Georgescu has called on numerous CEOs along with Ken Langone, the cofounder of Home Depot, making the case for setting aside shareholder primacy. Their diagnosis of the long-term impact was understood and accepted, but individual CEOs are unwilling to take first steps against standard practice. In the absence of such initiative, Georgescu foresees government stepping in, dictating what business must do to reverse the effects of shareholder primacy. His foresees government involvement would be accompanied by higher taxes, a judgment shared in a recent Washington Post opinion piece by economist Robert Samuelson.