March 2020
HSBC bank announced recently that it will be laying off 35,000 employees – more than 10% of its worldwide staff. So I expected to read that the 150-year-old bank (with 235,000 employees in 64 countries) had lost money last year. Not so. In fact HSBC cleared $5.97 billion in profit in 2019.
The problem is that $5.7 billion is 53% less than they earned in 2018.
HSBC’s employees are being sacrificed to support the price of HSBC stock. Since about 1980, the top-level people in charge of public companies have been rewarded almost exclusively with stock and stock options. Investing in new businesses, improving efficiency, increasing sales — are all measured by the effect they have on stock price.
Given this reward system, these executives do everything they can to maximize their company’s stock price. For example, many public companies (with some exceptions, like Amazon) have been buying back their own stock instead of investing their profits in expanding the business. HSBC been an active buyer of its own stock.
By one estimate, corporations themselves bought more than 50 times as much of their own stock in the last ten years as the public, foreigners, pension funds, investment funds, or other institutional buyers put together. The money used for buybacks is not available for investment in equipment, plants, employees or research and development.
This is all part of the “financialization” of the economy, according to economists. Nobel-prize-winning economist Paul Krugman puts it this way:
“During the U.S. economy’s greatest generation — the era of rapid, broadly shared growth that followed World War II — Wall Street was a fairly peripheral part of the picture. When people thought about business leaders, they thought about people running companies that actually made things, not people who got rich through wheeling and dealing.
“But that all changed in the 1980s, largely thanks to financial deregulation. Suddenly the big bucks came from buying and selling companies as opposed to running them.
“In many cases, these financial deals saddled companies with crippling levels of debt, often ending in bankruptcy and job destruction — a process that continues to this day.”
The profits that used to go into building businesses or compensating employees now go to investors. As Wikipedia puts it: “The aim is not to provide tangible capital formation or rising living standards, but to generate….capital gains that accrue mainly to insiders, headed by upper management and large financial institutions.”
Perhaps the most rapacious business practice in the financialized economy is private equity. These companies buy other companies -often by bidding on public companies- borrowing against the assets of the acquired company to fund the purchase.
Once they have privatized the company, they say they will improve it and make it public again, with a higher stock price. But often that is not what happens. Ask Toys ‘R Us or Sears. They commonly end up in bankruptcy court, where the lenders get stiffed, and the private equity people can keep the money they borrowed. The business collapses, tens of thousands lose their jobs, and the financial geniuses are laughing all the way to the bank.
The bottom line is that what’s good for CEOs is bad for the rest of us. From Wikipedia: “There has been a drop in net disposable income after paying taxes and withholding “forced saving” for Social Security and medical insurance, pension-fund contributions and – most serious of all – debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance….This diverts spending away from goods and services.”
What can we do about this? My suggestion is that employees be given a seat on the company’s board, as they are in Germany, so they can object to financial strategies that take money from employees and give it to investors. I would also require companies having a profitable year to transfer some stock into an employee trust account managed by trustees elected by the employees. Dividends would go to employee benefits and employees would have an increasing number of shares to vote.
