Financialization at work: Shareholder primacy and stagnant wages in the United States

Abstract

Financialization has been ‘at work’ in the United States for nearly half of a century, as corporate executives have increasingly prioritized shareholder payments over other productive uses of corporate resources. Over the same period, employee bargaining power has fallen and wages for non-executive workers have stagnated across sectors. This article examines the effects of shareholder primacy on labour compensation in the United States in the neoliberal era at the aggregate, sectoral and firm level. Specifically, the article analyses changes in the relationships between rising profits, shareholder payments, and wages over the past four decades, finding evidence that shareholders’ gains come at the expense of employees in publicly traded corporations. The growing power of shareholders has been neglected compared to traditional arguments for wage stagnation, including globalization, de-unionization, rising market power and changes in industry composition. To disincentivize corporate behavior that prioritizes shareholders, a policy agenda is proposed that ends the practice of stock buybacks and institutes a stakeholder approach to corporate governance.

Exit, control, and politics: The structural power of finance under asset manager capitalism

“…It shows, first, that the vast majority of corporate investment is financed from internal funds, that is, retained profits. Second, while the stock market had not been a source of net financing for the corporate sector since 1970, its contribution turned negative in the 1980s, meaning the stock market has helped ferret capital out of the corporate sector (Henwood, 1997;Mason, 2015), at the expense of workers and investment (L. E. Davis, 2018;Palladino, 2020). Third, and most remarkably, even traditional loans have made a negative contribution since 1990.…”

Economic Policies for Innovative Enterprises: Implementing Multi-Stakeholder Corporate Governance

“…Evidence for the rise of shareholder payments can be found in the rise of shareholder payments in the form of stock buybacks, which totaled $6.3 trillion from 2010 to 2019 (Palladino and Lala 2020). A specific strand of the literature has focused on the relationship between rising financialization and the falling labor share, showing a negative relationship between both rising financial receipts and rising financial payments and labor in the United States and Europe (Barradas 2019; Lin and Tomaskovic-Devey 2013; Lin 2016; Palladino 2020; Fligstein and Shin 2007; Cushen and Thompson 2016). In contrast, as shareholder primacy tied the remuneration of corporate executives to share prices, pay for corporate elites skyrocketed; the pressure coming from institutional shareholders to maximize shareholder value aligned with managers’ own self-interests (Hopkins and Lazonick 2016; Lazonick and Shin 2020).…”

Economic Democracy at Work: Why (and How) Workers Should be Represented on US Corporate Boards

“…The underlying error here in both cases is the assumption that corporate governance operates efficiently, so that, among other outcomes, any current structure already reflects worker preferences, rather than power imbalances and information asymmetries between workers and shareholders, as well as the power of the shareholder class to set corporate law (Ireland 2010). Today, it is shareholders who are currently "eating up" the productive uses of the firm in the United States, for example through the use of excessive stock buybacks, which raise share prices that benefit short term share-sellers and corporate executives at the expense of productive investment in future firm productivity (Lazonick 2014;Palladino 2020a). 7…”

“…Shareholder primacy contributes to widening economic inequality, as labor's share of income has stagnated while shareholder payments (increasingly in the form of stock buybacks) drive up the incomes of the wealthiest households (Barradas 2019;Lazonick 2014;Lin 2016;Lin and Tomaskovic-Devey 2013;Palladino 2020a;Piketty 2020). The focus on increasing share prices has been widely recognized as one of the factors driving the squeezing of labor costs, as activist investors threaten to discipline management when shareholder returns are not their sole focus (Crotty 2003;Davis 2009;Wartzman 2017).…”

“…The focus on increasing share prices has been widely recognized as one of the factors driving the squeezing of labor costs, as activist investors threaten to discipline management when shareholder returns are not their sole focus (Crotty 2003;Davis 2009;Wartzman 2017). Empirical evidence has found a strong relationship between shareholder primacy and negative financial impacts on labor, mainly at the aggregate level (Barradas 2019;Fligstein and Shin 2007;Palladino 2020a). Eighty-eight percent of corporate equity and mutual fund shares are owned by the top ten percent of US households by wealth (not including pension entitlements) (Federal Reserve 2020).…”