Very interesting piece by Steve Denning on the disconnect between corporate profits, shareholder value and the lack of investment by current public companies. The essential point, public companies are stealing from the future to feed the present executive pay packages.
Over the last month, the Financial Times has been doing a great job in cataloguing the problems caused by the shareholder value theory. Now Robin Harding has terrific article pinpointing its role in undermining the US economic recovery.
In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?
In standard economic theory, this makes no sense. When profits go up, companies should be seizing investment opportunities to lay the groundwork for even more profits in future. In turn, that investment should create jobs, generate more capital goods and lead to higher wages. That’s how capitalism is meant to work. So why isn’t it happening? Mr. Harding explores systematically why all the leading scapegoats for what’s gone wrong—regulations, Obamacare, tax policy, fear of another financial crisis and so on—and shows why they don’t add up.
The article goes on to further say: