Standpoint Research (which actually happens to have a very good track record) did something remarkable the other day, it downgraded Apple on a moral standpoint, arguing that:
For Apple Computers to pay their workers $2 an hour while they have $150B in the bank is nothing short of obscene [ZeroHedge]
Of course, Apple is far from the only company trying to manage world disparities. Companies like Nike pay sport stars multi-million dollar endorsement fees, sells shoes for $100 and more while they cost a few dollars to make and these shoes are assembled in low-paid sweatshops in Asia where people earn a few bucks an hour.
Now, there is a lot of things that can be said of this. For starters, these jobs are in developing countries, where $2 an hour jobs often mean the first step to progress, and where the realistic alternative between these kind of (often very hard) jobs is no jobs at all. However harsh these jobs, if the economy is well managed, this kind of assembly work provides an opportunity for lifting a whole economy out of a low income equilibrium.
While we understand that some people might find this reality hard to stomach, we're actually not against these developments as the alternative is likely to be worse. It's up to local governments to introduce legislation and regulation to ameliorate the worst cases and to balance the risks of developing the economy versus the rights and safety of their workforce and environment.
We do see some danger of a race to the bottom in terms of labor (and environmental) regulation though, some minimal standards internationally would be helpful here, but on the whole, we agree with ZeroHedge that this is capitalism.
However, there is another interesting case going on which also goes to the heart of capitalism, and that is Samsung's (OTC:SSNLF) decision to pay its entire workforce a bonus averaging $4000 per employee (it has some 240,000 employees):
Samsung Electronics Co Ltd, the world's largest smartphone maker, has reignited shareholder calls for more returns after splashing out on a special employee bonus estimated at nearly $1 billion. [Reuters]
Apparently this has created some fuss, shareholders are unhappy and demanding higher pay-outs from Samsung's gargantuan profits and it's $50B cash reserves. We have seen similar requests from Carl Icahn for a big pay-out from Apple's even larger kitty.
Despite our name, here we are entirely in Samsung's camp. In fact, we would argue that this is an example that deserves much wider following. In essence, we have three reasons for this position:
- A company belongs as much to the employees as to the shareholders
- Median wages, especially in the US, have fallen way behind productivity
- Bonus payments can be used to spur involvement and productivity
The heart of a company
We think that the proposition that companies should be run for the sole benefit of shareholders is a self-defeating proposition. For starters, employees usually have far more at stake. It's way easier for a shareholder to liquidate or diversify risk than it is for an employee, who often have to invest in company specific skills or be far along a corporate career path that would be nullified elsewhere.
Second, in the times of knowledge driven organizations, capital is basically a commodity and the knowledge, capabilities and creativity of employees is what drives competitive advantage. We think that shareholders capitalism has a habit of leading companies to see labor primarily as a cost to be minimized
This predisposes companies to embark on a command and control style of management which isn't conducive to engendering the environment of trust on which free flow of information and ideas which knowledge driven organizations need. But perhaps we have been reading too much management blurb.
We have also seen the rise of 'organizational economics' enter the field, both in theory and in practice, and we're fairly familiar with that literature. The premise, as with much of economics, is that work is a 'disutility,' that is, people supposedly work only for financial gain and slack off as soon as circumstance permit, and this can only be countered by an intricate system of financial incentives and surveillance.
Work might very well be a disutility when behind the counter at McDonald's, but whether that holds true for the majority of the professions on which the competitive advantage of so many organizations rely remains to be seen. Such inherently distrusting organizational and management approaches risk killing the involvement of the most valuable and creative employees, diminishing their professional ethic and reduce their cooperation to that which can be contractually enforced ('perfunctory cooperation').
Perfunctory cooperation doesn't cut it when performance depends on the interpretation, creativity and problem solving capabilities of employees and it isn't conducive to creating an organization in which ideas, information and knowledge are flowing freely.
Shareholders main role used to be to provide capital to entrepreneurs and companies, but lately, the flow of funds have reversed and companies are returning way more capital to shareholders. This is a curious and somewhat worrying development, and could reinforce pressures to treat labor simply as a cost to be minimized.
Productivity, wages and secular stagnation
For each individual company, wages can be seen as a cost and demand an externality, but for all firms together this no longer holds. We have attended readers to the growing gulf between median wages and productivity before, but we're fairly sure it's an important development and one that has been going on since the 1970s.
The graph above contains median (most frequent) wages (including benefits), that is, it reflects as much a deterioration in job quality as it does reflect lagging wages itself. Nevertheless, the trend is, in our view, alarming, for the simple economic reason that it strongly suggest that demand for goods and services does not rise in tandem with the supply of these.
This tunes in directly into the so called 'secular stagnation' debate opened by Larry Summers, who argued that even credit infused asset bubbles can't produce an overheated economy anymore. Daniel Davies from Crooked Timber summarized it as follows:
the thesis is that since about the mid-1990s, it has been the case that it has only been possible to achieve anything like full employment in America during periods when the private sector has been chronically over-consuming and increasing its debt levels. The "natural rate of interest" consistent with full employment has been consistently negative all that time
We offered wages lagging productivity as the main explanation for this long before the debate on secular stagnation started. So while it's clearly not rational for an individual company to raise wages in order to address demand deficiencies, it's rational for corporate America as a whole. The question is how.
Samsung's opening shot
One way to do it is what Samsung just did, provide employees (all of them) with a rather massive bonus. But this pits employees against shareholders, and we think this is unnecessary. A much better way would be to make part of wages dependent on performance, and pay part of it in shares, rather than cash. This has the following advantages:
- It makes employees co-owners, giving them a bigger stake in the company and creating more involvement and a bigger sense of ownership
- It can help making wages more flexible, this is one reason why unemployment never really got out of hand in Japan, despite an epic asset bubble bursting
- It helps restoring a macro balance between wages and productivity
- In tying these payments to concrete improvements, these can be a method for increasing productivity growth, potentially making everyone better off in the company.
The last point refers to a practice called gainsharing. It isn't a miracle cure, but we think when executed smartly, these four advantages of spreading more of the gains to employees can be significant and do not have to pit employees against shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.