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How not to run an Economy:
Ownership

How does the ownership of our most powerful companies affect our communities and our economy as a whole?

In today's world, a single model of business ownership has come to be the dominant force. It has been responsible for providing such modern conveniences as the UK and US rail networks, ubiquitous mobile phones and a computer in every western home. It also led to the decimation of American public transport, has given us the highest difference between rich and poor since the second world war, obliterated organised labour unions and quite possibly caused anthropogenic global warming. The Corporation as an entity (it actually has the rights of a 'natural person', but for that story and much more I'd refer you to Joel Bakan's fantastic work, the Corporation) is defined largely by its system of ownership. What separates a corporation from other, more normal types of business is that it is owned by shareholders who, very often, have no direct relationship with the company other than owning it. All companies floated on the stock exchanges of London, New York, Tokyo, Paris, follow this model. Indeed, the shares that are traded, and are collected in such familiar names as the FTSE100, the Dow Jones Industrial Average and the CAC40, are just that - the ownership of a company.

Why would anyone want to trade the ownership of companies, you may ask. Well, these companies regularly (normally yearly, sometimes more often) pay cash dividends to their shareholders. These dividends are the profits which that business has made in that period of time. Generally, the companies that make the biggest and most consistant profits pay bigger dividends, and therefore become the more sought-after shares. However, share prices change every day, based on rumour and market sentiment, on anticipation of actions a company is likely to make, or simply how the rest of the world economy is considered to be doing. The management of these companies often float the company on a stock exchange in order to gain a sizaeble injection of cash, while employees may also gain shares in the company, often as a substitute for existing pension funds. People or companies from outside the Corporation who buy shares are generally only interested in making money from their investment, so the company must therefore make sure the share price is increasing by maximising its profits, either through innovation or through cost cutting. Meanwhile, the workforce shares this motivation as their final pensions settlements are linked to the performance of the company's share price (not annual profits).

While investment in innovation is costly and uncertain, especially in the short-term (which is all investors are generally interested in, especially considering shares can be traded at over 10,000 a second), cost cutting has become much easier with globalisation. Companies no longer need all their production to come from their home country. In fact, it's often much more profitable to relocate their factories overseas, preferably to somewhere with low wages and more relaxed labour laws. The thing is that once one company does it, all its competitors have to follow, otherwise they wouldn't be maximising their profits and their share price would go down. However, cost cutting is not simply done by moving to China. Airlines, for example, cannot easily relocate their operations. After 9/11 many US-based airlines had financial difficulties and had to go into what's known as Chapter 11 bankruptcy. This is not a bankruptcy in the traditional sense, but rather a way that allows the business to restructure by renegotiating employees' pay and pensions. The last major airline standing was American Airlines, which last month filed for Chapter 11, citing high fuel prices and unsustainable labour costs & obligations. The aim is to cut the wage bill in half, while some or all of the $18billion pension deficit (a pot of money which had been given away as profits in the good years to improve the company's performance on the stock market) will be written off through enforced labour settlements. This is done by effectively sacking the entire workforce, who will be obliged to take reduced pay and pension arrangements in order to stay in their old job. Sacrificing employees' pay and future well-being does not make the management of American Airlines evil. They are forced to do this to be able to compete with their post-bankrupt rivals and return to profit. What's more, they are, in a way, helping their employees who have invested in shares in the company by restoring the share price, but only after it had fallen 80% on the day of the announcement.

Making a company 'public' oftentimes leads to management losing control of the future of the corporation (known as a PLC in the UK). Cadbury's chocolate was founded by a family of Quakers who, having established a highly successful business, bought enough land for their Bourneville factory in the south of Birmingham to build suitable housing for the workforce. This act of philanthropy, providing for a content and healthy workforce, helped to establish Cadbury's chocolate as Britain's favourite. It was with some shock, therefore, that in early 2010 it was announced that Cadbury's would be bought by the multinational conglomerate Kraft. Despite reluctance both within government and management to sell this national icon, Kraft were able to persuade enough shareholders of the company to sell to them that they could force the rest to sell at 8.40 a share. Of the 11 billion it cost Kraft to buy Cadbury's, 7 billion was borrowed, with the British company used as security for the loan using a mechanism called 'Leveraged Buyout' (the same as recently happened to the English football giants Manchester United and Liverpool). Not only was the company taken over, it inherited 7billion of debt from its own purchase, forcing Kraft to go against the promises made in acquiring Cadbury's and close the company's Keynsham factory, with the loss of 400 jobs. What was once a model, socially-responsible enterprise became an debt-laden investment vehicle for institutional or just very rich investors - the primary beneficiaries of the sale.

The kind of philanthropy from business owners towards their workforce was not uncommon in Britain in the 1800's, and Bourneville is far from the only model village constructed at the time to ensure employees' general well-being. There is nothing to stop privately-owned companies from making such investments today, and although the days of manufacturing villages are sadly behind us in the west, long-term investment and business-planning is still much easier in private firms. This is one reason facebook, for example, has so far resisted floatation - although it's looking increasingly likely that management will soon take the money and run. To build something, you need to reinvest money into the business wisely, and not give away all excess earnings as profit to wealthy shareholders. By going public, however, a company is forced to negate long-term planning in the name of short-term profit maximisation.

Due to the huge cash injections which usually result from floating a company, corporations have the financial muscle to steam-roller local competition, which either get swallowed-up, goes bankrupt (the real kind, not the Chapter 11 sort) or are forced to float themselves. The announcement of a new supermarket being built in an area usually comes with a barrage of newspaper articles full of optimistic predictions of job creation and all the benefits it will bring to the local economy. Meanwhile, small independent shopkeepers are often unable to compete with the big chains - especially when supermarkets are able to sell certain products at a loss (so-called loss leaders) in order to kill the competition, only to charge more for such items as bread, meat and fish when the have a local monopoly. This means the only competition which can exist is between the big supermarkets, of which in Britain there are just four. Ever wondered why there are no more independent bakers or grocers in your area? This is why. But wait, it gets worse. The jobs created by a new Tesco or Walmart will generally be low paid, around minimum wage, and the profits made by a big chain store, rather than remaining within the community, are taken as profits by the company as a whole and are paid to shareholders as dividends. This means a supermarket, or any Corporation-owned store for that matter (such as the vast majority of the British High Street), acts as a vacuum cleaner for wealth in the locality, effectively removing money from a village or town and passing it up to institutional or other shareholders.

Just why governments and municipalities allow such things to happen, as well as the reason decisions made by officials so often seem to benefit big business above smaller enterprises and citizens rights, will be covered in the next article in the series: Government as a Corporation.

Adam R. Mathews, West Midlands, 20 December 2011

This article is part of the series How not to run an Economy.

How not to run an Economy

"What choice do we have?" It's a common refrain these days; while the economic cracks in the system have been proliferating and widening, the explanations are generally seen as incomplete, and the solutions as little more than useless. In order to build a better economy and reform the system, we need a better understanding of the fundamental causes of the pickle we find ourselves in. This series addresses a number of such topics, including governments' favouring of big over small enterprises and the increased financialisation, largely through debt, of our world. The aim is to create an awareness whereby precise solutions can be proposed and worked upon, because answering the question 'what can we do?' cannot be done in a single two line soundbite.

The first article in the series deals with the peculiarities of ownership of companies and some of the consequences of the current situation.

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Also in the series

Part 5: Industrial Rise and Decline
The Black Country led the world into industrial prowess and then economic decline - what does it tell us about today's world?

Part 4: Utilities and Resources
Rising dependence on gas and ballooning prices are not a path towards a sustainable energy policy

Part 3: Growth and Debt
To cover our huge debts we have to grow our economies, but for how long will that be physically possible?

Part 2: Government as a Corporation
When financial markets become a measure of the well-being of an economy, what are the consequences in the real world?

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