Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (16 page)

When I shared this approach with researchers at the World Economic Forum, they argued that a company like Walmart cannot operate this way without violating its corporate charter and risking shareholder lawsuits. True enough; but while making other people wealthy may not be consistent with a traditional corporate code, it may just be a better long-term strategy for prosperity than economic destruction. In a shrinking, postgrowth landscape, maybe keeping one’s customers and suppliers viable is the best option. By facilitating local economic development, Walmart would be sustaining the markets on which it depends for its retail businesses. Or, in terms that shareholders would understand, the money will come back.

These are the sorts of principles that are already espoused, albeit a bit less dramatically, by a relatively new corporate ethos called “inclusive capitalism.” Conceived by a task force including E. L. Rothschild CEO Lady Lynn Forester de Rothschild, the inclusive capitalism movement seeks to correct the dislocations caused by traditional corporate capitalism, particularly over the last thirty years. The initiative holds conferences and publishes papers encouraging corporations to conduct at least some portion of their business activities in ways designed to promote economic and social development.

One of its tenets is that larger corporations should attempt to award
contracts and purchase supplies from as many small and local businesses as possible, in order to feed the local and bottom-up economy. Unlike cash transfers to fellow megaconglomerates, purchases from small and medium-sized businesses tend to put more money into circulation. The cash ends up injected into businesses that operate closer to the ground, where a higher portion of revenue goes to salaries and local taxes.

Corporations can do an awful lot of good for the world and provide insurance for themselves by adopting a hybrid approach to contract rewards. Hewlett-Packard UK, for example, contracted to over six hundred small and medium-sized enterprises (SMEs) in 2011, intentionally dedicating some 10 percent of its supply-chain budget to these smaller vendors. By doing so, HP ends up working against the perverse, winner-takes-all extremes of corporate efficiency in a digital age.
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Moreover, utilizing the equal and opposite capability of digital technology to bring about more distributed outcomes, in March 2012, IBM helped to launch the Supplier Connection, an online marketplace connecting small business suppliers to large corporations looking to follow in HP’s footsteps. Over $150 billion has moved through this network annually since its inception.
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It’s the equivalent of a fisherman throwing back smaller fish to populate the lake on which he depends, or a farmer rotating a cash crop with one that restores the topsoil. Smart businesses know not to destroy the communities on which they are depending.

3. Change the Shareholder Mentality

Inspired by the inclusive capitalism initiative, the Unilever conglomerate, responsible for such brands as Lipton, Dove, and Hellmann’s, has done away with its quarterly earnings reports in order to focus on advancing the social and sustainability interests that must be addressed if there is even to be a consumer market in the future.
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Clearly, Unilever is still constitutionally obligated to deliver returns, but at least it’s given itself a bit more room to engage in activities that might not immediately be recognizable as profitable.

Most corporations don’t yet have the courage to follow suit—not even for initiatives that make pure business sense. According to a 2013 McKinsey survey, over half of corporate executives would pass on a viable project “if it would cause the company to even marginally miss its quarterly earnings target.”
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They are so afraid of their shareholders that they surrender what they believe to be in the best long-term interests of the company’s profitability. These are not progressive, environmental, or spiritual priorities they’re sacrificing to shareholder addiction to growth but
business
priorities.

In an economy in which corporate profit over net worth is declining, shareholders can no longer look to share price as the single metric of success. If a company can’t grow without cannibalizing itself, then it has to give up on growth if it wants to survive in the long term. That means its stock just won’t go up until the next period of growth, if that ever even happens. The good news is that it doesn’t have to. A nongrowing company can be tremendously prosperous and deliver the vast majority of that prosperity to its shareholders. It just might not come in the form of a rising share price, which is the only metric most shareholders understand. That’s why shareholders need to be trained to value other metrics or be replaced by people who do.

The easiest alternative to make shareholders happy is to pay them. Dividends—a quarterly payment to shareholders—used to be considered a good thing. An investor would buy a stock hoping for long-term growth but counting mostly on participating in the company’s generation of wealth. In our current, growth-obsessed stock market, dividends are understood as a sign of weakness. Can’t the company put that money to work? Companies that engage in particularly large regular payouts to shareholders are called “dividend traps,” because investors fear a big dividend portends slower growth and a decline in share price.

We might better call stocks with no dividends “growth traps.” If a company is depending entirely on quarter-over-quarter growth in order to deliver value to its shareholders, it is in a much more precarious position—particularly in a contracting economy—than a company that
has managed to achieve sustainable prosperity. It’s one thing to grow. It’s another to be dependent on growth in order to pay back debts and generate shareholder value. Or, worse, to simply promise that real earnings are coming at some point in the future.

The disproportionate emphasis on share price is magnified further by our increasingly digital stock exchanges. Algorithms can trade only on changes in share price. They depend on volatility, not consistent returns. To an algorithm, a stable stock market is a profitless one. And a high-speed, high-frequency trading program never sticks around long enough to collect its dividend, anyway.

Instead of catering to this prosperity-defeating, ultrashort-term mentality, CEOs of sustainable companies need to communicate honestly with their shareholders about the firms’ prospects—and the virtues of holding on to shares. Dividends and the stability of returns ought to replace share price as the measure of the company’s value over time. Common shares become more like what are now known as the “preferred” shares usually owned by institutional investors and pension funds. Preferred shares don’t shoot up so much when a stock is in favor but, instead, provide constant returns to investors. It’s less like owning a share of stock than, well, owning a company.

Stressing earnings over share price also helps a company unwind from its own destructive impact on the greater economy. Unlike share prices, which remain trapped in capital, dividends come in the form of money. Sure, they can be reinvested in more shares, but they can also be spent. If a shareholder population can’t be convinced to accept prosperity over growth, then they need to be replaced. This isn’t so easy. The more people there are who want to sell their shares, the lower the shares’ prices go, and that’s when the class-action lawsuits start coming. The better alternative may be to buy out the shareholders oneself and get off the stock exchange altogether.

Going private—even temporarily—permits businesses to hit the reset button. They can eschew shareholder obsessions like growth targets and focus on the long term and on creating real value instead of the day’s
closing share price. Until recently, privatization has been used mostly as a form of financial jujitsu. A private-equity firm purchases a distressed or undervalued firm, uses its banking relationships to restructure the company’s debt, and then puts it back on the market for a hefty profit. That’s what happened when the Blackstone Group purchased the Hilton hotel chain in 2007, for $47.50 per share, a 32 percent premium to the stock’s closing public valuation.
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Seven years later, Blackstone took Hilton public once more, with an IPO that netted them a $10 billion profit—credited mostly to complicated tax and debt maneuvers.
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Even at that, many observers considered it a disappointing return on investment.
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But buying back a company from one’s shareholders can also give a CEO, a founder, or employees a chance to suspend growth and focus on more important things. That’s the approach taken, perhaps most famously, by Michael Dell. While the company was growing in the 1980s and 1990s, shareholders were more than happy. But Dell found its growth slowing as the PC market was disrupted by tablets and the server market upended by cloud services. The company’s problems were compounded by its typically corporate, growth-obsessed overexpansion, as well as its myopic focus on supply costs and margins over product innovation.
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Michael Dell sought to implement some seemingly radical changes, such as selling PCs at a loss in order to upsell more profitable software and services, but his impatient shareholders disagreed.
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Such a pivot would take longer than a single quarter to accomplish. If it failed, or failed to succeed fast enough, Dell’s share price would decline further, making the company an easy target for a takeover, an ouster, or a shareholder lawsuit.

Using successful but contracting markets as loss leaders in order to pivot toward new opportunities is not a novel, radical approach at all. It is basic common sense, taught in any undergraduate business course. As Michael Dell explained in his SEC filing about the buyback, “These steps in Dell’s transformation are needed to restore the Company to health in the long term. In the short term, however, they are likely to lower gross margins, raise the Company’s operating expenses and raise capital expenditures, resulting in lower earnings.”
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Shareholders just won’t put up
with that. Moreover, share value had become such a widely accepted metric of corporate health that if the company’s share price continued to drop, according to Michael Dell, it could hurt consumer perception and employee retention.
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Unable to take the basic steps required to save a publicly held company, Dell enlisted the help of a private-equity firm to buy it back from his shareholders.

When the deal was done, he announced to his employees that Dell was the largest company in terms of revenue ever to go from public to private.
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He did so, at least in part, to have the freedom to strengthen the company and its future instead of futilely trying to prop up its share price for stockholders who had no real interest in the company, its employees, or its sustainability.

Although Dell went private for purely business reasons, sometimes a company goes private to save what it sees as its soul. For example, CEO Mickey Drexler is largely credited with creating the brand magic that made the Gap synonymous with youth and effortless cool in the 1990s. Drexler accomplished this with an auteurlike sense of positioning, which he attempted to apply to the more high end J.Crew brand when he came on board there as CEO in 2003.
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But after several years, Drexler found himself in combat with shareholders who expected the company to be working on margins and efficiencies—more like Zara or H&M, whose cash registers are networked to robotic supply chains capable of replacing stock in real time. Drexler convinced his board of directors to take the company private, largely to give himself the time and breathing room he needed to build the brand into something as iconic as the Gap.
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When a company does go private, it must select its private equity partners carefully. Otherwise, it is no guarantee against short-term pressure. As of this writing, Drexler and J.Crew are taking heat from their private equity stakeholders to go public again. It’s been almost five years now, and the investors want to cash out, as well as fund a major international expansion. The growth imperative is hard to kill.
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Counterintuitively (at least to corporations that see their workers as expendable resources), the most patient shareholders might just be a
company’s own employees. Unlike retail shareholders, employees have a stake in the company’s long-term prosperity. By becoming wholly or even partially employee owned, corporations can help ensure that business decisions reflect the best interests of the company, its employees, and their community—not distant investors or the abstract momentum of capital itself. It’s still corporate capitalism, but corporate capitalism that ensures that the primary stockholders are also real-world stakeholders in multiple facets of the enterprise.

So far, most companies that have sold themselves to employees have done so under duress. For instance, in 1985, Amsted Industries, a heavy industrial parts manufacturer with some thirty-five plants across the U.S. and Canada, learned that corporate raider Charles Hurwitz had targeted the company for hostile takeover. That same year, Hurwitz would become famous for purchasing the Pacific Lumber Company and attempting to clear-cut the old-growth redwoods of California for a fast, onetime profit. So rather than accept its business being dismantled and sold off for its assets, Amsted opted to distribute ownership to its employees through a stock ownership plan, for a price of $529 million.
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Thirty years later, the company is still here and still employee owned. It has endured its share of bumps and conflicts along the way, and its shareholder communications sometimes sound more like a Brooklyn food co-op meeting than a traditional quarterly report. But the company’s shift toward employee ownership attests to the possibility of similar arrangements, even for thriving companies looking to maintain prosperity instead of sacrficing it to growth.

Many companies set themselves up this way from the start, enjoy greater stability than their shareholder-owned peers, and still grow plenty big. With roughly 160,000 employees, Publix Super Markets is the seventh-largest privately held company in the United States, and the largest corporation whose employees own a majority stake.
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Approximately 80 percent of the company stock is distributed among employees, while the rest belongs to the family of founder George W. Jenkins. Employees with a thousand hours and a year of employment receive an additional 8.5 percent of
their pay in the form of stock. Stock price is set quarterly by an independent evaluator. According to
Forbes
, a store manager with twenty years at the company, in addition to a $100,000-plus salary, will likely own $300,000 in stock. That means that Publix employees, from the bag boy to the butcher, have no incentive to leave—especially since the company promotes almost exclusively from within.
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