SANE Views

Vol.6 No.12, 05 April 2006

Why profits are king, shareholders little princes

Margaret Legum

Standard Bank charged me R90 to replace my garage card. Not R19, not R9 – nine o rands! Yawn. What’s new? Don’t worry: this is not another moan story about a bank: it leads somewhere else.

Suffice to say I know no one, including people who work for banks, who would not take their money out of banks if there were a practical alternative. An entrepreneurial Minister could turn the post office into an excellent alternative – national, safe, centred in customers and the national interest, not profit – and challenge the cosy oligopoly that now agrees among themselves how to compete on superficials, while continuing to rip us all off.

Consider what happens to the R90 and other equivalents that banks bleed off us. The young woman who gave me the news looked deeply ashamed. As my jaw hit the deck, she said: ‘I know, its awful, but that is the price I have to give you.’ I told her it was not her fault, and I didn’t assume the money would go into staff salaries. She blushed: she is not supposed to talk to customers about staff salaries. But as she turned away she let fall that management is currently fighting a demand for a 5% increase for staff. Hardly a fortune, if you know what bank foot soldiers earn.

As I drove home I heard that Standard Bank is among the companies that did especially well that day on the JSE. One of the ‘winners’ on the day’s trading. I didn’t fancy that was because news had got out about my impending R90. What it did was confirm the facts about the winners and losers in today’s economic system. And it is a system: it is largely unaffected by the morality of the decisions taken by individuals who manage the business.

There is one over-riding consideration that must inform the decisions of all companies listed on the stock exchange – that is, companies whose shares the public can buy. Above all, they must maximize their profits and the price of their shares. That is because people who own their shares can shift elsewhere in a jiffy – sell those shares and buy others. If one company is not ‘performing’ as they put it, by reference to others, it is abandoned. Loyalty is not even sought. So the rate of profit is what keeps your ‘owners’ happy; and they have no interest in how the profit is made.

You might think that companies’ fortunes would be unaffected by trade in their shares. Right. Except for the fact that Director’s salaries and bonuses are linked to the price of shares; so if people are selling and the price goes down, it takes the bonuses with it. So Directors have an interest in share prices, which are based on expectations of profits.

But what about companies’ mission statements about customers coming first; and about how staff is their most precious resource? Their policies about ‘growing people’ inside the company and developing customer loyalty? Well, yes – but only if and because those policies serve the expansion of profit. Of course they want staff and customers to remain loyal to them. If they didn’t do that, staff might brave the dangers of unemployment and take their training elsewhere. And customers might face jumping through the hoops of changing banks, putting the hope that the new bank will be different over the experience of everyone they know.

And what about the triple bottom line? What about companies’ public commitment to the three objectives of profit, social equity and the environment? The only way you can sell that to publicly listed companies is as a branding tool. If they think it will attract customers you can get a hearing.

Cynical? No. Realistic and logical. You cannot set up a system in which the prizes are as huge and the price of failure so high, and then expect most business leaders to behave as though profit were only one of number of objectives. The odd exceptional individual, maybe, but not the genre as a whole. Government whistles in the wind when expecting business to invest for any other purpose than a competitive profit rate. They cannot do so, without going under. Those are the rules, and by acceding to business’ demand for minimal regulation, we force them into cutthroat competition.

With a few honourable exceptions the media play in with the muddled thinking that fails to put proper understanding. Rich people are treated voyeuristically as celebrities. When Directors’ incomes go up by an average of 30%, and profits by similar amounts, that is not contrasted with tiny wage increases, but acclaimed as a sign of our world-class prosperity. But when trade unions ask for an increase of 7% they are accused of damaging the economy and creating unemployment.

Above all, where is the public critique of a system that moves incomes systematically from the working population to passive investors, from wages and salaries to profits and bonuses, from the real economy to the financial sector which makes its money by dealing in money. Where is the public debate about economic justice? And if that is too soppy, where is the debate about the sheer inefficiency of concentrating money where it has so little effect on the output of real goods and services on the ground?