‘Shareholder value’ versus the public good: the case of Germany

Support for companies amid the pandemic must come with social and ecological strings attached.

With uncertainty around the world about how and when the coronavirus outbreak will decelerate, whole business sectors have been affected by lockdowns and are facing ruin. In Germany, more than 750,000 companies have put over 12 million employees on reduced working hours (Kurzarbeit), dwarfing the 3 million hit by the 2008 crisis. And in a survey of nearly 8,000 working people by the Hans-Böckler Foundation, 70 per cent of respondents said they felt financially insecure, with those in lower-income groups betraying most concern.

Society’s loss goes beyond the toll on employment. As the crisis lengthens, innovative capabilities accumulated over years and even decades may atrophy and disappear, making it far more difficult to emerge from the pandemic with a healthy economy.

This ‘innovation drain’ can be avoided if, and only if, corporations devote every available resource to retaining, and reinvesting, in productive capacity. Implementation of the rescue packages adopted in Germany in March and June must thus fundamentally address future practices of corporate resource allocation.

Companies with more than 250 employees constitute 0.7 per cent of the total incorporated in the country but they employ 39.2 per cent of the workforce and undertake 57 per cent of corporate investment. They will eventually receive much of the government support—including due to their ‘too big to fail’ status—based on their importance to industry supply chains and business ecosystems.

Making government support conditional on replacing value-extractive practices, such as excessive dividend payments and executive compensation, is the most effective way to block damaging business decisions which undermine investment in productive capabilities and secure employment.

Hours slashed

Among the applicants for Kurzarbeit and loans from the national KfW development bank submitted by DAX 30 and MDAX 60 companies, Adidas AG demonstrates the urgency of reinvesting resources in productive capabilities. While the company received approval of a €2.4 billion KfW-backed loan and slashed the hours of more than a thousand of its employees in Germany, its financial statements reveal that in the last five years it spent 73 per cent of its net income—a total of €4.7 billion—on dividends and share buybacks.

According to the assumptions underlying the dominant business model employed by large western companies, shareholders are the only risk-takers and a company’s primary purpose is to ‘maximise shareholder value’, even at the expense of any investment in innovative capabilities. Although shareholder influence is negotiated within a stakeholder coalition in the German variant, the model has also been applied by many DAX 30 and MDAX 60 companies since the early 2000s.

As a result, profits distributed to shareholders has been so high over most of the past two decades that, without any reserves for a rainy day, the collapse of economic activity was immediate when the pandemic struck Germany. Unprepared organisationally and financially, corporations faced difficulties within a very short time.

Germany’s case was, it’s true, not as dramatic as that of the US, where S&P 500 companies, having fallen victim to the American disease of corporate financialisation, distributed 92 per cent of their net income between 2009 and 2018 in stock buybacks and dividends. Still, in the decade from 2010 to 2019, 65 German companies in the DAX 30 and MDAX 60 indices paid out a total of €338.8 billion, or 46 per cent of their combined profits, in dividends, in addition to €35.3 billion, or 5 per cent of profits, in stock buybacks.

Value extractors

DAX 30, MDAX 60 and other public firms are likely to reduce or stop dividends and buybacks for a time. But once economic stability is achieved, in the absence of any formal restrictions, they will likely resume transferring large portions of their earnings to value extractors. Although some have postponed dividend payments, the majority of German public companies are willing to stick to current dividend plans.

Such a return to business-as-usual, as shortly after the great recession, would be unsustainable. Companies should, now and always, prioritise their employees’ financial security and focus on the sustainability of their productive economic activity.

Much of the financial support government has allocated to large companies has been undertaken with a long-term perspective and it should be conditional upon long-term behavioural change on the part of those receiving assistance. The chancellor, Angela Merkel, has confirmed Germany’s commitment to the European Green Deal while however treating financial markets as the source of cheap capital for climate-friendly investment.

Whether the commitments of corporations are formalised and enforced will be the big issue. If they are not, these cheap credits will only help companies to maximise shareholder value through financial distributions as soon as their cash flow is restored.

Climate crisis

The government’s response to the public-health crisis must not be repeated as we confront the climate crisis in the coming years. Aid to specific companies and sectors must be contingent upon conversion of production lines to cleaner products and services and on energy-system transformation if climate-protection goals are to be reached without any delay in the measures already approved by the European Commission. Only legally enforceable and binding regulatory measures would make German corporations truly follow what they professed in a recent statement on the need for a climate-stimulus programme to make the economy more resilient.

After many years of domination of value extraction over value creation, it is time for governments to place ecological transition and social equality at the heart of economic recovery, to strengthen our resilience in the face of health and climate risks. The broken corporate mechanisms which prevent our societies reaching sustainable prosperity must be replaced.