Who Owns an Ownership Society?

Earlier this week, I was reading a WSJ article about how US Corporate Profits were at an all-time high. I think the article noted that the record high was achieved in nominal terms and as a percentage of GDP.

Anyhow, that got me thinking... Who are the main beneficiaries of these record profits? Where’s all this cash going? Who is it benefiting?

Top Management – Perhaps I am only reading about the most extreme cases of management pay but it seems to have totally broken from the realm of sanity. It’s not a case of folks aspiring to get out of flying Economy Class – rather I read of people justifying packages set at a multiple 100s of times what is paid to the folks that are working underneath them. I sit and listen to some of my peers talking about the simple convenience of personal jets. The quantum of the wealth creation for the elites in the financial services area is far beyond what you can imagine. Like drafting in elite male ironman races... it's a topic that "those that know" are often reluctant to discuss.

It appears like there is collusion between directors, managers, institutions and the media. Even “activist” shareholders appear to be part of the skim. Heck, I’ve made a career sitting in the middle.

Somewhere the obligation to all stakeholders in many organizations appears to have been lost. I sense a relentless drive to increase productivity per head and keep a lid on wage costs. Many of us accept this as a requirement of a capitalist society. But is it really? My preference is to work within a corporate culture that works for the benefit of all stakeholders in society.

Perhaps I am over-reacting, I think to myself. Perhaps it is best, it is most efficient, to have the sole goal of industry to maximize near term profitability?

But then I think to myself... who really benefits if this is the case?

At this stage, some might say that the shareholders benefit. Others might point out that with the growth of institutional investors and mutual funds; we've become an ownership society.

We are told that as an ownership society, we all benefit and in a long bull market you will actually believe this. However, I know the difference between Net and Gross IRRs.

Something bothers me about the “society is wealthier” argument. Even if it is, are the "owners" actually calling the shots? Not a chance, they have been difused, then pooled into collective investment schemes managed by the Persuaders.

You see, I've worked in a few businesses that exist between "your" ownership and “you”. In some cases, the businesses added material value to the value of your investments -- so you might argue that these situations made society more efficient. However, in other instances, once you adjusted for transactions costs, fees and financial "friction"... well, you'd have been better investing in US Treasuries. While you might have been better, somewhere a Financial Persuader's NAV would have been impaired.

Across a wide portfolio, over a long time horizon -- I am confident that there is far more value extraction than value addition. I'll leave it to other to make the case in numbers.

When you look at the value of your investments, don’t confuse asset appreciation with value addition. Many people make this error.

There is (and has been) a massive wealth transfer towards a new stakeholder in our society, The Financial Persuaders. More than half of the brightest and hardest working people that I've come across in my life fall into this category, including me! My most marketable skill is being able to speak, write and sell the language of financial persuasion. I had excellent teachers and was a quick study. My mentors have been more broad than simply Ironman triathlon!

Easy for me to say, right? I've used my skills to enrich myself. Well, there is a great speech that one of the Founders of Vanguard gave at West Point (Bogle West Point Vanguard will google you there). It's worth a read – his enrichment was a wee bit more than mine…

When you start thinking about kids, you start thinking about their standard of living. What struck me was not the comparison to the way I chose to live my life. What struck me was the comparison to the way kids grew up in the 50s. To match that quality of life requires a massive move up the socio-economic ladder (or a move to Christchurch or Tasmania – societies that have a history of simplicity, low envy and moderate consumption expectations – they are changing, just changing slower).

Despite…

** all the wealth creation,

** all the growth in real GDP per head,

** all the increases in consumption by the West,

** the massive run up in personal debts

In the most "advanced" areas of America, it appears to me that only the children of the elites will match the quality of their grandparent's childhood.

That wasn't the way it was presented in finance class.