126.96.36.199 Directors’ Distribution of Wealth
In a capitalist economy, private investors launch companies to create wealth (3.2.1). This wealth is shared between the investors, employees and the government – but the amount received by each is determined in separate negotiations:
● The board of directors distributes much of the profits: as dividends to shareholders, as remuneration for the directors themselves, or retaining money to develop the business.
● Shareholders can exercise some governance over the board but, particularly if they are able to move their money around quickly, tend not to ‘interfere’ even when the management performs poorly.
● A widely admired theory, ‘maximising shareholder value’, has led to short-termism. The pay of many chief executives is linked to share price, so both they and the shareholders have an interest in increasing the share price – by such measures as cost-cutting or share buybacks – regardless of what might be best for the business in the medium to long term, as described in Steve Denning’s article: The Lure Of Short-Termism: Kill ‘The World’s Dumbest Idea’.
● If loans have been taken out, the lenders receive a rate of interest which is largely determined by financial markets (188.8.131.52).
The balance of power between the participants in these negotiations has shifted over time, partly as a result of macroeconomic policies described earlier (184.108.40.206). This has caused the sharing of wealth to change markedly, particularly since the 1980s – as reviewed in the next section (220.127.116.11).
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition03/3561a.htm