In his 1970 essay ‘The Friedman Doctrine’ published in the New York Times, economist Milton Friedman summarised his decades-long work in the following words “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits…” Milton Friedman was widely considered a messianic figure among the business community. He declared that a commercial organization’s sole commitment has to be towards shareholders, a gospel eagerly taken up the consulting and business community. For centuries European protestant ethics determined that enterprises consider the community as an implicit stakeholder and their wellbeing was their responsibility. Milton Friedman’s academic work and public outreach removed this expectation and fashioned it as a yoke. From this point in history, economic activity dressed within the corporate system became a single-minded focus on building profit and in effect create value for shareholders alone.
In this brief write-up and the one following this, we will try to explain the inverse dance of unemployment and corporate profit. We will try to paint as descriptive a picture as this blog will allow. In the end, you can determine what roles these historical realities play in determining India’s current economic condition.
Milton Friedman’s shareholder primacy dictum was championed by the growing class of consulting agencies who around the ’70s were the world’s largest institutional disruptors. Firms like the esteemed Mckinsey and co were propping the top management with restructuring strategies that opened the pandora box of systematic downsizing to raise profit. What started in the early ’70s in the automobile industry as an action to save firms against the onslaught of Japanese innovation by the ’90s turned into a well-tested go-to strategy to improve executive and shareholder profit. When the US acts, the world follows.
A major corporate governance innovation was the linkage of stock options to the CEO’s compensation. Earlier the CEO would act as the leader of the organization promoting enterprise, but with the growing involvement of stock options and weaker governance, the role of the CEO turned into that of a bureaucrat. They were primed to consider shareholder’s value over everything else. From 1978 to 2018, CEO compensation in the US grew by 940.3% under the options-realized measure. This period saw the emergence of extreme CEOs like Tyco’s Dennis Kozlowski who within six years pushed for 88 mergers to realize a value of over $15 billion and Jeffrey Skilling who introduced Enron to stratospheric growth. Both these CEOs were also responsible for the loss of over 11,000 jobs when their actions could not be sustained.
The same era also witnessed the 2008 economic recession. By 2010, markets had recovered with profits jumping to about 40% relative to late 2008, but wages and salaries had hardly budged. In terms of unemployment, the same period saw consecutive job losses every quarter. By March 2010, over 8.7 million jobs disappeared, amounting to roughly 7% of the job market. Neal Soss, chief economist for Credit Suisse observed that compared to 2001 when the economy was turbulent after the terrorist attack and had quickly recovered in terms of jobs, this time companies are squeezing more savings out of their workforces by downsizing and reducing wages citing the recession. A case in point is the quintessential American brand, Harley Davidson. The bike company reported $71 million as profit during 2010’s second quarter, at the same time after culling 2000 jobs (Over 1/5th of their strength), they were threatening further cuts up to 1600 more jobs. The company’s CEO Keith Wandell was awarded $2.8 million as a bonus in 2011.
CEO compensation has over the years been redesigned to value shareholder growth over everything else. The story remains true to the Indian context too. 2020-21 reports suggest a 6% hike for Indian top executives and the overall corporate net profit increase is pegged at a massive 56% jump for the year 2020-21. According to NASSCOM, the Indian IT Industry’s 52% share in service exports has grown by a good 2.3% to a reported $194 billion dollars in the year 2021-22.
The current unemployment number rests at 10.8%, an increase from 6.8% during the first quarter. Reports are out that traditionally resilient IT firms considered as the country’s flagship industry will cull three million jobs by 2022.