Concentration of Corporate Power

The Center for Global Awareness is releasing our 6th book this summer: Connecting the Roots of a Holistic System: The Global Economy, A Brief Edition. The book is for students in grades 9-12 and non-economic major undergraduate students. To celebrate this event we are publishing a series of blogs this summer that summarize the essence of one of the chapters in the book: The Impact of Neoliberalism in the United States: Ten Consequences. We hope you follow and enjoy the blog series!  The following blog is the fifth in the series.

Impact #5: Concentration of Corporate Power 

The fifth impact of neoliberalism is the concentration of corporate power. If capitalism is a growth machine, corporations are doing the growing. Corporations can vary in size and complexity from small companies run by a few people to huge organizations that are larger than many nations.

I once was the president of a corporation! To be truthful, it wasn’t a multinational corporation but rather a small sub-S corporation called the Willow Basket that consisted of my partner (my sister-in-law) and me, and about three part-time employees. We sold an assortment of gifts and home decorating products in a downtown location in Normal, Illinois. Since my partner and I both had young children at the time, we shared the work, and generally it was fun and profitable. However, I yearned to go back into the education field and after eight years sold the business. But our small, family-owned corporation was a far cry from the giant corporations that reach their tentacles around the world today.

5a Saudi Aramco Headquarters

Saudi Aramco

I am making a distinction between huge corporations and small to medium sized corporations that are the cornerstone of the American economy and way of life. In 2000, of the 100 largest economies in the world, 53 were global corporations; only 44 were countries. In 2010, Walmart was the largest publicly-traded corporation in the world with revenues of $408.2 billion and profits of $14.3 billion. The second largest were Royal Dutch Shell and Exxon Mobil. Today many state-owned enterprises (SOE) or partially state-owned enterprises dwarf them in size. For example, Saudi Aramco, the state-owned oil company of Saudi Arabia, had an estimated market value of $781 billion to $7 trillion (US$).

5b CEO payCorporate CEOs have profited from a shift to neoliberal policies. The total compensation for the average CEO of one of the 500 largest companies in 2006 was $14.8 million, which declined slightly to $10.8 million in 2010.  In contrast, the pay for the average worker in 2010 was $33,121, up just 3.3 percent over the year before. In 1970, the ratio of compensation for a corporate CEO in the U.S. to that of an average worker was 45:1. It jumped in 2000 to 300:1, declined slightly in 2005 to 262:1, and rose a little to 263:1 in 2009.  Despite the recession, it jumped to the highest ratio on record in 2010: 325:1! 

Corporate Consolidation, Mergers, and Acquisitions 

In the post-war years, an oversupply of goods and services contributed to the crisis of the 1970s. Corporations faced fierce competition from each other, which usually resulted in a decline in their profit margins and market share. Corporations do not like competition because it cuts into profits. To prevent corporations from forming monopolies that restrict competition, the U.S. has passed anti-trust laws, such as the 1913 Clayton Anti-trust Law. However, enforcement of these laws is up to the courts. Since the 1980s, the courts have favored large corporations that have tried to eliminate or reduce competition. One of the strategies to reach this goal is consolidation, mergers, or acquisitions.

The 1980s was a time of “hostile takeovers” by “corporate raiders.” These raiders bought up a company’s stock when it was undervalued, which meant the company’s assets were worth more than their stock. The raiders would sell off the assets of the raided company to make a profit, but as a result, the companies raided went out of business. Some companies, in an effort to ward off the dreaded raiders, carried out what were called “leveraged buyouts,” in which the soon-to-be raided companies would “go private” by buying up their own stock with borrowed funds to avoid the takeover of their corporation by another. This was very unproductive; takeovers added nothing of value to the economy. Financial specialists who put together the deals were usually the only ones to make money on the activity. The leveraged buyout of Safeway Supermarkets exemplifies the 1980s corporate takeover culture.

 Safeway Supermarkets: A Corporate Takeover  

5c SafewayIn 1986, Safeway Supermarkets owned 2,365 stores and employed 172,000 workers. Its employee motto was “Safeway Offers Security.” The company offered good job benefits and decent union wages. In 1985, the company reported record profits of $231 million. All changed in July 1986 after a hostile takeover bid by a group of corporate raiders. Alarmed, Safeway’s management called in a leveraged buyout specialist to help ward off the corporate raiders. They came up with a plan that that included $130 million of investors’ money, then borrowed more than $4.3 billion to buy up all the company’s stock. In return, the buyout specialist received $60 million in consulting fees for the transaction. When added to fees received by investment bankers, lawyers, and accountants, more than $200 million went towards the buyout.

5d Former Safeway headquarters

Former Safeway Headquarters

At this point the new private owners needed to come up with more than $500 million a year to pay off the interest and debt on the buyout. Taxpayers unwillingly kicked in their share; the company stopped paying $122 million a year in taxes and even received a U.S. refund check for past taxes of $11 million. But that only paid for part of the debt. The rest had to come from selling stores, firing workers, and cutting wages. The new corporate owners eventually sold more than 1,200 stores, putting 63,000 people out of work. In the Dallas Safeway, for example, the owners fired 60 percent of the former workers. Those who were able to work for the bought-out stores saw their hourly wages drop from $12 to $6.50.  Although the Dallas stores made a small profit, liquidating them and selling off their inventory and equipment made far more money. Employees lost all their health benefits within two weeks and received a maximum severance pay of eight weeks. However, the chairman kept his million-dollar-a-year-job.

A 1990 business magazine article said it was The Buyout that Saved Safeway. It noted that profit margins were higher, largely because the company got rid of surly unions and uncompetitive stores. Somehow the author thought that undermining American workers and a tax subsidy exceeding $500 million was good for the economy. No mention was made of the welfare, unemployment, and health benefits which the firings have cost all Americans, nor the loss of those hundreds of millions in taxes which tens of thousands of former Safeway workers no longer pay. Had the government insisted that existing labor contracts needed to be enforced and limited the tax deductions that corporations could take for their interest expense on debt, the corporate takeovers of the 1980s would never have happened.

questions-to-consider

  1. Do you think the corporate takeover of Safeway was detrimental or beneficial to society?
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