There’s a fascinating “Room for Debate” discussion at the NYTimes entitled Profiting Profits or Reinvesting Them with the prompt:
Corporations have gone from reinvesting about 90 percent of their profits into their business in the 1970s, to about 10 percent today, William Lazonick wrote in a recent Harvard Business Review article. Profits are instead being used to pay dividends to investors and to buy back stock to boost its price, benefiting the company’s executives. Can this trend be reversed to help fuel growth that benefits everyone?
Bill Lazonick is a friend and I’ve been meaning to write about his great article at HBR that inspired this debate. So I was thrilled to see it be the basis of a really rich discussion. His case is very clear. And he feels that change must come from regulators.
Lynn Stout, Law Professor at Cornell, makes the case for changing the definition of shareholder value and Peter Thiel co-founder of PayPal feels the root of the problem is a failure of imagination of corporate leaders: “The reason that big corporations aren’t using their profits to do new things is simply because they’re out of ideas, and the C.E.O.-politicians who run them are the last people we should expect to think of new ones.”
Unfortunately, the representative from the MBA world, Bruce Greenwald of the Columbia Business School, clouds the issue. He makes a few confusing statements that capital investment today “largely entails intangibles like acquiring customers, training workers and increasing product portfolios, all of which tend to be buried in operating expense….High profits with low levels of identifiable investment should be with us for the foreseeable future.” which doesn’t make sense. If companies were investing, they would either have lower profits or higher investments, not both.
What do ICountants have to contribute to the conversation? I’ll offer a few ideas and welcome more:
There are some very clear calls here from people trying to change pieces of the system from the top down. Our work at Smarter-Companies is to drive change from the bottom up. I believe that if we can empower individual knowledge workers to take control of their organizations and their information, we’ll have a better shot at reversing the trend and building a more prosperous and profitable future.