Get your share.

Remember the good old days when a prosperous business was an expanding business? A time when companies increased profits by attracting more customers and selling more products?

Telstra’s CEO, Sol Trujillo last week announced yet more staff cuts in an effort to increase shareholder wealth. This is becoming a common story. Large corporations are continually recording bigger profits but still laying off more staff. Why does this happen?

The workings of big business are obviously too complex to cover in detail here so here is a basic rundown of how public companies work today.

In order for the share price of a company to increase, increased profits need to be recorded. So if a bank, for example, records a profit of two billion dollars it is not enough to record the same profit again next year. For the share price to increase they must record an even bigger profit. And the word ‘must’ is used advisably. As the laws stand it is the company’s obligation to record a greater profit. This is why CEOs often state that they are responsible only to the shareholders. At the end of the day it is the shareholders who the company is operating for. (I would have thought if you ran a telecommunications company your main interest would be in actually providing a telecommunications service, but then, what do I know?)

So if you are a CEO of a large corporation how do you ensure that your profits will increase when you are already making a profit? One way would be to expand your customer base, offer new services and find new income streams. As an example, Virgin has expanded its airline empire to include a credit card company and a mobile phone service. That’s a lot more customers to get money from. Unfortunately, expansion takes time, money, intelligence and effort. The easier way to increase profits is to produce exactly the same amount of goods and services you did last year (which garnered a profit), but reduce your operating costs.

Operating costs are a huge drain on a company’s finances and the biggest and most annoying operating cost is wages. Those filthy employees selfishly take home the money that should belong to the shareholders. So smart CEOs order ‘downsizing’ across the company. The best bit about reducing staff numbers is that you can always make the remaining staff work harder to fill the gaps. So the same profit is made as last year but added to that is the extra money that you didn’t need to spend on employees and office space and that counts towards an increased profit.

By now the more savvy amongst you are probably thinking “But hang on. If you keep reducing the staff, somewhere along the line you won’t be able to keep producing the same amount of products or services” and you are right. Of course that doesn’t matter. Because, before that happens the smart CEO has moved on to his next appointment and gotten his giant golden handshake in appreciation for increasing the profits of the company. Someone else can fix the mess or sell the hollowed out company to a bigger company.

An interesting sideline to this is the companies who offer their own shares to their employees. Many Telstra workers, for example, have Telstra shares. (We won’t get into the argument that before privatisation all Australian taxpayers already had shares in Telstra but were forced to buy them anyway). If we follow the logic of having shares in the company in which you work you may strike an interesting conundrum. As a shareholder you will want the share price to increase. This means that it is in your best interest to increase profits. But what happens if the only way to increase the profits requires you to lose your job? I guess as a shareholder you must vote to be sacked.

Companies will always claim to be responsible to their shareholders. I guess the only question to ask then is does that make the shareholders ultimately responsible for the company? Maybe lung cancer patients, asbestosis victims and those affected by environmental damage should be suing the shareholders rather than the company. If shareholders want the profits they should be prepared to accept the responsibility for where that money comes from. They might be more cautious about where they invest and about the CEOs that they appoint.

I’m not sure where CEOs actually come from. They must be very clever considering they can move from running railways, to running telecommunications companies to running food processing companies or supermarkets with no real ground roots experience in any industry. No wonder we and our government put so much faith in them. They are clearly better people than us.