Taking Stock: 50 Years of prioritising shareholders

In our new series of long reads, we examine the manifestation of monopoly power across various sectors and countries. We want to unravel the complex ties between corporate concentration and power, focusing on four key aspects:

1. The power to extract profits.
2. The power to distribute profits.
3. The power to profit without producing.
4. The power to extract value from a value chain.

We researched these four dimensions using data from 51,000 publicly listed firms, over 100 countries, and 180 exchanges over the past three decades. We particularly emphasise the largest 1 per cent of publicly listed firms worldwide (by market capitalisation), providing fresh insights and discussing each dimension in detail.

In the first article, we looked at the power to extract profits. In this second article, we look at the power to distribute profits away from innovation, employees and workers, and production to shareholders. We focus on the top 1% of the biggest companies (by market capitalisation).

2023: USD 1,559 billion to shareholders of the biggest firms

From 2004 to 2023, this top 1% increased their total nominal payouts to shareholders by 428%, from USD 295 billion to USD 1,559 billion, while the bottom 50% saw a 90% increase, from USD 10 billion to USD 18. The top 1% distributed 5% of sales as payouts in 2004 and increased this to 8% by 2023, while the bottom 50% maintained a 1% payout share over the same period.

This pattern shows that concentrated corporate power and financialisation (mobilising all cash flows within the firm to maximise payouts to shareholders) are closely linked. Financialized behaviour, guided by short-term goals such as share buybacks, temporarily boosts stock prices but has long-term consequences. Firms are “hollowed out”, as payouts crowd out investments and innovation, leaving companies highly indebted without securing future income streams.

Starving wages and investments

Large payouts to shareholders starve other financial flows, including wages, taxes, and investments, causing inequality and tax injustice and hindering the transformation of carbon-based economies.

The trend towards growing payouts at the expense of other financial flows is especially pronounced among the top 1%, illustrating the intersection between monopoly power and financialisation. From 2004 to 2023, total payouts amounted to 106% of the total expenditure on wages among the top 1%, compared to 26% for the bottom 50%.

Redirect financial flows

If we look at net profits of the 1%, payouts took up 78% of all net profits from 2004 to 2023. For firms that are part of the bottom 50%, payouts amounted to 41% of net profits.

The world cannot sustain this level of shareholder compensation and needs to redirect financial flows to other parts of society. As overlapping crises – the cost of living, the rise of the radical right, geopolitical tensions, and climate change – take shape, the focus must shift to the power to distribute profits.

Radical transformation

What we are seeing now is the result of a regulatory and corporate incentive structure that prioritises shareholders. This structure has been dominant in the last 50 years. To understand the origins of the historically high levels of payouts we need to go back to the influential writings of Milton Friedman, whose doctrine of shareholder value propelled a radical transformation in corporate governance.

The high payout regime today results from corporate governance changes initiated in the US in the 1980s that spread globally. This US mode of corporate behaviour influenced the UK and other national varieties of capitalism, driving all models towards increasing payouts, although differences between them remained.

Amassing power

Two powerful ideas transformed the world: the doctrine that a business’s sole responsibility is to maximise shareholder value and the belief that efficiency, not market power, should guide antitrust matters. These ideas helped firms prioritise shareholder payouts and concentrate corporate power. Larger corporate power concentrations made it possible to increase shareholder compensation, enhancing firms’ market value and enabling them to amass more and more power.

Evaluate the impact

More than 50 years after Milton Friedman’s doctrine began influencing global practices we can evaluate its impact. Looking at global payouts, dividends have steadily increased (Figure 1), while share buybacks fluctuate with stock market movements (Figure 2). When share prices rise, share buybacks increase and dividends remain stable. As shown in Figure 3, global payouts to shareholders as a share of sales have been largely driven by share buybacks. In 2007, just before the global financial crisis, global payouts hit a historic high of 4.8% of total sales. This ratio collapsed after the crisis and returned to pre-crisis levels only in 2022.

If we look at the distribution of total payouts across different clusters of firms, we clearly see how the 1% largest firms saw the largest increase in the nominal value of payouts.

High payout in the US

Another aspect of global payouts is the varying degree to which share buybacks are used to reward shareholders in different (clusters of) countries. Figure 5 shows that the repurchase of shares as a percentage of total payouts is significantly higher in the US.

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If we compare share buybacks as a percentage of turnover across different clusters (Figure 6), we see that the US is ahead by 6.6%, closely followed by the group of tax havens (6.5%). European firms have significantly lower ratios on average. Within the EU, we see that firms domiciled in tax havens (Netherlands, Ireland, Luxembourg) have higher shares of share buybacks.

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The US is clearly at the centre of global payouts(opens in new window) through share buybacks, while countries such as China, some EU countries (non-tax havens), and countries in the Global South have much lower percentages of share buybacks. Of the total stock of global share repurchases from 2004 to 2023, amounting to USD 11,833bn, US firms repurchased 76.6% (USD 9,073bn). Second were all EU countries combined, with 12.5% (USD 1,474bn). Firms from the Global South repurchased 1.5% of global transactions, and China 0.5%.

The unequal global distribution of share buybacks indicates how much this type of shareholder primacy is part of a particular model of capitalism.

The short-run

The price of adopting the Friedman doctrine is high and manifold. The postwar model of capitalism in advanced economies, which revolved around the allocation of resources within the firm and aimed at long-term value creation, was replaced by maximising shareholder value in the short run. This was propelled by the gradual shift from competing in product markets to competing in(opens in new window) financial markets. As firms consolidated global market power in the age of globalisation and diminished competition with peers from the same industry, competitive pressures moved to capital markets, where competitive behaviour focused on attracting and pleasing shareholders and bondholders.

“Hollow firms”

To be competitive in this market environment, firms went along with the trend towards larger payouts at the expense of operational parts of the firm. The orientation towards capital markets opened the door to adopting a narrow set of financial indicators, such as share prices, as a key metric of success. William Lazoninck, an economist exploring and documenting these shifts in the past three decades, has extensively described the grand shift from the “retain and reinvest” postwar model to the corporate model of “downsize and distribute(opens in new window) ”.

To prioritise shareholders, firms reallocated resources to maximise profits(opens in new window) . This meant that investments declined(opens in new window) and labour became dispensable(opens in new window) . The long-term labour arrangements sustained by patient capital, which had grown in the postwar period, were gradually abandoned. Instead of reinvesting earnings, firms became an ATM for shareholders and did not shy away from borrowing to finance share buybacks(opens in new window) .

Lower investment rates

If we turn to monopoly power, we see that the financialisation tendencies that developed over the decades are significantly stronger among the largest firms in the global economy. From 2004 to 2023, the investment rate (investments in fixed capital as a percentage of the fixed capital stock) was 19.8% for the top 1% and 25.1% for the bottom 50%. These indicators show that investments in fixed capital were significantly smaller among the most valuable firms, which relied more on intangible assets like intellectual property for investments and revenue. The next article will focus on the power to profit without producing.

At the expense of labour

If we focus on wages, we see another strong disparity between the 1% and the bottom 50%. From 2004 to 2023, total payouts of the 1% were 109.4% of total labour costs (including remuneration of executives). The bottom 50% paid out a sum to shareholders that amounted to 30.7% of labour costs in the same period. Again, this indicator shows that rerouting cash flows towards shareholders is much more pronounced among the 1% largest firms. It exhibits how they exorbitantly reward owners of capital at the expense of labour.

Underinvestments

Overall, we see that the 1% had total payouts that were 73.5% of net income in the period 2004–2023, while the bottom 50% paid 41.4% of net profits to their shareholders. The larger the share of net profits paid out to shareholders, the smaller the share available for reinvestment. The downsize-and-distribute model worked well when firms could capitalise on past investments, but this model hits a wall when fresh investments are required. This is what the new world, characterised by the need to move away from fossil fuels, is demanding from firms: to lower payouts and increase investments.

A historical shift

In recent decades, the prioritisation of shareholders has become a defining characteristic of our economic landscape, but this is only one part of a larger historical shift. The increased corporate power and re-emergence of monopolies in this era are supported by several other factors: competition policies focused on consumer welfare, globalisation driven by trade and investment liberalisation, the empowerment of capital-exporting firms, and the reinforcement of intangible assets.

The ‘Medici loop’

Concentrated corporate power is intrinsically linked to firms being organised around shareholders’ interests. This creates a self-reinforcing cycle, similar to the “Medici loop” described by Luigi Zingales(opens in new window) , where financial power bolsters political power and vice versa. As shareholder payouts grow, firm valuations increase, which facilitates even greater payouts. While monopoly power can take various forms, the capacity to distribute profits stands out as particularly politically controversial. It directly impacts wage shares and highlights the tangible needs of capitalists.

‘Patient’ capital

The economic world today is starkly different from the economy of the postwar period, which some remember for its patient capital and the ability of workers to subsist on their wages. During that time, global corporate concentration was significantly lower. The powerful ideas that shaped our current economy favoured capital owners and dismantled a balanced economic system where the interests of all stakeholders, including those relying on patient capital, were more aligned. This transformation was part of a broader right-wing revolution prioritising capital, accelerating globalisation, and cementing neoliberalism.

Reversing the trend

Reversing these deep-seated historical trends won’t be achieved by a single policy change in one country. Yet, the widespread frustration over the escalating cost of living, economic imbalances, and unchecked corporate power is driving voters toward radical right-wing solutions. Now is the time for progressive voices to rise and reclaim the narrative.

The reversal should focus on counteracting Milton Friedman’s approach by ensuring corporations are guided by principles that encompass broader interests, aligning their operations with the well-being of the planet and its people. In this era of significant transition, boosting profits and maximising shareholder value is no longer a viable option for leading corporations.

Future liabilities

From the mid-1930s through the 1980s, share buybacks were illegal in the US, since they were seen as a way to manipulate share prices. We must reinstate this punitive regulatory framework for share buybacks. Executive remuneration should also be regulated to prevent connections to metrics that share buybacks can manipulate.

Profit payouts should also be linked to all liabilities of the firm. In a system where firms externalise costs with the support of accounting standards and professionals, future liabilities, including stranded assets, are frequently overlooked. These assets can lose value unexpectedly due to changes such as regulatory shifts or market dynamics, and addressing them is crucial for responsible corporate governance.

We have the opportunity to build a more equitable economic model that ensures a fair distribution of wealth and power and takes the climate crisis seriously. Unrestrained corporate power and shareholder prioritisation are the products of a system that places the material interests of capital owners above all else. Let’s unite and push for a future where the economy serves the many, not the few.