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by John Brian Shannon | May 13, 2016
Should developed nations favour a free market economy? Monopolies?
Or a regulatory framework that strengthens the macro economy?
- The entrepreneur in me likes Perfect Competition in a free market economy.
- The businessman in me likes Monopoly because of the opportunities afforded by economies of scale.
Monopolistic economies of scale allow corporations to:
[a] provide more services or products for the same cost,
[b] provide the same services or products for less cost,
[c] provide decreasing services or products to improve the corporate bottom line.
Unfortunately, monopolies are becoming the norm in America these days and one of the reasons for this is due to the emergence of the activist shareholder who demands higher dividends — no matter the burden this places on the corporation.
Eventually it ruins the corporation as higher profits (gained by cost-cutting and lowering standards in the rush to keep shareholders happy) are directed up and out of the corporation, and sometimes out of the country.
In simple terms, today’s activist and powerful shareholders are taking huge corporate fortunes and creating small fortunes out of them — in exchange for higher personal returns.
When they bleed one corporation dry they simply migrate to the next corporation. That’s not the way to build a strong country.
How to Strengthen the Macro Economy via new Corporate Ownership Regulations
The regulation we need is that no more than 50% of any corporation’s total value should be available to shareholders.
By law, the other 50% would always remain founder-owned or corporation-owned shares.
This would prevent the most egregious profit-taking damage to corporations — and C-suite executives could then lead the corporation according to what works best to gain higher customer approval ratings and improved market share — instead of what works best to meet shareholder demands.
By keeping 50% of the value of the corporation within any combination of the corporation or its founder(s) it helps to prevent excessive profit-syphoning to shareholders and it allows for rock-solid collateral when (re)capitalizing the corporation during expansion, for example.
One immediate bonus would be a much larger investment pool available to corporations that are looking to offer up to 50% of their value to shareholders.
I’d expect a NASDAQ boom if such a regulation were passed. A small and mid-cap renaissance would finance a new bull market from one profound regulatory change.