Definition of a corporation and shareholder
A corporation is like a box that holds assets (like cash and equipment) and may owe liabilities (debts).
Shareholders "own" a portion of the net assets (assets - liabilities) based on the proportion of total shares that they own. If a shareholder owns 1 share, and there are 100 total shares, then that shareholder has 1% of the 3 core shareholder rights ("own" is in scare quotes because you will see that it doesn't conform to its common meaning)
The 3 core shareholder rights
For each % of shares the shareholder owns, he can:
- Vote on corporate decisions. Each share is entitled to one vote, and so a majority shareholder is effectively a dictator.
- If an offer to buy the company is accepted (through above vote), then the proceeds must be shared among all shareholders, according to their respective percentage ownership
- If a decision to disburse funds from the box as dividends is made (through vote) then the dividend amount must be equal for each share.
Borrowing against shares
Another way for me to get cash without paying dividends or letting anyone else in the company make money is to borrow against the shares. Although there is an interest cost, it is tax deductible, and if shares go up in perceived value by more than the after tax cost of the borrowing, then it has no cost.
Corporate share buybacks
Corporations may buy shares from the stock market. The finance industry and textbooks tell us that this is a great sign for the stock, as the company must believe that its shares are undervalued, and the extra demand for the shares will push up its price, and reducing the shares outstanding means that future earnings and dividends per share will be increased. The finance industry also tells us that corporate share buybacks count as giving back to shareholders, because there is flow out of the box. But technically, that money is only going to shareholders who are unhappy and selling out. No one that continues holding their shares is paid.
For me (as controlling owner of the corporation), corporate share buybacks are a useful use of the funds in the box if it is effective in convincing stock market idiots that the shares are worth more. That belief allows me to sell voting and non voting shares at a higher price while continuing to maintain a controlling interest. Even if the funds in the box don't directly flow to me, different stock market idiot buyers will pay me a higher amount, than if I didn't compete with them with the money from the box.
In fact, the more fearful I am about the worthlessness of the stock, or the deterioration of the value of the box, the more useful it is to me to use corporate share buybacks to help me cash out at a reasonable level. I necessarily have better information on the future of the company than anyone else.
Maintaining controlling interest without a majority of shares
Even without a total majority of shares, buyouts can still be prevented by management. Poison pills and golden parachutes are corporate bylaws that can be created for the sole purpose of making buyouts more expensive, and thus less likely, and protecting management's compensation. Laws that prevent institutional investors from voting for board members, and manipulation of democratic process and voter apathy, can allow management to appoint loyal board members with industry experience, while returning the favour and serving as board members on their companies.
Loyalty to management by the financial industry that promotes their shares, and industry leaders that share a desire to maintain the corporate gravy train for management conspire against paying dividends or sufficiently high dividends. The core lie that justifies this behaviour is that management deserves to keep your money because they will invest it wisely. This misleads society by denying investors the choice to give back their dividend earnings to the company only when the investors agree that management deserves to reinvest it.
The harm that is created
The stock market price a stock trades for reflects the value of the minority shareholder stake. Trades occur a small number of shares at a time. When a company trades its controlling interests those trades happen behind closed boardroom doors. Controlling stakes in the company are worth the value of the box. Minority stakes are worth less.
When a company is difficult or impossible to take over, and when it refuses to pay dividends, then the shares that minority stake holders are trading on the stock market are worth far less than the value of the company, and cannot justify their trading price. The increasing corruption of shareholder value is partially responsible for poor stock market returns in the last decade, but it ensures future dismal investment performance. Society also loses significantly when businesses hoard cash because businesses will only invest when consumer markets have the cash needed to buy their products, and keeping the cash to themselves necessarily reduces the cash available to consumers.
Dividends also significantly reduce risk of investment. There is no possible way of knowing what will happen to a company in 20 years. A 5% per year dividend for 20 years ensures that no matter what happens after that time, the investor cannot lose money.
Calling this a pyramid or ponzi scheme
When a share in stock will never receive sufficient compensation in the form of dividends or a buyout, then it is necessarily a scam. That you have the power to sell that share to a greater fool is simply the power to make a different victim of the scam. While its easy to argue that ponzi and pyramid schemes are a different scam than worthless stock shares, there is a core commonality: Trading financial instruments that are determined mathematically to be worth less than their traded value.
Who is to blame for the lie
While I've implicated finance academia in the lies that permit corporations' abuse of minority shareholders, they would defend themselves by claiming that finance academics only speak of the value of the box. They are still culpable through their silence on the issue and cosy loyalty to the financial industry, and the propaganda and brainwashing force that comes with rewarding 20 year olds with good test scores when they internalize the lies. For most people, it seems, lies that were created for them by their first year college teachers are some of the most passionately defended and internalized.
The financial industry and their client stock issuing firms are the most responsible for misleading the investing public that some company shares have value. There is no excuse for valuing shares based only on the value of the box, when that box has no direct relevance to a share's returns.
Investors that go along with the lie, just because it is more believed than the truth, and hope the belief will stay common long enough for them to flip the stock have some responsibility as well. They should be staying away from companies that can not compensate their shares rather than hope the truth stays hidden.
The biggest single issue that assures shareholder abuse is dual class shares. That is what makes dividends impossible. What makes buyouts impossible. The tech and social media companies that went public with dual share structures did so because they could. They did not need extra capital, and so did not need to go public. The tech companies were great vehicles for the financial industry to sell an investment story, and that is why their stocks turned into a scam. The financial industry was confident in being able to sell that scam.
My original essay on the topic contains solutions at the end. I still believe they are all needed. An additional solution would be to threaten supporters of worthless stock with legal consequences. The same common sense basis for Bernie Maddoff being liable for selling worthless investments should apply to others who lie about the value of shares.