Corporate obligations troubling

By DAVID MOON, Moon Capital Management, LLC
February 13, 2011

A week ago, President Obama spoke to the US Chamber of Commerce.

His speech was filled with motherhood and apple pie phrases – things that about which only a committed mother hater or diabetic could complain.

Sprinkled in his 34 minutes of lofty language, however, were a couple of troublesome references to obligations – references that if they came from most people would suggest a lack of understanding of basic corporate law.

Given his intellect and that he has a degree from Harvard Law School, however, I’m certain that the President’s position is based on a self-declared moral principle, not a legal one.

The President said that the increased corporate profits that result from tax code reform and increased exports must be shared with American workers.

On the surface, that sounds pretty good. I’d like to see everyone make more money. The problem, however, is that the profits of a company belong to the people who own the company, not the folks who provide services to that company.

Corporate profits are not goody bags to be handed out at the whim of company executives.

There are several factors that impact a person’s compensation. The scarcity of their talent. A person’s ability to produce valuable results. And the amount of risk the person has at stake.

Everyone in business is at risk, but he folks with the greatest amount of money at risk are the stockholders of a company. They own the factories and all of the equipment. They borrow the money. In a small business, it is the owner who foregoes a paycheck when there isn’t enough cash flow to pay both him and his employees.

And it is the owner who has a full claim on the profits.

Like the President, many people argue that the moral obligation to share the wealth with a company’s employees outweighs any technical argument in favor of the shareholders. The most basic moral position, however, should be to protect the rights of all individuals, without application of needs testing.

The entry level employee has the right to his agreed wage in exchange for the output agreed between him and the employer. In the Chamber speech, the President said that America’s success happened because of our commitment to rewarding people for hard work.

Wrong.

America’s success happened, in part, because of our commitment to rewarding people for their useful output – not their hard work.

When I was a kid I chopped weeds in a cotton field for $1.85 an hour. Four years later I was selling lumber on the telephone for $8 an hour. Which job required more hard work? At which job did I produce more value to my employer?

The President challenged the Chamber members to hire more workers, as if companies were intentionally ignoring profitable business opportunities because they lacked the manpower to do the work.

If a business can achieve its goals with 1,000 employees, why would it hire 50 more? Wouldn’t the money spent on those make-work jobs be resources that were needlessly stolen from the owners of the company?

The manager of a company has no moral right to do that. And no leader should encourage it.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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