For Whom? Part II

Leader of the Job Creator Brigade

As my several readers around the globe may recall, I have written before about the irony of the GE CEO’s appointment to chair President Obama’s Council on Jobs and Competitiveness (see the January 23, 2013 Allegory Notebook entry). At the time, I was able to find in the then most recent GE annual report (2011) mention of the company having “announced the creation of 13,000 jobs in the United States since 2009”. A search of the 2013 annual report yielded a few mentions of jobs, but in developing countries like Algeria, rather than in the U.S. A search for the term “jobs” in the 2014 annual report led to commentary on what the company calls the “Industrial Internet,” and the “high-skilled, high-paying” jobs it will generate, while remaining silent as to where those jobs may materialize.

It goes without saying that GE enjoys a reputation as an icon of American industrial might. The thing is, for decades the globalization of free trade and the liberalization of the economies in the developing world have buffeted the U.S. manufacturing industry. Data relating to manufacturing employee data by company is not publicly available, but the Bureau of Labor Statistics publishes a survey of employment for the U.S. manufacturing sector going back to 1939. Leaving off the first few years of data to exclude the run-up during World War II, the trend in U.S. manufacturing employment shows a boom in the post-war years, a peak in the late-seventies, and a cyclic but secular decline since then. The recovery in the years since the Great Recession looks meager in the context of the broad arc of U.S. manufacturing employment history.

GE CEO’s efforts to retain and create new U.S. manufacturing jobs may be heroic, but the notion that a sitting President would appoint a U.S. manufacturing CEO the leader of the “job creation brigade” is more than a little ironic. See the chart below. As a whole, the industry has responded to the macro forces of globalization I mention (among numerous other forces beyond their control) by reducing U.S. manufacturing employee headcount in favor of automation and the “off-shoring” of jobs. The result is the frown of a trend you see there. The uptick at the end is what passes in Washington these days as a “Manufacturing Renaissance.” Michelangelo is rolling over in his tomb.

For Whom - Part II Chart I

The Inevitable: Death and Taxes

The two things inevitable in life, the saying goes, are death and taxes. As it turns out, that may not be the case for some big U.S. companies. The Citizens for Tax Justice have been reporting for several years now an historical analysis done on the estimated Federal tax paid by GE (among other big U.S. companies, like Boeing). When creating the chart below, based on the data on, I had to brush up my spreadsheet chart-making skills to accommodate the negative percentages you see for the years 2007-2010.

In case you are wondering, the weighted-average federal tax rate for the entire period shown is about 0.4%. For the years in which you see negative rates, that means that in those years the U.S. government was cutting checks payable to GE, not the other way around. As with the outsourcing of jobs overseas, the trend among large U.S. corporations appears to be to limit their U.S. federal tax paid by “off-shoring” profits wherever possible.

For Whom - Part II Chart II

The Big Bucks Stop Here

The analysis so far suggests unfavorable relative performance for GE common stockholders compared with a low-cost index fund tracking the blue-chip stock benchmark. The U.S. job creation claims pale in comparison to the long-term historical trends for the sector in the opposite direction. The weighted average federal tax rate for the past ten years has been less than one-half of 1%. A reasonable person cannot be blamed for wondering about who benefits from the churning of earnings at one of America’s blue-chip industrial companies (according to the WSJ piece cited in Part I, over $5 Billion in the fourth quarter of 2014 alone).

As it turns out, according to proxy statements available on the GE site, CEO Jeffrey Immelt has collected over $170 million since 2002. The chart below contains inconsistencies, as some of the proxy statements included a summary table with a column labeled “SEC Total,” whereas, others did not, and in those cases, I chose to use data in the column labeled “Total.” The detailed footnotes to these summary tables attest to the complexity of the reporting of executive compensation. As with the other graphs in this entry, it is included for illustrative purposes only.

There are executives on Wall Street whose compensation make $170 million seem like chump change, but to the ordinary investor, this illustration gives a glimpse at the disproportionate take at the top of one of America’s flagship blue-chip companies. I began to include data on the other senior executives whose compensation is included in the proxy statements but the process got too depressing.

The U.S. manufacturing renaissance appears to have boosted GE’s stock price since the Crisis of 2008, which appears to have been good for executive compensation. Before that, the salad days for pay appear to have been in the run-up to the financial crisis itself. On that topic, GE’s financial subsidiary (GE Capital) is so big that according to the NY Times “the federal government’s Financial Stability Oversight Council has designated the lender a systemically important financial institution, subjecting it to greater regulatory scrutiny.” Does the ordinary investor know that GE is a major financial services company? It is not surprising that, as I write this, headlines are announcing the sale of parts of this business.

For Whom - Part II Chart III

If the illustrative data and observations included herein are accurate, the reasonable observer cannot be blamed for feeling the weight of the existential question left begging, the one few if any public leaders are asking: for whom exactly do America’s high-profile companies exist?

I do not know the answer, but one thing is certain. The passage from poet John Donne’s famous Devotion, from which Hemingway minted a book title, offers little solace to the ordinary investor saving toward retirement as an owner of common stock, that ownership all but divorced from the control of America’s blue-chip companies (italics and spelling as in the cited reference):

“No man is an Iland, intire of it selfe; every man is a peece of the Continent, a part of the maine; if a Clod bee washed away by the Sea, Europe is the lesse, as well as if a Promontorie were, as well as if a Mannor of thy friends or of thine owne were; any mans death diminishes me, because I am involved in Mankinde; And therefore never send to know for whom the bell tolls; It tolls for thee.”

–John Donne

(Meditations from ‘Devotions Upon Emergent Occasions’ XVII, The Complete Poetry and Selected Prose of John Donne, Random House, New York, 1941, p. 332)


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