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E4 Common-Good oriented use of profits

A) Point of departure and goal of the indicator

Appropriation of profit by enterprises is one of the most hotly debated issues in business. It is kindled by the rising dividend payout ratios of stock-market companies which result from the pressure exerted by globalized markets. In 2010, the thirty DAX companies paid out more money in dividends to shareholders than they had earned in profits the previous year. Even relatively small companies sometimes pay out part or even multiples of their profits to partners who do not / no longer work in the company.

The goal is to distribute/reinvest companies’ profits in the most fair, purposeful way possible and to the greatest possible benefit of the Common Good. In principle, income should be coupled with work performance. Owners of capital should no longer be entitled to income (with the exception of founders who receive a “founder’s pension” for a period of time equal to that during which they built up the enterprise through their own active exertion.)

B) Prompt questions

  • What is the goal of our company?
  • What does “performance” mean for us?
  • Should capital always fundamentally demand to be increased?
  • Which systemic consequences do returns on capital have (making money out of money without work performance)?
  • Do we see a connection between the habit of seeking returns on investments and the economy’s compulsion to grow?

C) Evaluation table

 

Sub-Indicator

First Steps     (0-10%)

Advanced

(11-30%)

Experienced

(31-60%)

Exemplary 

(61-100%)

External dividend payout

 

Relevance: high

5-year average: dividends not higher than inflation plus 5%

5-year average:

dividends not higher than inflation plus 2.5%

5-year average:

dividends not higher than inflation

No profit distribution to external owners

Use of profits oriented to the Common Good: dividend payout and labour-based
strengthening of equity capital as well as eco-social re-investments

 

Relevance: high

 

50-70% of profits (at least 50% of which are social-ecological investments) 

 

 

71-80% of profits (at least 50% of which are social-ecological investments) 

 

 

81-90% of profits (at least 50% of which are social-ecological investments) 

 

 

91-100% of profits (at least 50% of which are social-ecological investments) 

 

 

D) Special aspects regarding the evaluation

 

Exception: “founder’s pension”**

Maximum: 3 times the average wage/salary

Maximum: 2 times the average wage/salary

Maximum: 1.5 times the average wage/salary

Maximum: average wage/salary

Exception: PE/venture capital, Business Angels*

5-year average: dividends not higher than inflation plus 10%

5-year average: dividends not higher than inflation plus 5%

5-year average: dividends not higher than inflation plus 2.5%

5-year average: dividends not higher than inflation

 

* PE = Private Equity. Justification: some enterprises are still too young or small to get capital from the stock market or to be granted a bank loan. On “venture capital markets,” high returns on capital are customary. The editing team wants to make allowances for start-ups and companies which have no access to banks while not losing sight of the issue.

 

** Justification: some founders remove only a small income from the company over the course of years or decades (entrepreneurial income) so that it can develop well and they can harvest the fruits later on, sometimes in part to finance private pension schemes. The period of validity is the same during which they made active efforts to build up the company. Whoever built up a company from his/her early days on, receives a pension as long as he/she lives. Those who did not found an enterprise until five years before they retired, for example, only receive a pension for that period of time.

 

FAQs concerning the evaluation:

 

How do stock companies relate to a Common-Good orientation?

 

The law text of the Austrian Stock Corporation Act uses the term “public interest” in the sense of common economic interests. From this it does not follow, however, that board members can be made liable for conduct which is detrimental to the Common Good. The Austrian Stock Corporation Act and the Labour Constitution Act, like similar German legislature, apply the concept of company co-determination. In Austria the board is obligated by law to take the employees’ interests into account. Both legal orders provide for appointment of employee representatives to a company’s supervisory board for the purpose of protecting their interests.[1]

 

Can shareholders waive the right to dividends to promote the Common Good?

 

The Austrian and the German Stock Corporation Acts lack any regulation of permissibility and implementation of such waivers. Renunciation of dividends would have to be anchored in the statutes of the company in question. This can raise further legal issues, however, such as whether such renunciation contradicts the nature of a stock company.

 

Differentiation from other indicators:

 

Creditors: ethical financial management B1

 

“labour relations”: in-company democracy and transparency E5

Democratic polity /civil society: contribution to the Common Good E2

 

E) Definitions + Background

There are three reasons why capital income in the sense of “making money out of money” (without working) is principally questionable:

 

  • Growing inequality: a growing proportion of the national income is generated by capital income (not earned through labour), a decreasing part by work income (wages, salaries). Since the financial assets are concentrated in the hands of a minority (in Austria, twenty percent possess some 80 percent of the financial assets), this minority receives a large portion of the entire capital income. The majority is structurally dispossessed to the advantage of equity owners – through interest, dividends and capital gains. This even holds for the “inflationary adjustment” of savings accounts. Such adjustment has to be financed; from a systemic perspective, the consumers as a whole are the ones who finance the credit costs by purchasing products and services. The banks pay interest on savings out of the money they make from interest on credit. Eighty to ninety percent of the population pays more interest on credit than they receive for savings. The opposite is only true for 10-20% of the population. The higher the interest on savings is, the more this minority profits. Interest rates, no matter how low they are, constitute a mechanism for distributing money from the large minority to a small majority.
  • Compulsion to grow: when interest is paid on capital, this generates a – systemic – compulsion to grow. But the economy cannot grow indefinitely. For this reason, it makes sense to exit the growth spiral by refraining from paying interest on capital altogether.
  • Mathematics: over the long term, paying interest on all financial assets is actually mathematically impossible, for such assets increase in value all the time, amounting to increasingly large multiples of the economic output (GDP).  Financial assets can only be increased if they are invested in the “real” economy, and capital gain derives from the actual added value. If the financial wealth exceeds the real economy many times over, it can no longer be invested in full – and bear interest. 

F) Implementation

Study of citizen participation models such as the Regionalwert AG in Freiburg, the taz (“tageszeitung”), diverse energy cooperatives and the Demokratische Bank project.

Newly defined investor relations in the direction of sensitizing investors for the effects of return on capital and the interest system.

G) Best practices

The Demokratische Bank, which is in the process of being founded, “does not want to pay out any dividends on principal.” (excerpt from the vision): www.mitgruenden.at

The Regionalwert AG registers a multitude of non-monetary profit aspects: http://www.regionalwertag.de/index.php?option=com_content&view=article&id=15:gewinn&catid=29:aktie&Itemid=15

Düsselsolar: http://www.buefem.de/duessel-solar

H) Bibliography/ Links /Experts

On the topic of compulsion to grow:
  • De-growth movement: http://www.degrowth.net
  • Casse: http://steadystate.org
  • Nico Paech: “Befreiung vom Überfluss. Auf dem Weg in die Postwachstumsökonomie,” oekom 2012.
  • Irmi Seidl / Angelika Zahrnt (eds.): “Postwachstumsgesellschaft. Konzepte für die Zukunft,” Metropolis 2010.
  • Tim Jackson: “ Prosperity Without Growth: Economics for a Finite Planet,” Taylor & Francis Ltd. 2009.
 
On the topic of financial assets:

 

 

Editor: Christian Felber: info@christian-felber.at; assistance: Nonno Breuss, Harro Colshorn, Angela Drosg-Plöckinger, Gisela Heindl, Christian Loy, Christian Rüther.


[1]          Abarahnlich: legislative proposal by the European Commission from November 2012 for a female quota on supervisory boards. You can find this proposal in C. Felber, Economy for the Common Good, 2015.