The rather Cardassian-looking personage at right is Robert A. “Bob” McDonald, Chairman of the Board, President, and CEO of the Procter & Gamble corporation. He was interviewed recently by Advertising Age on the topic of why P&G continues to pump out dividends to its shareholders, despite the Great Recession. The answers he gave are textbook confirmation of the profound difference between corporate and classic capitalism.
Recall that, despite the centrality of price-slashing to the ideal capitalist system described by Adam Smith, in practice, nobody hates price reductions more than capitalists. Explaining his 1892 decision to sell Edison Electric to the investment ring that was seeking to form the General Electric corporation, Thomas Alva Edison confided to The New York Times:
Recently, there has been a sharp rivalry between the [existing] companies, and prices have been cut so that there is little profit in the manufacture of electrical machinery for anybody. The consolidation of the companies will give the added advantage that a large concern has over a small one. It will give a larger working capital. It will do away with a competition that has become so sharp that the product of the factories has been worth little more than ordinary hardware… I do not know that there will be any increase in prices, but there should be an increase of 3 or 4 percent in the profits by the simple advantage of placing all of the interests under one management….I simply want to get as large dividends as possible from such stock as I hold.
Big, conglomerate, merger-forming, unregulated corporations (a.k.a., our ruling institutions today) were knowingly sought and obtained by frustrated capitalist investors precisely as a means of restricting price competition.
Within a few decades, the newly empowered investor-barons found that their success in this direction also made it possible to launch what we now know as marketing, a.k.a. studied managerial manipulation of the off-the-job behaviors of prospective customers, and to thereby further accelerate profit-making.
By diverting to marketing some of the steadily rising revenues made possible by constant price increases, big businesses could have their cake and eat it, too. People paid higher and higher prices, funding not only expanding returns on shareholder investments, but also the ever-expanding brainwashing effort on which those returns were increasingly premised. In essence, the new pricing power permitted corporate capitalists to collect a private tax and spend it on the marketing race, to the primary benefit of their owners’ portfolios.
I mention all this again because, in his Ad Age interview, Mr. McDonald confirms how the whole thing works.
“[W]e don’t signal pricing to competition, which is illegal and unethical,” says McDonald, in the mandatory pro forma nod to the prevailing agreement that a lack of old-fashioned price-fixing klatches somehow means co-respective pricing isn’t the norm.
So what do P&G managers do instead?
They make price increases, then “it takes competitors about a month or two to recognize you are pricing and about a month or two to decide to execute their price increase and then another six months to actually execute their price increase.”
In other words, they “don’t signal pricing to competition,” but they do make price changes then pay very close attention to whether competitors will co-operate on the hikes (and they usually do).
So, no (or at least not usually) secret meeting, but everybody knows how the system works, and very few ever buck it. Different process, same intent and same results:
P&G plans additional price hikes early next calendar year to recoup commodity costs and currency changes, but is about two-thirds of the way through price increases, he said.
Overall, P&G posted results in-line with analyst expectations, with organic sales up 4% to $21.9 billion and fully diluted net earnings per share up 1% to $1.03, as commodity costs continued to eat into margins despite price increases.
Under Bob’s leadership, P&G has grown sales by an average of nearly four percent per year over the past two years; core earnings per share an average of nearly seven percent; and adjusted free cash flow 106%. The Company has delivered these results despite significant economic headwinds, including slow to no growth in developed markets and rising commodity costs.
On the strength of these results, P&G has paid about $5.5 billion in dividends, returned over $6 billion to shareholders through the repurchase of P&G stock, and marked the 121st consecutive year that P&G has paid a dividend.
P.S. Bob also makes a highly interesting comment on the continuing polarization of American society:
“I don’t really see a dramatic change in consumer behavior,” Mr. McDonald said, compared to what consumers have been doing since 2008. Unemployed consumers continue to look for good value and sometimes trade down, he said. “But at the same time you’ve got people at the higher end of the economic pyramid doing extremely well and continuing to trade up.
In mainstream politics and media, it’s still a “middle-class” society. At the commanding heights of “the economic pyramid,” they know better.