How the cult of shareholder value wrecked American business

[eridani]

http://articles.washingtonpost.com/2013-09-06/business/41816395_1_shareholder-value-directors-executives

In the recent history of management ideas, few have had a more profound — or pernicious — effect than the one that says corporations should be run in a manner that “maximizes shareholder value.”

Indeed, you could argue that much of what Americans perceive to be wrong with the economy these days — the slow growth and rising inequality; the recurring scandals; the wild swings from boom to bust; the inadequate investment in R&D, worker training and public goods — has its roots in this ideology.

The funny thing is that this supposed imperative to “maximize” a company’s share price has no foundation in history or in law. Nor is there any empirical evidence that it makes the economy or the society better off. What began in the 1970s and ’80s as a useful corrective to self-satisfied managerialmediocrity has become a corrupting, self-interested dogma peddled by finance professors, money managers and over-compensated corporate executives.

<snip>

There are no statutes that put the shareholder at the top of the corporate priority list. In most states, corporations can be formed for any lawful purpose. Cornell University law professor Lynn Stout has been looking for years for a corporate charter that even mentions maximizing profits or share price. She hasn’t found one.

Nor does the law require, as many believe, that executives and directors owe a special fiduciary duty to shareholders. The fiduciary duty, in fact, is owed simply to the corporation, which is owned by no one, just as you and I are owned by no one — we are all “persons” in the eyes of the law. Shareholders, however, have a contractual claim to the “residual value” of the corporation once all its other obligations have been satisfied — and even then directors are given wide latitude to make whatever use of that residual value they choose, as long they’re not stealing it for themselves.

[snagglepuss]

1. to read later. thanks for posting.

[unblock]

2. say what? corporations are owned by no one?

that just flat out wrong.

corporations are owned by their shareholders.

minority shareholders can sue if they a benefit is given to the majority shareholders and/or executives at the expense of the minority shareholders.

all shareholders can sue if their value is eroded due to a variety of management actions. not for incompetence, but if, for example, management starts spending money on things outside the stated business plan. you can't raise money from investors saying you're going to launch an iphone app business and then put all that money in gold futures.

and the fact that corporations can enter into contract and have standing to sue (are "persons" in the eye of the law) has nothing to do with it.

[eridani]

3. Shareholders don't own the corporation--they own SHARES n/t

[unblock]

5. ok -- shares -- which confer rights that look remarkably like ownership.

[eridani]

6. If corporations are people, wouldn't that be slavery? n/t

[unblock]

7. no. the legal term "person" is not the same as the lay term "person".

certainly, one corporations can own 100% of another, it's called a "wholly-owned subsidiary" and clearly has nothing to do with slavery.

corporations are also not entitled to vote for senators and such, and no one has a problem with that either.

[Xipe Totec]

4. Good article. Well worth reading. Thanks! nt

[jtuck004]

8. This really ought to be pinned at the top of the economy group.

And the little quibble about who owns what - the article is correct, the shareholders don't own the corporation - it's a legal entity. They own the value, or lack thereof, sometimes. They can direct actions if enough get together, they can pilot the ship, but they don't own the thing.

But that's not the most important point in the article, which is the next to last paragraph...

...
My guess is that it will be a new generation of employees that finally frees the American corporation from the ­shareholder-value straightjacket. Young people — particularly those with skills that are in high demand — today are drawn to work that not only pays well but also has meaning and social value. As the economy improves and the baby boom generation retires, companies that have reputations as ruthless maximizers of short-term profits will find themselves on the losing end of the global competition for talent. In an era of plentiful capital, it will be skills, knowledge, creativity and experience that will be in short supply, with those who have it setting the norms of corporate behavior.
...

The world we are moving is very skill oriented, and companies can't develop those skills in their people if they are returning the profits that would otherwise be invested in them to shareholders in the name of short-term profit. Groups of people who see this, like the cooperatives at Mondragon, have a distinct competitive advantage over those who don't. In the long run they have a real chance to change things and sideline the worst of these players.

It was that investment in people, looking at long-term gain instead of short-term profit, people sacrificing to build that which they would never live to take advantage of, which built this country in the first half of the 20th century. In the latter part and and into today we have replaced that growth model with a mean-spirited and narrow-minded outlook that seeks to get us no further than today. That is a powerful force, and many movements have been stopped or co-opted by it, but there is always the possibility that a few will realize the folly of continuing down this path and seek another.