The myth of “shareholder primacy” continues to crumble; employers, employees and shareholders win
When I was getting my MBA 10 years ago, the manifold virtues of shareholder primacy were so ingrained in the culture of business academics that, while they informed every bit of the curriculum, they were only discussed in passing. There was no more attention paid this foundational concept than you would pay attention to the concept of addition in a calculus class. Fortunately that is changing.
Lynn Stout, the Distinguished Professor of Corporate and Business Law at Cornell Law School, helps move shareholder primacy into a coffin and provides some coffin nails for the myth that has wrecked our economy in her most recent book, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public. This abstract of the book explores the logical connections between the 40 year rise of shareholder value thinking and subsequent declines in investor returns, numbers of public companies, and corporate life expectancy. It also shows that shareholder primacy is an bullshit economic theory, completely lacking in support from history, law, or empirical evidence.
By the end of the 20th century, a broad consensus had emerged in the Anglo-American business world that corporations should be governed according to the philosophy often called shareholder primacy. Shareholder primacy theory taught that corporations were owned by their shareholders; that directors and executives should do what the company’s owners/shareholders wanted them to do; and that what shareholders generally wanted managers to do was to maximize “shareholder value,” measured by share price.
Today this consensus is crumbling. As just one example, in the past year no fewer than three prominent New York Times columnists have published articles questioning shareholder value thinking.1 Shareholder primacy theory is suffering a crisis of confidence. This is happening in large part because it is becoming clear that shareholder value thinking doesn’t seem to work, even for most shareholders.
There was a study done several years ago on long term profitability of publicly traded companies that compared those companies who were consistently on the “Best Places To Work” list and those that were not. In other words, flipping the paradigm of shareholders/stakeholders first, customers and employees – well, keep enough to take care of the shareholders.
What this study found was that the BPTW employers who put their employees first, customers second consistently out performed their non-BPTW competitors. Happy employees take better care of customers (whether superior products, services, etc.) which means higher customer loyalty… Long term profitability and growth.
I saw this happen first hand when I worked for a very large, international privately held company that “merged” (yeah, right!) with a publicly traded company. We were all in culture shock. We were expected to produce more with less talent which meant our product (service) suffered, customers were less satisfied… There was no employee loyalty – if you didn’t meet goals, you were gone. Those who left ended up taking customers with them until the company instituted non-competes.
I think “Best Places To Work” thinking is really turning the tide. The nice thing about business is that it is a very dynamic laboratory in which allows for constant iteration and change.
Shareholder primacy companies are now feeling the heat so I don’t think it will take them very long to adopt that strategies and tactics of companies that are eating their lunch.
The concept of “Putting Shareholders First” is the Jack Welch & “Chainsaw” Al Dunlap method of being a successful CEO. Screw EVERYONE (employees first!), downsize the fuck out of the corporation & then sell it off to the highest bidder.
It ain’t rocket science, but it made those 2 fuckers a LOT of money. It’s also not a sustainable business model, but they don’t care about anything other than the next quarterly report OR their “golden parachutes.”
Fuck them.
Shareholder value comes in many forms. We have a convoluted system now that favors the short term, not the true value of a company.
Yep. That is one of the fallacies Milton Friedman pulled out of his ass in 1970. That all shareholders had one goal – short term gains.
“We have a convoluted system now that favors the short term, not the true value of a company.”
You can thank Bush’s tilting of the tax code for that, and Obama’s failure to completely restore the balance when he had the chance.
And since Al Dunlap was making much of his money and doing his creative destruction during the Clinton years, we know that — once again — puck has his own (and largely wrong) financial narrative. The tilting of the tax code towards shareholders (leaving workers behind) started with Reagan and even Clinton didn’t do much to right that imbalance. cf the 30 year flat wages of American workers.
I love how I can always find a reliable apologist for Bush economic policy here.
I love how — in spite of real data otherwise — the magical thinking about money persists here. Who needs the Laffer Curve when we have puck, here?
Puck-
Cassandra isn’t BSing you. Just google “Al Dunlap”.
When did Al Dunlap become an argument for keeping investment taxes unnaturally low?
Do you really not know what this thread is discussing? This is about the destructiveness of the “shareholder value” position — not low investment taxes. And why would that mean anything anyway? The Dunlaps of the world were doing their thing no matter the tax structure.
*sigh* It would be easier to convince John Carney that taxes on the investor class need to go up.
You may have lost sight of the fact that this thread kept drilling down until we found the problem that resulted from sharehoder primacy was SHORT TERM THINKING and short-term profit seeking, best represented by corporate dividends (taxed at 20%)
Why on earth would you so sneeringly oppose decreasing the tax reward for Dunlap-like behaviors?
I’ve never opposed increasing the taxes. I am opposed to misrepresenting the incentives that might accompany an increase in taxes. And an increase in taxes won’t stop this short-term thinking for quarterly profits and nor would it result in increased employment. The sneering is for your Laffer-like insistence otherwise.
Well, there’s your logical error. For some reason you want to insist that tax incentives or disincentives don’t affect corporate behavior. Maybe small changes don’t, but big ones will.
And you’ve been challenged over and over again to produce reliable data that increased corporate taxes increase employment. All you can produce is more magical thinking. Increased taxes to corporations (or individuals for that matter) are increased costs. For some businesses, those increased costs may restrain other spending decisions, and for others, those increased costs might be passed on in whole or part to consumers. But they don’t spur investment or employment and you’d think you have some real and reliable data that this happens. Instead of a complete wrong narrative on the Clinton-era economic policy.
“Increased taxes to corporations (or individuals for that matter) are increased costs. For some businesses, those increased costs may restrain other spending decisions”
Now who’s pushing the Laffer Curve. Corporations are awash in money. Lack of money is not the reason they are not hiring. The rewards for dumping labor are high right now due to our tax code.
I know you’re stuck in your magical thinking here, but I’ve made no claims that corporations had no money or even that a lack of money was why they aren’t hiring. Demand is why they aren’t hiring. The tax code is not why they are dumping labor.
But I note you still haven’t produced any data for your position, either. STILL.
The only data I need to produce is the correlation between the 2001 tax cuts and the shrinkage of the middle class. Tax policy is the biggest lever we have to affect corporate behavior. My exasperation stems from the failure of the administration to strike a square blow with the expiration hammer and max out the investment taxes. But that battle is over and we lost. Now “raising investment taxes” is in the same pie-in-the-sky category as investment in infrastructure, direct job creation,, re-empowering unions, or national health care. Because of lack of support form wishy-washy, Republican-leaning Democrats.
In other words, you’ve got nothing except for your feelings.
Which is why you can’t get any support from anybody — because policy ought to be driven by data, not on what you feel. Investment taxes are by no means the biggest problem in tax policy and certainly not a driver for employment.
In any case, “demand” requires consumer disposable income. Another word for that is “jobs.” At this point our options are: Incentivize the job creators to put their shoulder to the wheel again; or do direct government job creation financed by soaking the rich. If we ever get to do fiscal stimulus again, the checks better be payroll checks direct to individuals and not trickle-down contracts to corporations.
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Taxes don’t incentivize either employment or raises. And if they did, there’d be plenty of data on it. Go find it and we’ll talk. Otherwise, this is still you talking out of your ass.
And look at this bit of stupidity:
not trickle-down contracts to corporations
Really? You can’t talk about the kind of infrastructure investments Obama has been pushing WITHOUT contracts to corporations. Unless you are thinking that everyone will be sending a piece of their payroll checks to the magical entities that build bridges.
“You can’t talk about the kind of infrastructure investments Obama has been pushing WITHOUT contracts to corporations.”
not if tney are cheating their labor and paying out the “savings” as short-term dividends to shareholders, which at only 20% tax is exactly what they will do. That is pouring money into a leaky bucket. Again. Somebody has to stand up and reverse the upward redistribution of income.
What savings? Most of the government investments in construction require payment of prevailing wages.
Stopping the upward redistribution of income is more about wage equity and paying people in accordance with their actual productivity and eliminating the government subsidies and tax credits to them.