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.