If John Carney is a Democrat, here is a good way to prove it
The concept of “shareholder primacy” is a cancer that is not only undermining our democracy but is eating away at capitalism itself. While other countries like the UK have passed laws to attempt to address the pernicious effects of shareholder primacy, (requiring company directors to consider the interests of a broad range of stakeholder such as employees, customers, the environment and the community), the US has done nothing.
If John Carney is looking for a way to assert his democratic credentials (and I doubt he is) he couldn’t find a better issue.
The Governance Institute of Australia has challenged the ‘shareholders first’ focus of existing corporations law in a new discussion paper.
The paper, entitled Shareholder primacy: Is there a need for change?, invites public input about the principle that shareholders’ interests are “paramount in business decision-making”.
Governance Institute chief executive Tim Sheehy said community groups are labelling the ‘shareholders first’ focus of corporations law as a “deficient governance model” that puts short-term private interests ahead of the public good.
“With mounting community expectations that companies become more focused on the ‘common good’ and a growing awareness of the need for companies to take a longer-term view, it’s timely to re-open the debate on whether shareholders should still be ‘king’,” Mr Sheehy said.
“Today, more than ever, Australian companies and their directors are coming up against community expectations that directly clash with short-term goals of maximising profit,” he said.
“The central question is: who should make the ultimate call on which party’s interests take priority — directors or the government?” Mr Sheehy asked.
The Governance Institute pointed out its discussion paper also raises various options for “tackling this dilemma”, including amending the Corporations Act to adopt “expanded directors’ duties” similar to the UK Companies Act.
“UK law requires directors to consider the interests of a broad range of stakeholders beyond just shareholders — including employees, customers, the environment and the community, in order to foster a longer-term perspective in business decision-making,” Mr Sheehy said.
“This approach puts the onus on directors to judge whether shareholder profit or corporate responsibility should prevail when deciding what activities are in the best interests of the company,” he said.
Aside from the fact that you know Carney wouldn’t touch this with your ten-foot pole, I see two issues:
1) You could define a new and different 1% with the number of people outside the wealthiest 1% who actually know what the concept of “shareholder primacy” is.
2) Once you did explain it, the wonders of demagoguery kick in: “Well, duh, what else should you expect from a business I invest in other than profits?”
I’m curious, though, it seems to me that the most effective way to market this in the US is not from the perspective of governmental regulation (which would require Congresscritters and Senators to ignore their own corporate shareholders), but from the same perspective as “green,” or “socially conscious,” or “responsible” investing–although I admit I have no grasp on how effective those ideas have been in terms of collecting adherents who actually invest.
The “B corp” movement has had some success, but until that 1% of people who have heard of the disaster that is “shareholder primacy” grows to at least 40% – I’m not expecting much.
I agree that passing legislation would be tough, but there are people alive today who remember what life was like prior to 1970. They could be activated if some party (Democrats, say) make it a political issue.
The problem is that somebody high profile has to start telling the story of the few companies who are doing things beyond merely looking at the shareholder bottom line are doing. “Our shareholders are amazing people who understand that our company is about more than just quick profits–our company is about our community, our environment, and our conscience. We’re proud to have shareholders who share those values.” It is a story that could be told (maybe it has been and I missed it) but that’s where it’s got to go. I have a good friend who teaches corporate ethics (don’t snicker) at Duquesne University, and this has been her passion for about a decade.
Examples of companies that are doing the right things are good, but since 1970 the concept of shareholder primacy has spread like wildfire because it completely relieves companies from having to deal with any downstream moral or economic costs. The genie isn’t going back in the bottle on its own. It will need governmental help.
” It will need governmental help”
Despite my initial inclination, you are probably right. The market place has become inorganic to the point where shareholders are longer individual investors. Rather they are institutional entities, essentially representing shareholders. The essence of this is non-organic entity investing in another non-organic entity, facilitated by other non-organic entities (trading programs). None of whom can possess morality because they are not people.
One of the largest is CALPERS representing 1.6 million people (over 3000 school districts, state and local agencies). Further most of these are members of bargaining units. So who do we want to act in a moral manner? The members (teachers, some of who teach ethics I would assume), the unions, the state agencies, CALPERS, the companies they invest in?
The result is the lack of personal responsibility which has alleviated the individual from acting in a moral manner. Hey I just contribute to the retirement system, I have no say so on what they invest in! You can’t just fix the companies, you also have to fix the entities that invest in these companies. In short you have to reshape society to the point that the individual matters and where the individual is responsible.
That’s a tough nut to crack. So maybe it takes government to influence society and act as an instrument of social engineering, but more importantly, at least in my view, it will take serious conversation on why the societal good is in the best interests of the individual because ultimately, we choose to live in a society because of our own self interest. We like to be around other people that we share common interests and concerns.
And that’s really the crux of it, common interests, shared responsibility. Unfortunately we live in world where uncommon interests have a greater value than common interests. We celebrate diversity, which is right, but the price has been the demotion of that which brings us together. Companies reflect the moral values of its shareholders and stakeholders.
Stockholder primacy is not new.
Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).
Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919) deals only with a very special circumstance & has been refuted many times when it is given as an example of the courts ruling in favor of shareholder supremacy.
There are actually no laws nor much legal precedent that require shareholder supremacy.
If your really interested in the topic, read this book:
The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public Paperback – May 7, 2012
by Lynn Stout (Author)
Jason: A corporation is to be run in the interests of shareholders. This principle predates 1970, 1950, 1920.
The struggle to help the people involves fights for collective bargaining, environmental protection, public infrastructure, progressive taxation, Net neutrality, financial regulation, level-headed international policy, an end to mass incarceration and more. The cause is not advanced by propeller-headed nonsense that betrays utter ignorance of corporate law.
Don’t be a sap. 1970 is the watershed year for obvious reasons.
And all the things you mention are the symptoms the disease is shareholder primacy.
What’s so obvious about 1970? Help me. Mungo Jerry? Willis Reed? Did Sam Arsht photo-shop the corporate code while the judges were out watching Z?
For-profit corporations are run for the benefit of those who own them. Arguing the contrary debases this site.
You really are clueless. I blame myself for not going over this more frequently. Okay, class begins tomorrow.
Roughly one third of the Delaware state budget comes directly ( franchise tax and escheat) from corporations who locate here for what could be described as “shareholder primacy” type issues. Another large chunk comes indirectly (law firms etc.). If they all adopted an “our community” stance we’d be up shit creek.
And let’s elect judges, too. Power to the people!
http://abovethelaw.com/2015/02/john-oliver-thrashes-elected-judges/
@JM: I am not a lawyer, obviously. But I have always understood that Delaware, more than other jurisdictions, limits shareholder rights in favor of management. Is this true?
@radef16
I have read the book (and I have owned the book for a long time). That said, nothing has convinced me that stockholder primacy is new (or took hold only in the 1970s).