Debating “The Shareholder Value Myth”

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17 Responses

  1. Brett Bellmore says:

    “Instead, Stout claimed, corporations own themselves and in running corporations, managers can and should pursue any lawful purpose.”

    How convenient for those managers, suddenly pursuing their own ends with funds entrusted to them based on the earlier, “maximize shareholder value” norm. But that’s a trick you can only pull off once, and then people will find other things to do with their money than become shareholders.

    A lot of norms are like that: Somebody stands to profit from overturning them, but only once, because you can only betray a trust once, and then nobody trusts you.

  2. PrometheeFeu says:

    That is a fascinating perspective. Thank you for bringing it up here.

    Perhaps we are simply conceiving of ownership in the wrong way, or wrongly defining the unit that is the corporation. Let me explain myself. I am the owner of a wide variety of things which could be said to “act” independently of my will and interests. My computer for instance has on some occasions deleted things I did not wish to see deleted.

    Perhaps the actions of managers should be seen in the same way. When a manager acts, it is merely the corporation that is acting. Shareholders are free to act “upon” that which they own, but they cannot dictate their actions to managers any more than the law comes to my rescue when a program misbehaves.

  3. Shag from Brookline says:

    Brett’s:

    ” … but only once, because you can only betray a trust once, and then nobody trusts you.”

    apparently didn’t apply to Georg W. Bush in 2004. (Fool me once, shame on you; fool me twice, shame on me.)

  4. Brett Bellmore says:

    Oh, my! I never realized Shag had trusted Bush, and voted for him twice! How remarkably gullible! Unlike me, who only expected him to be the lesser evil. (Though I still got disappointed, I expected a bit more “lesser”.)

    Were there no other place than stock shares where people could put their money, corporations might be similarly situated to politicians, one of whom is going to be elected even if you rationally distrust both. And so they get voted for even though the rational voter knows they’re being lied to.

    But they’re not similarly situated: Should corporations, already in possession of funds given them under a norm of shareholder maximization, suddenly switch to a norm of shareholder screwing over, there ARE other places people can put their money. Commodities. Personal property. Heck, at today’s interest rates, mattresses are competitive with savings accounts, and perhaps safer.

    And so, we can rationally expect that, were corporations to take the above advice, they would suddenly find it remarkably more difficult to raise money. As well as facing considerable political pressure to change laws in order to formally reinstate the norm, only with serious penalties.

    Corporations are in possession of huge sums of other people’s money, and those other people should not be expected to be indifferent to the proposed change of norms.

    Again I say, you can profit from betraying trust, but only once. Make no mistake, that’s what is proposed here, a betrayal.

  5. Shag from Brookline says:

    Brett apparently is unaware of Bernie Madoff, who made off with other peoples’ monies (invested and reinvested) for a long, long time (for which he will be doing long, long time).

    No, Brett, I never trusted Bush, especially after reading a “favorable” biography “First Son, George W. Bush and the Bush Family Dynasty” by Bill Minutaglio, published in anticipation of his run in 2000. And I never voted for him. But you apparently have no shame.

    Regarding shareholder value, consider the tax benefits to shareholders for unearned income in the form of dividends and and long term capital gains that came about with the Bush tax cuts.

    In any event, there was no lesser evil than Bush/Cheney.

    As for corporations, in their roles as “people” per Citizens United, Burt Neuborne’s “Of ‘Singles’ Without Baseball: Corporations As Frozen Relational Moments” available at:

    http://ssrn.com/abstract=2255094

    provides an astute and short (24 pages) history of corporate “personality” in America. Citizens United makes a myth of the diversity of shareholders in a large corporation in spending corporate funds for political purposes without shareholder approvals.

  6. Lawrence Cunningham says:

    Kelli:

    Great post.

    Sitting here in Omaha this morning at the start of the Berkshire Hathaway annual shareholders’ meeting, it is amazing to hear Lynn Stout deny that shareholders own corporations. The idea of shareholders as owners as at the heart of Warren Buffett’s investment and management philosophy.

    It’s funny that Lynn participated in our symposium on Buffett’s letters 17 years ago and I don’t recall her raising any question about this proposition. Perhaps later this month when you and I and others do the on-line symposium about Buffett’s letters we can get into that fundamental idea.

    Meanwhile, again, great post.

    –Larry

  7. Shag from Brookline says:

    If more corporate CEO/Chairmen were of the caliber of Warren Buffett, there might not be a myth. (I provide no services to either Buffett or Berkshire Hathaway, nor am I a stockholder, just a fan.)

  8. Joe says:

    “Citizens United makes a myth of the diversity of shareholders in a large corporation in spending corporate funds for political purposes without shareholder approvals.”

    I recently read a biography (written when Shag was but a babe) of Justice Wayne [“James Moore Wayne, Southern unionist”] and the position of corporation as a “citizen” or “person” for limited purposes was familiar back then. That is the 1840s.

    So, I find it more helpful to address things such as shareholder approvals. Cf. how unions are treated, multiple opinions concerned about unwilling workers be forced to have their money spent for union causes.

  9. Urska says:

    Thank you for writing this post, Kelli.

    Stout is obviously right that shareholders can’t tell managers for a share of the profits that the firm generated in any given year. And so is Macey when he says that shareholders are residual claimants (even if they are not the “only” residual claimants). But they disagree about the implications of their positions – to which I suspect you will get in your next posts.

    Why does it matter that we call shareholders owners rather than something else? A lawful owner of a bald or golden eagle feather can’t even give it away, let alone sell.

  10. Kelli says:

    Thanks, Larry. I think one of Lynn’s main objectives is to move managers away from prioritizing short term profits. She and Warren Buffett would agree on that point. The short term/long term debate is what I’d like to discuss in my next post, so I won’t write all of my thoughts on the matter here, but I think Lynn thinks we get away from short-termism by de-emphasizing the interests of short-term shareholders and she thinks a way to do that is to relieve managers of the obligation to prioritize the interests of shareholders at all.

    Urska — I agree with you that whether we call shareholders “owners” may not matter much as long as we understand their rights and role within the firm. I think Lynn’s point was that she thinks shareholder value thinking is destructive and it is often justified by the understanding (which she thinks is mistaken) that shareholders are the true owners of the firm. Considering the shareholders owners leads managers to believe they are required to make decisions that will maximize shareholder value and that thinking is what Lynn finds troubling.

  11. Shag from Brookline says:

    Adam Liptak’s NYTimes column (5/4/13) “Corporations Find a Friend in the Supreme Court” seems to confirm the myth.

  12. Douglas Levene says:

    As Prof. Bainbridge has pointed out repeatedly, it is a mistake to think of shareholders in a widely held public corporation as the “owners” of the corporation. They are the owners of a claim to the residual interest in the corporation. Because the contract between the corporation and the residual interest holders is necessarily incomplete, the law fills the gap in that contract by giving shareholders a vote for directors and mandating a duty of directors to act loyally in the shareholders’ interests. This is all elementary and, I thought, widely understood.

    If you eliminate the fiduciary duty to act loyally in the shareholders’ interest, then one of two things will happen. Either the residual interest holders will figure out how to draft much more explicit contracts binding the directors to act in their interests, or they will require much higher returns to compensate them for the increased risk to the residual interest. The only thing such a change would not do is discourage the directors from focusing on short-term profits, which in any event is not required by the law of fiduciary duty but rather by market forces.

  13. Lawrence Cunningham says:

    @Douglas 12:

    I’d say what you think is “elementary” and “widely-understood” are a set of assertions that are better described as “over-simplifications” and “widely-debated.”

    For instance, there is no “contract” between the corporation and the “residual interest holders”; that is just a simplifying image. Similarly, the “residual interest holder” is not a legal or business concept but a theoretical idea or heuristic from economics.

    More broadly, shareholders “own” many rights other than the “claim to a residual interest,” including as you note to elect directors as well as to: (a) remove and replace directors; (b) vote on dissolution, charter amendments, mergers and substantial asset sales; (c) amend bylaws; (d) inspect books and records; (e) call, attend, participate in and vote at special shareholders’ meetings; (f) initiate derivative lawsuits; and (g) freely transfer those and a bundle of other rights to others. Controlling shareholders, moreover, even have duties to the corporation and the other shareholders.

    Given this complexity, it is as sensible to say that shareholders own the corporation (the traditional view) as it is to say they own the residual interest (the contemporary law-and-economic theory view), as both are imprecise short-hands for a complex set of ideas. But to say that the view you seem to have adopted is “elementary and widely-understood” seems off. Instead, exactly how to classify shareholders in the corporation is a complex question on which there is a vast history, tradition, criticism, literature and range of highly-contested positions.

  14. Douglas Levene says:

    Point well taken. I summarized the bundle of rights that shareholders have (which is, as you point out, a combination of contractual and legal rights), as do those who describe shareholders as the “owners” of the corporation. In any event, the elements I omitted did not seem particularly relevant to the question whether describing shareholders as “owners” or “residual rights claimants” makes a difference in terms of the directors’ focus on short-term profits. I also don’t disagree with you that there is still an ongoing debate about the nature of the corporation, even within the law and economics tradition (e.g., compare Macey with Bainbridge on the market for corporate control), and that Prof. Stout always has something challenging and interesting to add to that debate. The law and economics analysis seems far more powerful to me, though.

    Query: do you disagree with my claim about what the result would be of eliminating the duty of directors to act loyally in the interests of shareholders?

  15. Jennifer Taub says:

    Kelli,

    Excellent post. Wondering if there was a video or transcript of the event. It would be useful to watch/read the debate between Stout and Macey.

    JT

  16. Jennifer Taub says:

    Thank you!