The Shareholder Value Myth | Lynn Stout

Summary

The video challenges the widely held belief that shareholders own corporations and that corporations should maximize shareholder value. This ideology, which emerged in the late 1970s and 1980s, replaced the earlier view of corporations as social institutions serving various stakeholders. The speaker argues that the shareholder value approach has led to negative outcomes, such as fewer public companies, reduced corporate longevity, and lower reinvestment and innovation. Additionally, legal and economic analyses do not support the notion that corporations must prioritize shareholder value, highlighting the diverse and complex interests of real shareholders.

Takeaways

• 📜 The idea that corporations exist solely to maximize shareholder value is a relatively new concept, emerging in the late 1970s or early 1980s.
• 🏭 Prior to this, corporations were viewed as social and economic institutions with a responsibility to serve various stakeholders, including customers, employees, creditors, and communities.
• 🌐 The shift to shareholder value maximization influenced regulatory bodies like the Securities Exchange Commission and tax codes, giving shareholders more power and influence.
• 📉 Despite the focus on shareholder value, the number of publicly listed companies in the U.S. has significantly decreased, and the life expectancy of public companies has also declined.
• 💡 Companies are reinvesting less of their profits back into the business, which some believe is affecting innovation and the overall health of corporations.
• 🤔 The shareholder value maximization philosophy is questioned as it does not seem to have increased shareholder value, with returns being slightly less than in the managerial era.
• 📚 The script argues that the shareholder value philosophy is more of an ideology without strong backing from corporate law or corporate economics.
• 📖 Corporate law, as reflected in state codes and corporate charters, does not require maximizing shareholder value but allows corporations to be run for any lawful purpose.
• 👨‍⚖️ Case law is mixed, with some judges advocating for shareholder value maximization, while others, like Supreme Court Justice Alito, suggest that corporations are not required to maximize profits at the expense of everything else.
• 🤝 Shareholders are not the owners of corporations; they own a contract with the corporation called a share of stock, which grants them limited rights.
• 🌟 Real shareholders have diverse interests and are not solely focused on short-term stock price gains; many are concerned with the long-term sustainability and ethical conduct of corporations.

Q & A

What was the common belief about corporations before the late 1970s or early 1980s?

Before the late 1970s or early 1980s, corporations were viewed as social and economic institutions that were supposed to serve many different constituencies, including shareholders, customers, employees, creditors, local communities, and possibly society as a whole. This philosophy was known as managerialism.

What significant shift occurred in the business world around the 1970s and 1980s?

Around the 1970s and 1980s, the business world shifted from managerialism to the belief that shareholders owned corporations and that they should maximize shareholder value. This new ideology began to influence business practices, rules, and policies.

How did the Securities Exchange Commission respond to the shift towards shareholder value maximization?

The Securities Exchange Commission passed several new rules designed to give shareholders of the corporation more power and influence over their boards of directors, in response to the shift towards shareholder value maximization.

What change in the tax code in 1993 was influenced by the shareholder value ideology?

In 1993, a new rule was introduced stating that companies wanting tax deductibility must tie their executive pay to an objective performance metric, which often meant that share price became the determining factor in executive compensation.

Why has the shareholder value maximization approach been criticized?

The shareholder value maximization approach has been criticized because it doesn't seem to be working well for corporations. It has been associated with a decline in the number of publicly listed companies, reduced corporate life expectancy, less reinvestment, and even reduced shareholder returns.

What does the speaker claim about the legal basis for the shareholder value maximization ideology?

The speaker claims that there is no legal basis for the shareholder value maximization ideology. Corporate law, as reflected in state codes and corporate charters, does not require corporations to maximize shareholder value but allows them to be run for any lawful purpose.

According to the script, what does the business judgment rule protect directors from?

The business judgment rule protects directors as long as they operate in what they honestly believe is the best interest of the corporate entity, without requiring them to maximize shareholder profits or value.

What is the speaker's argument against the economic theory that shareholders are the residual claimants of corporations?

The speaker argues that corporations, as legal persons, own themselves and that shareholders own a contract with the corporation called a share of stock, which gives them limited rights. Shareholders are not the residual claimants; the corporation itself is, and it is the Board of Directors that decides on dividend payments.

How does the speaker describe the typical shareholder according to the shareholder value maximization ideology?

The speaker describes the typical shareholder in the shareholder value maximization ideology as a hypothetical 'platonic shareholder' who only cares about the stock price of one company at one moment in time, which is an unrealistic and overly simplified model.

What are some of the interests that real shareholders have, according to the script?

Real shareholders have many differing interests, including long-term investment goals, diversified holdings, concerns about the company's impact on the environment and society, and ethical standards that they do not want their companies to violate.

What does the speaker suggest about the percentage of shareholders who might be considered 'psychopaths' in their investment approach?

The speaker suggests that while psychopaths exist, they usually account for only two to four percent of the population, and this is probably true for shareholders as well, implying that most shareholders are not solely focused on immediate profit at the expense of others or breaking rules.