In its most corrosive application — the one instilled in business schools, applied by in-house lawyers, and demanded by activist investors and Wall Street analysts — maximizing shareholder value meant doing whatever it took to boost stock prices this quarter and the next. Over the years, it has been used to justify customer confusion, pressure workers and suppliers, avoid taxes, and waste stock options on executives. Most of what people find so unpleasant about American capitalism – cruelty, greed, inequality – has its roots in this misconception of what business is. When Friedman chose shareholder supremacy, he ignored a better view that was on the table: client capitalism. In 1954, Peter Drucker argued that “there is only one valid purpose of a company to create a customer.” If the customer`s needs are met, the shareholder`s needs will also be met in due course. When customers are enthusiastic, the company makes more money and can afford to pay workers more and meet the needs of other stakeholders. Moreover, client capitalism is inherently moral: people create value for others. The change has been dramatic. In 1997, the Business Roundtable issued a new statement, which was also discovered in Daedalus` article. He noted that the primary goal of a company “is to generate economic returns for its owners” and that if “the CEO and directors do not focus on shareholder value, the company is less likely to recognize that value.” “There is a widespread and completely false belief that there is some kind of legal obligation that corporate leaders must `maximize profits` or `maximize shareholder value,`” said Lynn Stout, a law professor at Cornell and author of “The Shareholder Value Myth.” According to Stout, the inappropriate hypothesis stems from an old case in which the interests of shareholders are cited.
This case did not set a legal precedent compared to a more recent case, she said. Companies raise capital to buy assets and use those assets to generate sales or invest in new projects with a positive expected return. A well-run business maximizes the use of its assets, allowing the business to operate with a lower investment in assets. In the new formulation of the Roundtable`s corporate purpose, providing value to customers, investing in employees, dealing fairly and honestly with suppliers, supporting communities and protecting the environment have the same calculation with generating long-term value for shareholders. The statement rejects the whole idea of “maximizing” one value to the exclusion of all others. Instead, it recognizes the need for balance and compromise to serve all stakeholders in a company. Some who argue for using shareholder value as a measure of corporate success argue that with retirees dependent on shares, whether through pension funds or 401(k)s, rising stock prices benefit more than Wall Street. A common criticism of corporate governance by stakeholders is that moving away from the shareholder model will significantly reduce investors` investments.
Regardless of the validity of this concern, the stakeholder model we propose explicitly involves shareholders as key stakeholders. Our stakeholder model does not reduce the role of investors in corporate governance; It only extends the table to other stakeholders as well. Arguably, the main beneficiaries of shareholder primacy are stock sellers – traders who constantly buy and sell shares and seek profits. Real investors who want to keep companies in long-term portfolios are negatively affected by the short-term focus on shareholder primacy, as company money is spent on driving up the share price at the expense of long-term investments in real innovation. “I wouldn`t put shareholders at the center,” he said. “I`m always unhappy with the situation where people end up thinking that shareholders are paramount, that they are our only bosses. No, not at all. Shareholder value is a business term sometimes formulated as maximizing shareholder value or as a model of shareholder value, implying that the ultimate measure of a company`s success is the extent to which it enriches shareholders. He became popular in the 1980s and is particularly associated with former General Electric CEO Jack Welch. Drucker presented his radical idea without hard evidence. That`s because there were virtually none in 1954.
Large companies that focus primarily on creating value for customers? It was a fancy exaggeration to accept that a company like General Motors (GM) was in business for something other than making money itself. GM didn`t completely ignore the customer, sometimes even reciting phrases like “Our customer is number one.” But when things got complicated, the customer only played a role in his thinking to the extent that it matched the internal concerns and plans of the company itself. The commitment to serve the customer was a highly skilled commitment and limited by the company`s goal of making money for itself. There are, of course, restrictions on these mandates. Most countries employ a minimum number of employees before a company has to elect employee representatives. These minimum requirements range from 25 to 5,000 employees, areas that determine the frequency of employee-friendly boards. Even in Germany, where there can be up to 50% employee representation, they don`t have the power to block or override a vote from the rest of the board. In the German case, the chairman of the board of directors is still a shareholder and holds the tie. This approach has indeed made Wall Street happy. The stock market increased twelvefold in the 80s and 90s. For every dollar of earnings, 80 cents went to shareholders through dividends and so-called share buybacks. Stout said these legal theories appealed to the media — the idea that shareholders were kings simplified the confused debate about a company`s purpose.
Members of the Business Roundtable, a prestigious group that includes executives from Apple, GM, Walmart and BlackRock, recently updated their statement about a company`s purpose.