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The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public
“Shareholder value is the dumbest idea in the world.”
—Jack Welch
Executives, investors, and the business press routinely chant the mantra that corporations are required to “maximize shareholder value.” In this pathbreaking book, renowned corporate expert Lynn Stout debunks the myth that corporate law mandates shareholder primacy. Stout shows how shareholder value thinking endangers not only investors but the rest of us as well, leading managers to focus myopically on short-term earnings; discouraging investment and innovation; harming employees, customers, and communities; and causing companies to indulge in reckless, sociopathic, and irresponsible behaviors. And she looks at new models of corporate purpose that better serve the needs of investors, corporations, and society.
—Jack Welch
Executives, investors, and the business press routinely chant the mantra that corporations are required to “maximize shareholder value.” In this pathbreaking book, renowned corporate expert Lynn Stout debunks the myth that corporate law mandates shareholder primacy. Stout shows how shareholder value thinking endangers not only investors but the rest of us as well, leading managers to focus myopically on short-term earnings; discouraging investment and innovation; harming employees, customers, and communities; and causing companies to indulge in reckless, sociopathic, and irresponsible behaviors. And she looks at new models of corporate purpose that better serve the needs of investors, corporations, and society.
144 pages, Paperback
First published January 1, 2004
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April 6, 2017
If you own stock, invest in companies, or are starting a new business, read this book!
If you so much as skim the business pages in a newspaper, there’s little doubt you’ve heard it said or seen it written that corporate officers and directors are required by law to maximize shareholder value and that they’re subject to lawsuits if their decisions favor any other stakeholder such as employees, customers, or suppliers over profit. The well-entrenched view that shareholders are paramount is widely regarded as the cornerstone of contemporary business law — and it’s flatly untrue.
In The Shareholder Value Myth, business law professor Lynn Stout proves this point, citing chapter and verse in court decisions going back more than a century. “So long as a board can claim its members honestly believe that what they’re doing is best for ‘the corporation in the long run,’ courts will not interfere with a disinterested board’s decisions — even decisions that reduce share price today.” Having laid the legal groundwork, Stout then proceeds to explain how this mistaken view of shareholder primacy is bad for business.
“Put bluntly,” she writes, “conventional shareholder value thinking is a mistake for most firms — and a big mistake at that. Shareholder value thinking causes corporate managers to focus myopically on short-term earnings reports at the expense of long-term performance; discourages investment and innovation; harms employees, customers, and communities; and causes companies to indulge in reckless, sociopathic, and socially irresponsible behaviors.” Among the examples Stout cites is the Gulf oil spill, caused by excessive cost-cutting on the part of BP. “In trying to save $1 million a day by skimping on safety procedures at the Macondo well, BP cost its shareholders alone a hundred thousand times more, nearly $100 billion.” Q.E.D.
Stout deftly demonstrates that this irrational focus on shareholder value has been harmful in other ways as well. For example, “[b]etween 1997 and 2008, the number of companies listed on U.S. exchanges declined from 8,823 to only 5,401.” Of several factors that help explain this trend, shareholder primacy clearly stands out. Smart people know that there’s more to success in business than a rising stock price.
The origin of this misguided notion lies in the thinking of the so-called Chicago School of free-market economists best known through the work of the late Nobel Prize-winner Milton Friedman. Friedman had written a book in the 1960s that highlighted the idea, but it was his essay in 1970 in the New York Times Magazine that gained wide attention. There, he “argued that because shareholders ‘own’ the corporation, the only ‘social responsibility of business is to increase its profits.’” Stout argues that “shareholders do not, and cannot, own corporations . . . Corporations are independent legal entities that own themselves, just as human beings own themselves.” Shareholders merely own shares of stock that constitute a contract with the corporation to receive certain financial benefits.
They’re not in charge of the show, either. Some lawyers and economists writing after Friedman contended that shareholders appoint the directors as their agents. This too, Stout contends, is mistaken. She devotes two chapters to prove that this description of shareholders as principals “mischaracterizes the actual legal and economic relationships among shareholders, directors, and executives in public companies . . . Moreover,” Stout writes, this assumes “that shareholders’ interests [are] purely financial,” when in fact shareholders may have any one of a great many different reasons for buying and holding shares in a company.
A fair portion of The Shareholder Value Myth is focused on analyzing the impact of several popular measures promoted by shareholder advocates, the SEC, and Congress over the past two decades: “de-staggering” boards, so that all directors may be removed at once; giving shareholders the right to circulate proxies to all other shareholders on issues of interest; and equity-based compensation. Ask yourself: How often have shareholders removed the entire membership of a corporate board with a single vote? And how often have shareholders of a public company — other than corporate raiders or hedge funds — successfully obtained proxies to overturn a corporate board policy? You can guess the answer to those questions. But the very worst impact of these efforts to strengthen the shareholders’ hand has come from the popularity of equity-based compensation. “In 1991, just before Congress amended the tax code to encourage stock performance-based pay, the average CEO of a large public company received compensation approximately 140 times that of the average employee. By 2003, the ratio was approximately 500 times.” That policy isn’t the only factor to account for this dramatic rise in the ratio, but it’s certainly a major one. And it only seems to work on the upside. How many times have you read about board decisions to lower a CEO’s pay in proportion to the decline in its stock price the past year? You probably know the answer to that one, too.
The Shareholder Value Myth is an important contribution to a growing body of thought that seeks to re-conceive the role of the corporation in a more expansive manner commensurate with its growing importance in contemporary society.
If you so much as skim the business pages in a newspaper, there’s little doubt you’ve heard it said or seen it written that corporate officers and directors are required by law to maximize shareholder value and that they’re subject to lawsuits if their decisions favor any other stakeholder such as employees, customers, or suppliers over profit. The well-entrenched view that shareholders are paramount is widely regarded as the cornerstone of contemporary business law — and it’s flatly untrue.
In The Shareholder Value Myth, business law professor Lynn Stout proves this point, citing chapter and verse in court decisions going back more than a century. “So long as a board can claim its members honestly believe that what they’re doing is best for ‘the corporation in the long run,’ courts will not interfere with a disinterested board’s decisions — even decisions that reduce share price today.” Having laid the legal groundwork, Stout then proceeds to explain how this mistaken view of shareholder primacy is bad for business.
“Put bluntly,” she writes, “conventional shareholder value thinking is a mistake for most firms — and a big mistake at that. Shareholder value thinking causes corporate managers to focus myopically on short-term earnings reports at the expense of long-term performance; discourages investment and innovation; harms employees, customers, and communities; and causes companies to indulge in reckless, sociopathic, and socially irresponsible behaviors.” Among the examples Stout cites is the Gulf oil spill, caused by excessive cost-cutting on the part of BP. “In trying to save $1 million a day by skimping on safety procedures at the Macondo well, BP cost its shareholders alone a hundred thousand times more, nearly $100 billion.” Q.E.D.
Stout deftly demonstrates that this irrational focus on shareholder value has been harmful in other ways as well. For example, “[b]etween 1997 and 2008, the number of companies listed on U.S. exchanges declined from 8,823 to only 5,401.” Of several factors that help explain this trend, shareholder primacy clearly stands out. Smart people know that there’s more to success in business than a rising stock price.
The origin of this misguided notion lies in the thinking of the so-called Chicago School of free-market economists best known through the work of the late Nobel Prize-winner Milton Friedman. Friedman had written a book in the 1960s that highlighted the idea, but it was his essay in 1970 in the New York Times Magazine that gained wide attention. There, he “argued that because shareholders ‘own’ the corporation, the only ‘social responsibility of business is to increase its profits.’” Stout argues that “shareholders do not, and cannot, own corporations . . . Corporations are independent legal entities that own themselves, just as human beings own themselves.” Shareholders merely own shares of stock that constitute a contract with the corporation to receive certain financial benefits.
They’re not in charge of the show, either. Some lawyers and economists writing after Friedman contended that shareholders appoint the directors as their agents. This too, Stout contends, is mistaken. She devotes two chapters to prove that this description of shareholders as principals “mischaracterizes the actual legal and economic relationships among shareholders, directors, and executives in public companies . . . Moreover,” Stout writes, this assumes “that shareholders’ interests [are] purely financial,” when in fact shareholders may have any one of a great many different reasons for buying and holding shares in a company.
A fair portion of The Shareholder Value Myth is focused on analyzing the impact of several popular measures promoted by shareholder advocates, the SEC, and Congress over the past two decades: “de-staggering” boards, so that all directors may be removed at once; giving shareholders the right to circulate proxies to all other shareholders on issues of interest; and equity-based compensation. Ask yourself: How often have shareholders removed the entire membership of a corporate board with a single vote? And how often have shareholders of a public company — other than corporate raiders or hedge funds — successfully obtained proxies to overturn a corporate board policy? You can guess the answer to those questions. But the very worst impact of these efforts to strengthen the shareholders’ hand has come from the popularity of equity-based compensation. “In 1991, just before Congress amended the tax code to encourage stock performance-based pay, the average CEO of a large public company received compensation approximately 140 times that of the average employee. By 2003, the ratio was approximately 500 times.” That policy isn’t the only factor to account for this dramatic rise in the ratio, but it’s certainly a major one. And it only seems to work on the upside. How many times have you read about board decisions to lower a CEO’s pay in proportion to the decline in its stock price the past year? You probably know the answer to that one, too.
The Shareholder Value Myth is an important contribution to a growing body of thought that seeks to re-conceive the role of the corporation in a more expansive manner commensurate with its growing importance in contemporary society.
April 9, 2016
Short rather dense book. The first thirty of so pages could have been reduced to a paragraph or two. The author steps through a set of mis-assumptions regarding corporations in the US and at one point contrasts US law with British law and makes some interesting observations about the differences. Like many if the financial ideas that have come out of the University of Chicago--notions about shareholder rights and primacy is a half baked idea that in the real world has been a failure. The author gives examples of companies that should on the surface be shareholder friendlier and those companies are no more successful than companies that could be construed as hostile to shareholders rights.
April 20, 2015
A pretty damning critique of shareholder value maximization (SVM). According to the author SVM is not only bad for stakeholders, but ultimately shareholders and companies as well. I already believed that before picking up this book, but the argument was satisfyingly logical.
I'd steer clear from this book if you don't have a firm grasp on the topic to begin with.
I'd steer clear from this book if you don't have a firm grasp on the topic to begin with.
December 10, 2019
By remaining tight, focused, and generally restrained in its claims, this small gem does exactly what it sets out to do.
Most of us have read, and many of us have even said something like "corporations are required by law to maximise shareholder value". Stout sets out to show that is patently false. Most importantly, it has absolutely no basis in actual corporate law in the US. But Stout also shows that the economic theory underpinning it is questionable and, despite, several decades now of "shareholder ascendancy" and dozens, if not hundreds, of empirical studies, the real world evidence is, at best, mixed.
Apart from the "it's not part of corporate law" slam dunk, I thought Stout's next strongest argument was that "maximise shareholder value" is clearly undefined given the heterogeneous nature of shareholders. One shareholder may prefer to strip mine the company's assets and generate a short-term firesale to pump & dump the stock price. Another shareholder may prefer a decade's long strategy.
The problem grows even bigger when you consider the problem of a "universal investor". Many actual investors have stakes outside of the stock market "in the economy, the community, the planet". What does it mean to maximise the value for that shareholder?
Stout occasionally leans too hard on somewhat shaky evidence but almost always is wise enough to back off and hedge her claims. For example, which talking about the lack of empirical evidence for the efficacy of shareholder primary, Stout mentions that from 1933-1976 (when the seminal academic article pushing for shareholder primacy was published), US corporations returned 7.5% annually. In the time since then, when shareholder primacy became the dominant ideology, US corporations saw their annual returns drop to 6.5%. This is not conclusive but it is hardly a ringing endorsement for shareholder primacy improving things. And Stout makes the same point.
It is this temperance, along with the book's brevity -- it knows what it wants to say, it says it, and it doesn't spin it out for an unnecessary another 50 or 100 pages -- is what pushes my review up from 4- to 5-stars.
Most of us have read, and many of us have even said something like "corporations are required by law to maximise shareholder value". Stout sets out to show that is patently false. Most importantly, it has absolutely no basis in actual corporate law in the US. But Stout also shows that the economic theory underpinning it is questionable and, despite, several decades now of "shareholder ascendancy" and dozens, if not hundreds, of empirical studies, the real world evidence is, at best, mixed.
Apart from the "it's not part of corporate law" slam dunk, I thought Stout's next strongest argument was that "maximise shareholder value" is clearly undefined given the heterogeneous nature of shareholders. One shareholder may prefer to strip mine the company's assets and generate a short-term firesale to pump & dump the stock price. Another shareholder may prefer a decade's long strategy.
The problem grows even bigger when you consider the problem of a "universal investor". Many actual investors have stakes outside of the stock market "in the economy, the community, the planet". What does it mean to maximise the value for that shareholder?
Consider someone who owns not only BP stock, but also holds BP bonds; owns shares in other oil companies; owns a beach home on the Florida Panhandle; has a job in the Gulf tourism industry; and values his own human capital, including his good physical health and social connections in a thriving coastal community. By skimping on safety corners, BP may have given this investor several years of above-average share performance. But by causing an enormous oil spill in the Gulf, BP’s risk-taking imposed much greater “external costs” on the investor’s other interests. As a result of the Deepwater Horizon disaster, the U.S. government imposed a moratorium on exploratory drilling in the Gulf that idled not only BP’s operations but those of other oil companies as well. The spill hurt the value of BP bonds, which were downgraded in the disaster’s wake. The value of beachfront property in the Gulf declined, and its tourism and fishing industries suffered. The Gulf ecosystem was harmed, and its ability to provide healthy seafood and safe recreation degraded.
Stout occasionally leans too hard on somewhat shaky evidence but almost always is wise enough to back off and hedge her claims. For example, which talking about the lack of empirical evidence for the efficacy of shareholder primary, Stout mentions that from 1933-1976 (when the seminal academic article pushing for shareholder primacy was published), US corporations returned 7.5% annually. In the time since then, when shareholder primacy became the dominant ideology, US corporations saw their annual returns drop to 6.5%. This is not conclusive but it is hardly a ringing endorsement for shareholder primacy improving things. And Stout makes the same point.
Of course, other factors—financial deregulation, the 2008 credit crisis, and U.S. political dysfunction—may explain shareholders’ poor returns in the Age of Shareholder Value. (It is worth noting, however, that shareholder value thinking may have contributed to both financial deregulation and the 2008 crisis, which some attribute to the successful deregulation lobbying efforts of share-price-obsessed firms like Enron and Citibank.)88 When we look at such a large phenomenon as economic performance, it can be impossible to single out any single cause, or even to identify with certainty a suite of causes. Nevertheless, at a minimum, the stock market’s recent performance provides no empirical support for the shareholder primacy thesis.
It is this temperance, along with the book's brevity -- it knows what it wants to say, it says it, and it doesn't spin it out for an unnecessary another 50 or 100 pages -- is what pushes my review up from 4- to 5-stars.
July 2, 2017
An extremely interesting book that directly questions the prevalent wisdom of our times- the primacy of shareholders in each and every aspect of corporate decision-making and governance. The most eye opening aspect for me was the revelation that no law, unlike what is taught and preached everywhere and I also took as a given thus far, states that the shareholder is supreme. A company's management is not obligated to maximize profits for its shareholders. I would have dismissed the book as a made-up bunch of nonsense even before reading it were it not written by a professor of corporate law at Cornell whose writings also feature in prestigious publications. Somewhat serendipitously, I came across articles on Bloomberg and Harvard Business Review while reading the book that espoused similar arguments.
The book first slices and dices the written word of the law to debunk the legal validity of the shareholder primacy gospel. Indeed, it elucidates crucial points of law to demonstrate that the whole principal-agent construct is a mirage. The principals of a company- the directors- are not really "appointed" by its agents, the shareholders. They come into existence before shares are even issued. Next, it delves into the question of whether regardless of legal obligation, shareholders deserve outsized importance. Here, I find myself agreeing with some arguments and ambivalent about others. The weakest part of the book is its prescription of alternatives, none of which seem convincing enough as replacements. A moot point really, for whether one likes it or not, the primacy of shareholders is here to stay for a long time. Regulations in every major jurisdiction are geared towards this outcome and corporate chieftains, especially in firms where an individual or family is not in control of the company, can only ensure a controversy-free tenure by keeping shareholders' interests supreme. Combined with the new wave of investor activism and a shrill media dominated by journalists and anchors who are firmly anchored to the shareholder-interests-supreme school of thought, it would be a brave CEO who'll display the guts and gall to ignore it all even if his/her wisdom dictates otherwise.
The book first slices and dices the written word of the law to debunk the legal validity of the shareholder primacy gospel. Indeed, it elucidates crucial points of law to demonstrate that the whole principal-agent construct is a mirage. The principals of a company- the directors- are not really "appointed" by its agents, the shareholders. They come into existence before shares are even issued. Next, it delves into the question of whether regardless of legal obligation, shareholders deserve outsized importance. Here, I find myself agreeing with some arguments and ambivalent about others. The weakest part of the book is its prescription of alternatives, none of which seem convincing enough as replacements. A moot point really, for whether one likes it or not, the primacy of shareholders is here to stay for a long time. Regulations in every major jurisdiction are geared towards this outcome and corporate chieftains, especially in firms where an individual or family is not in control of the company, can only ensure a controversy-free tenure by keeping shareholders' interests supreme. Combined with the new wave of investor activism and a shrill media dominated by journalists and anchors who are firmly anchored to the shareholder-interests-supreme school of thought, it would be a brave CEO who'll display the guts and gall to ignore it all even if his/her wisdom dictates otherwise.
June 5, 2024
especially useful:
1) shareholders do not own corporations
2) directors do not have a duty to maximize stock price
3) directors are not the agents of shareholder-principals
1) shareholders do not own corporations
2) directors do not have a duty to maximize stock price
3) directors are not the agents of shareholder-principals
February 22, 2023
Despite some great points made in this book, I don’t think this will change anyone’s mind and it fails to provide (or even attempt to provide) a coherent or compelling replacement for shareholder value maximization as the overriding firm objective. I viewed this somewhat like Marxist critiques of capitalism….extremely compelling and (mostly) accurate critiques, but completely naive to the even bigger problems with proposed alternatives.
In other words, this is very much a book written by a lawyer and professor rather than someone who has actually run or helped run a business. While she offers many technical points that might appeal to lawyers or professors (such as shareholders don’t actually own the company), the logic of her main thesis can essentially be boiled down to:
Shareholders are not a monolithic group and have various interests (e.g. some invested for short term, some for long term, etc.)
Therefore, it’s a logical absurdity to think a corporation can maximize value (or even utility) for all of them simultaneously
However, interestingly, she goes on to say by the end that its the “short-termers” who typically hold outsize power and influence in practice, and so actually companies have chosen who to maximize value for and it’s the “short termers.” She then proceeds to cite numerous occasions (BP oil spill, etc.) where public corporations have behaved badly and attributes the lions share of the blame for this bad behavior on their desire to maximize value for short-term shareholders (which ignores the fact that plenty of private companies and even some non-profits behave poorly too).
So in the end, her entire argument really feels like an indictment of short-termism rather than shareholder value per se. And on that point, she would get many people - including those who believe in prioritizing shareholder value - to agree. However, instead of recognizing the problem as largely a “short term” vs “long term” problem, she throws out the concept of maximizing value entirely and talks about how that is in conflict with taking care of the environment, the workers, and even a company’s own management (they have to live with the pollution, upset community, etc. they create).
This is the biggest fallacy that “stakeholder value” advocates such as Stout fall victim to: that responsibly maximizing long-term shareholder value is incompatible with a clean environment, safe working conditions, fair treatment of customers, etc. In practice, companies are already balancing shareholder value and profits against environmental costs and employee and customer satisfaction every day. Because in order to make profits tomorrow, you can’t piss off your best employees and customers today or risk your reputation through poor environmental stewardship. Most smart and well run companies know this…but like any large group, there are some bad apples. The fact that there are bad apples doesn’t mean the entire system is broken.
And lastly, I would just say that the point of a for-profit corporation is to make money. When companies say they are prioritizing shareholder value, it’s just a short hand for attempting to make as much money as possible. Good companies try to do that responsibly over long-time horizons. Bad ones try to do that quickly by cutting corners and usually end up destroying rather than creating shareholder value along the way. If you have other objectives than to make money though, then start a non-profit or get involved in government. I won’t go into details on why (see any critique of socialism), but it’s very dangerous to start imposing other objectives onto for-profit corporations…almost all the wealth and jobs that have ever been created (and it must be created to be redistributed!!) are because corporations make profits. If you work in government or for a non-profit that relies on donations, you should be thanking the heavens every day that corporations make money…because that’s where the money comes from to pay your salaries and fund your services:).
In other words, this is very much a book written by a lawyer and professor rather than someone who has actually run or helped run a business. While she offers many technical points that might appeal to lawyers or professors (such as shareholders don’t actually own the company), the logic of her main thesis can essentially be boiled down to:
Shareholders are not a monolithic group and have various interests (e.g. some invested for short term, some for long term, etc.)
Therefore, it’s a logical absurdity to think a corporation can maximize value (or even utility) for all of them simultaneously
However, interestingly, she goes on to say by the end that its the “short-termers” who typically hold outsize power and influence in practice, and so actually companies have chosen who to maximize value for and it’s the “short termers.” She then proceeds to cite numerous occasions (BP oil spill, etc.) where public corporations have behaved badly and attributes the lions share of the blame for this bad behavior on their desire to maximize value for short-term shareholders (which ignores the fact that plenty of private companies and even some non-profits behave poorly too).
So in the end, her entire argument really feels like an indictment of short-termism rather than shareholder value per se. And on that point, she would get many people - including those who believe in prioritizing shareholder value - to agree. However, instead of recognizing the problem as largely a “short term” vs “long term” problem, she throws out the concept of maximizing value entirely and talks about how that is in conflict with taking care of the environment, the workers, and even a company’s own management (they have to live with the pollution, upset community, etc. they create).
This is the biggest fallacy that “stakeholder value” advocates such as Stout fall victim to: that responsibly maximizing long-term shareholder value is incompatible with a clean environment, safe working conditions, fair treatment of customers, etc. In practice, companies are already balancing shareholder value and profits against environmental costs and employee and customer satisfaction every day. Because in order to make profits tomorrow, you can’t piss off your best employees and customers today or risk your reputation through poor environmental stewardship. Most smart and well run companies know this…but like any large group, there are some bad apples. The fact that there are bad apples doesn’t mean the entire system is broken.
And lastly, I would just say that the point of a for-profit corporation is to make money. When companies say they are prioritizing shareholder value, it’s just a short hand for attempting to make as much money as possible. Good companies try to do that responsibly over long-time horizons. Bad ones try to do that quickly by cutting corners and usually end up destroying rather than creating shareholder value along the way. If you have other objectives than to make money though, then start a non-profit or get involved in government. I won’t go into details on why (see any critique of socialism), but it’s very dangerous to start imposing other objectives onto for-profit corporations…almost all the wealth and jobs that have ever been created (and it must be created to be redistributed!!) are because corporations make profits. If you work in government or for a non-profit that relies on donations, you should be thanking the heavens every day that corporations make money…because that’s where the money comes from to pay your salaries and fund your services:).
March 10, 2020
My 3 key takeaways
Humans have a habit of oversimplifying things to the lowest common denominator: Business is complicated. There are many moving parts and measuring performance of a business is hard. Should one evaluate a business on growth metrics? profitability? employment opportunities created? contribution to society?international footprint? Pick one at your own peril since you are likely to heavily discount some modern day behemoths depending on which metric you pick. With so many interlinked performance measures it is amazing that economists, lawyers and a majority of modern day executives align on defining maximising shareholder value the primary “purpose” of a corporation. When the author digs a little into what led to the emergence of this trend (first popularised in the 70’s by Milton Friedman) she discovers that literature identifies a clear chasm between stakeholders (Like employees, creditors, customers & the government) and shareholders. Stakeholders are clearly & routinely compensated in the form of salary, product offering, interest and taxes but shareholders have no clear & defined compensation. One may argue that shareholders are compensated via dividends, yet as informed investors are aware, corporate dividends are not guaranteed. Thus the only recourse or reward for the shareholders investment is the belief that the corporation will work earnestly to maximise the value of the stock she owns in the corporation so that one day she may have a reasonable expectation of a positive return on her investment. Now, in a perfect world the interests of the stakeholders and the shareholders will work in harmony and align yet as recent corporate frauds (Think Enron & Theranos) and massive disasters (Think BP Oil spill) the single minded pursuit of maximising shareholder value in terms of stock price more often than not conflicts with interests of all other stakeholders of the corporation. And so far we have not even addressed the fact that shareholders may “value” interests beyond just the stock price of their investment.
In its current form only 1 kind of investor benefits from the Shareholder value maximisation mantra: Traditionally shareholders invest in companies in the hope of seeing their capital appreciate with the growth of the business. Its very interesting to draw parallels between shareholder expectations evolution and evolution of society as a whole. As society moved towards a culture of instant gratification (think Netflix binge watching, Tinder & Uber eats/Swiggy) so did expectations of returns from their stocks. As big institutional investors & activist hedge funds (& some mom & pop investors) push for instant (read super short term) returns on their invested capitals, the room for long term & retail investors has practically vanished. This trend is validated empirically when one studies the average share turnover for firms listed on the New York Stock Exchange, which was 12% in the 1960s (translating to an average holding period of 8 years), 73% in 1987 and 300% in 2010 (translating to an average holding period of merely 4 months). With the emergence of this trend, poor corporations (& their executives) who are brainwashed on the philosophy of shareholder value primacy are left with no choice but to take steps that maximise short term profits (here & now) else risk watching a mass exodus of powerful (hedge fund) shareholders to other corporations that do prioritise short term profits. In some cases corporate executives may even risk losing their jobs as powerful hedge funds invariably have great influence over the corporate boards (sometimes even membership). General Electric is a prime example of the same, with the CEO losing his job within a year. In this environment, the balance between shareholders & stakeholders tips heavily in favour of the former with short term profits demanding job cuts, reduction in R&D budgets & sometimes pushing the corporation to take risks which result in environmental & social damage. So ask yourself, who is the winner in this game? Its not hard to see why activist hedge funds have gained such notoriety within corporate circles, yet their methods & needs are forever validated under the guise of the corporations duty to maximise shareholder wealth (Even at the cost of society as a whole). A quote i read somewhere brilliantly & simply analogises the problem with the short term minded investor/s — “ Think about how you drive & treat a car when you own the car vs. a rental car you will return to Hertz after a week”. Unfortunately the most powerful & influential “shareholders” today more often than not follow the rent-a-car model rather than real long term ownership.
Most Corporate Executives are not immoral … just brainwashed: When a MBA student is repeatedly exposed to the shtick of the shareholder value maximisation in classrooms, literature and the boardroom what else can we expect from the poor soul. As she rises up the corporate ladder its a concept etched in her memory that the sole purpose of a corporation and her as a proxy is to maximise shareholder wealth in any way legally plausible (even if it means bending the rules slightly sometimes). Finally as the blue eyed corporate executive makes it to the top tier of her corporation where she finally has the reins and the means to drive company strategy, the majority of her compensation is tied to the company stock. In this situation how else do you expect her to behave other than a crazy psychopath who spends sleepless nights thinking up new ways to bump up the stock price enough for her to cash out and keep the board and powerful investors off her back. What chance do poor employees & social obligation stand in the face of such a cult like philosophy. Although some sane & rational voices (such as the author’s) have started to speak out against the total absurdness & moral bankruptcy of today’s corporations driven by the shareholder value ethos, its unfortunate to say that they are in the very microscopic minority. Its my hope & wish that more CEOs & powerful executives read this book and educate themselves of the fact that there is NO legal obligation for them to maximise shareholder wealth. In fact, there are many cases cited in the books where courts have ruled in favour of the management even when they have taken steps which may ostensibly harm revenues/profit in favour of the larger social good. There is also no empirical evidence to prove that corporations that adopt the shareholder value maximisation mantra have performed better than companies which adopt a more measured & balanced approach between managing the interests of stakeholders like employees and shareholders. Look no further than the raging success of Chik fil a which made the unthinkable decision to stay closed on Sundays (The day with the highest footfall for a fast food restaurant and an estimated annual revenue loss >$100 MM) so that employees may spend time with family and pursue interests outside of work. Last I checked Chik fil a was blowing the competition out of the park. Here is wishing the coming decade witnesses the rise of more firms willing to adopt the Chik fil a motto to success and slowly move away from the draconian concept that is the Shareholder value myth.
Humans have a habit of oversimplifying things to the lowest common denominator: Business is complicated. There are many moving parts and measuring performance of a business is hard. Should one evaluate a business on growth metrics? profitability? employment opportunities created? contribution to society?international footprint? Pick one at your own peril since you are likely to heavily discount some modern day behemoths depending on which metric you pick. With so many interlinked performance measures it is amazing that economists, lawyers and a majority of modern day executives align on defining maximising shareholder value the primary “purpose” of a corporation. When the author digs a little into what led to the emergence of this trend (first popularised in the 70’s by Milton Friedman) she discovers that literature identifies a clear chasm between stakeholders (Like employees, creditors, customers & the government) and shareholders. Stakeholders are clearly & routinely compensated in the form of salary, product offering, interest and taxes but shareholders have no clear & defined compensation. One may argue that shareholders are compensated via dividends, yet as informed investors are aware, corporate dividends are not guaranteed. Thus the only recourse or reward for the shareholders investment is the belief that the corporation will work earnestly to maximise the value of the stock she owns in the corporation so that one day she may have a reasonable expectation of a positive return on her investment. Now, in a perfect world the interests of the stakeholders and the shareholders will work in harmony and align yet as recent corporate frauds (Think Enron & Theranos) and massive disasters (Think BP Oil spill) the single minded pursuit of maximising shareholder value in terms of stock price more often than not conflicts with interests of all other stakeholders of the corporation. And so far we have not even addressed the fact that shareholders may “value” interests beyond just the stock price of their investment.
In its current form only 1 kind of investor benefits from the Shareholder value maximisation mantra: Traditionally shareholders invest in companies in the hope of seeing their capital appreciate with the growth of the business. Its very interesting to draw parallels between shareholder expectations evolution and evolution of society as a whole. As society moved towards a culture of instant gratification (think Netflix binge watching, Tinder & Uber eats/Swiggy) so did expectations of returns from their stocks. As big institutional investors & activist hedge funds (& some mom & pop investors) push for instant (read super short term) returns on their invested capitals, the room for long term & retail investors has practically vanished. This trend is validated empirically when one studies the average share turnover for firms listed on the New York Stock Exchange, which was 12% in the 1960s (translating to an average holding period of 8 years), 73% in 1987 and 300% in 2010 (translating to an average holding period of merely 4 months). With the emergence of this trend, poor corporations (& their executives) who are brainwashed on the philosophy of shareholder value primacy are left with no choice but to take steps that maximise short term profits (here & now) else risk watching a mass exodus of powerful (hedge fund) shareholders to other corporations that do prioritise short term profits. In some cases corporate executives may even risk losing their jobs as powerful hedge funds invariably have great influence over the corporate boards (sometimes even membership). General Electric is a prime example of the same, with the CEO losing his job within a year. In this environment, the balance between shareholders & stakeholders tips heavily in favour of the former with short term profits demanding job cuts, reduction in R&D budgets & sometimes pushing the corporation to take risks which result in environmental & social damage. So ask yourself, who is the winner in this game? Its not hard to see why activist hedge funds have gained such notoriety within corporate circles, yet their methods & needs are forever validated under the guise of the corporations duty to maximise shareholder wealth (Even at the cost of society as a whole). A quote i read somewhere brilliantly & simply analogises the problem with the short term minded investor/s — “ Think about how you drive & treat a car when you own the car vs. a rental car you will return to Hertz after a week”. Unfortunately the most powerful & influential “shareholders” today more often than not follow the rent-a-car model rather than real long term ownership.
Most Corporate Executives are not immoral … just brainwashed: When a MBA student is repeatedly exposed to the shtick of the shareholder value maximisation in classrooms, literature and the boardroom what else can we expect from the poor soul. As she rises up the corporate ladder its a concept etched in her memory that the sole purpose of a corporation and her as a proxy is to maximise shareholder wealth in any way legally plausible (even if it means bending the rules slightly sometimes). Finally as the blue eyed corporate executive makes it to the top tier of her corporation where she finally has the reins and the means to drive company strategy, the majority of her compensation is tied to the company stock. In this situation how else do you expect her to behave other than a crazy psychopath who spends sleepless nights thinking up new ways to bump up the stock price enough for her to cash out and keep the board and powerful investors off her back. What chance do poor employees & social obligation stand in the face of such a cult like philosophy. Although some sane & rational voices (such as the author’s) have started to speak out against the total absurdness & moral bankruptcy of today’s corporations driven by the shareholder value ethos, its unfortunate to say that they are in the very microscopic minority. Its my hope & wish that more CEOs & powerful executives read this book and educate themselves of the fact that there is NO legal obligation for them to maximise shareholder wealth. In fact, there are many cases cited in the books where courts have ruled in favour of the management even when they have taken steps which may ostensibly harm revenues/profit in favour of the larger social good. There is also no empirical evidence to prove that corporations that adopt the shareholder value maximisation mantra have performed better than companies which adopt a more measured & balanced approach between managing the interests of stakeholders like employees and shareholders. Look no further than the raging success of Chik fil a which made the unthinkable decision to stay closed on Sundays (The day with the highest footfall for a fast food restaurant and an estimated annual revenue loss >$100 MM) so that employees may spend time with family and pursue interests outside of work. Last I checked Chik fil a was blowing the competition out of the park. Here is wishing the coming decade witnesses the rise of more firms willing to adopt the Chik fil a motto to success and slowly move away from the draconian concept that is the Shareholder value myth.
May 1, 2020
A wonderfully precise bullseye by Lynn Stout!She treats as dubious what apparently all in the corporate world preach as gospel. I'm not sure what to think myself, but it's worth mentioning that before this book, I never even questioned that the purpose of a corporation is to optimize value for the shareholder.
But now, I can step outside of that well-fortified paradigm, and see what a corporation could accomplish with a fresher and wider perspective. Amazing work, especially because her claims are very honed towards just her one thing, and she does not make assertions that go beyond her textual evidence or research and is clearly intellectually honest. While this sounds like it would be obvious, perhaps, it is has been rare in my experience to see authors.
But now, I can step outside of that well-fortified paradigm, and see what a corporation could accomplish with a fresher and wider perspective. Amazing work, especially because her claims are very honed towards just her one thing, and she does not make assertions that go beyond her textual evidence or research and is clearly intellectually honest. While this sounds like it would be obvious, perhaps, it is has been rare in my experience to see authors.
May 1, 2025
It is quite scary that only one archetype of investor - the psychopathically selfish one - generally becomes of the universal profile guiding those who follow the shareholder primacy ideology. This is why Lynn Stout's suggestion that balancing interests in=s an inherently human ability, and therefore it should be possible for corporations. In this current era, where short-termism is a common MO, the counterview is so critical. Stout even suggests the investors are ultimately harmed by companies that operate according to this myth. Here's a quick synopsis of Stout's views, direct from her: https://www.thesustainableenterprisef...
February 24, 2020
Great, concise look at how we have looked at corporations, do look at corporations, and how this affects their behavior. Highlights some big problems and possible solutions. The author got imprecise in correlating the whole of the GDP slowdown to shareholder primacy, but pretty much every other argument was remarkably pointed and clear in explaining why this perspective is not much more than a value judgment
January 27, 2021
Lynn Stout poses intellectually enticing questions, thus challenging the common wisdom of shareholder value thinking. Unfortunately, she constrains herself to criticising and damning the old way of thinking rather than developing her ideas of stakeholder thinking forward (how would regulations and laws have to change? what can be learned from countries where shareholder value thinking is not dominant?)
April 10, 2023
Emerging alternatives views of the “Purpose” of the Corporation.
The author provides a compelling argumentation on how “maximizing shareholder value” true laser focus on stock price, not only hurts society but shareholders themselves. The author provides alternative (and innovative) views and approaches that challenge this paradigm, representing a new vision of the corporation of the 21st century.
The author provides a compelling argumentation on how “maximizing shareholder value” true laser focus on stock price, not only hurts society but shareholders themselves. The author provides alternative (and innovative) views and approaches that challenge this paradigm, representing a new vision of the corporation of the 21st century.
June 26, 2021
I re-read this book because honestly I miss Lynn Stout. She was a great thinker and a great person. This book nails the wrongness of shareholder supremacy. In a good way, the book's core message has really taken hold of the culture--when Blackrock rebuts profit maximization as the primary objective of businesses, you know the myth is dying. And it is dying thanks in no small part to Stout's work.
February 3, 2023
i fear this book may have lost a bit of the strenght of its message in our current time. as every single business is under increased scrutiny for ESG and all impacts it makes, we live in a world where the shareholder profit maximisation is no longer the single drive. good argumentation though for an important topic.
July 22, 2017
Fascinating take about the cons of the shareholder primacy philosophy of corporate governance. A great book to read when ruthless capitalism and wealth creation sometimes seem to take priority in the world of finance theory.
December 14, 2017
Read for International HR at MSU. Really interesting and intriguing perspective, dispelling some really common practices and thoughts that corporations should value shareholder wealth above everything else. The Enron case is used here as a cautionary tale.
March 21, 2017
Must read for anyone who believes corporations must maximize shareholder value. Clear and concise.
September 28, 2017
Good read. The right length. Good book if you are interested in the business and legal history on the topic.
November 12, 2017
Interesting discussion of the purpose of corporations.
October 1, 2018
Great ideas.
January 13, 2019
Short and repetitive but otherwise an interesting read.
January 31, 2019
This is a fabulous book that questions an assumption that underpins the modern economy. Every business and law student should read it- it's a short but compelling book!
June 22, 2022
This should be required reading for business schools. Lays out an excellent case that seems like it should be intuitive but clearly has not been in practice.
November 27, 2023
Really important material, but also felt like a dry piece of toast. Wish it was a bit more interesting while giving all its wisdom!
February 12, 2023
As a business school graduate, the idea that increasing shareholder value as the prime objective of corporations is axiomatic. As I've gotten older, I have (heretically) questioned this in my mind. After a recent HBR podcast discussed the topic, I started looking for some reading material. There doesn't seem to be much in popular literature except this book. While on the short side, and despite it being occasionally demagogic and containing a little bit of mood affiliation, I think this book does a decent job of making an alternative point to the idea of the primacy of shareholder value.
The idea of the primacy of shareholder value seems to have really taken hold after Milton Friedman's 1970 article in New York Times Magazine entitled "The Social Responsibility of Business is to Increase its Profits". Thereafter, and certainly with a couple decades, this idea became dogma. Stout pushes back on this idea.
First, she pushes back on the idea that shareholders are "principles" and directors and executives are the "agents". The notion that corporate law requires directors, executives, and employees to maximize shareholder wealth simply isn't true. There are three core assumptions to the principal-agent model: 1) shareholders own corporations; 2) shareholders are the residual claimants in corporations; 3) shareholders are principals who hire directors and executives to act as their agents. She goes on to show how all three assumptions are erroneous.
Corporations are independent legal entities that own themselves, and can legally act in the same way adult individuals do. Shareholders are in a contract with corporations that give them limited rights under limited circumstances. Shareholders have no claim on any of the corporation's assets, and have no liability in the event the corporation breaks the law. Directors and executives can place other stakeholder's interests or society's interests above shareholders, and there is nothing shareholders can do about it legally.
The idea that "shareholders" are a single entity (some sort of Platonic ideal) that only care about maximizing short-term wealth is wrong. In reality, most shareholders are not short-term maximizers but rather long-term. Entities like hedge funds can end up gaining so much control in the name of shareholder value, but long-term shareholder value is generally harmed for short-term profits. Moves to give "shareholders" more control, like un-staggering boards and getting rid of a Board's ability to "poison-pill" an acquisitive shareholder, ultimately hurt most shareholders.
She goes on to talk about ways the SEC has encouraged the idea of shareholder primacy, and ultimately how this all hurts shareholders.
There's more of interest, and she makes many good points. I don't think this settles the issue by any means, but is rather a good alternative view that should be considered. The issue is ultimately very complicated, but it is important to understand the history of this idea and its flaws in the hopes we can move towards a better alternative.
The idea of the primacy of shareholder value seems to have really taken hold after Milton Friedman's 1970 article in New York Times Magazine entitled "The Social Responsibility of Business is to Increase its Profits". Thereafter, and certainly with a couple decades, this idea became dogma. Stout pushes back on this idea.
First, she pushes back on the idea that shareholders are "principles" and directors and executives are the "agents". The notion that corporate law requires directors, executives, and employees to maximize shareholder wealth simply isn't true. There are three core assumptions to the principal-agent model: 1) shareholders own corporations; 2) shareholders are the residual claimants in corporations; 3) shareholders are principals who hire directors and executives to act as their agents. She goes on to show how all three assumptions are erroneous.
Corporations are independent legal entities that own themselves, and can legally act in the same way adult individuals do. Shareholders are in a contract with corporations that give them limited rights under limited circumstances. Shareholders have no claim on any of the corporation's assets, and have no liability in the event the corporation breaks the law. Directors and executives can place other stakeholder's interests or society's interests above shareholders, and there is nothing shareholders can do about it legally.
The idea that "shareholders" are a single entity (some sort of Platonic ideal) that only care about maximizing short-term wealth is wrong. In reality, most shareholders are not short-term maximizers but rather long-term. Entities like hedge funds can end up gaining so much control in the name of shareholder value, but long-term shareholder value is generally harmed for short-term profits. Moves to give "shareholders" more control, like un-staggering boards and getting rid of a Board's ability to "poison-pill" an acquisitive shareholder, ultimately hurt most shareholders.
She goes on to talk about ways the SEC has encouraged the idea of shareholder primacy, and ultimately how this all hurts shareholders.
There's more of interest, and she makes many good points. I don't think this settles the issue by any means, but is rather a good alternative view that should be considered. The issue is ultimately very complicated, but it is important to understand the history of this idea and its flaws in the hopes we can move towards a better alternative.
June 8, 2020
In this short but eye-opening book, the author takes the perspective that the "Shareholder Primacy Movement" that has been dominant in law and business schools for the past 4 decades is based on faulty assumptions, lacks empirical validity, and does not derive from the actual law related to shareholders and corporate forms. I'd highly recommend this book to anyone who wants a critical perspective on U.S. corporate governance, an understanding of the American legal treatment of corporations, knowledge about different classes of active investors, and a heterodox view of shareholder conflicts. Overall, this book is packed with information and I ended up with about 3 single-spaced pages of notes in a word doc. Highly recommend to anyone who didn't manage to take a corporate governance class during b-school (or one wasn't offered) or to anyone who wants a deeper understanding of how and why corporations make decisions in 2020.
December 29, 2014
Corporate misconduct is a plague on society in a way that few can ignore. Many want to end corporate personhood, but it is not clear how that would solve many of the worst problems of corporations.
Corporations are created by the State, that is by government, to serve a limited public purpose. They are not created by shareholders or incorporators, and they are not owned by the shareholders. They are not required by law to maximize profits or to make the shareholders rich.
In this brief and accessible book, Lynn Stout effectively makes the case that corporations can be beneficial to society, but that their behavior has become increasingly sociopathic due to the dangerous myth that their sole purpose is to create shareholder value. Citing law, economics and business case studies, she effectively marshals evidence that corporations have a legal responsibility to serve the public, not to maximize profits for their shareholders. Ideological arguments to the contrary have dominated corporate law and governance for the past 40 years, but the whole concept of shareholder value goes back only to the mid-1950s, and became the dominant corporate ideology only during the Reagan years. Before Gordon Gekko, there was a sense of public purpose in most corporations.
Stout is pro-capitalism, pro-business and pro-corporation, but is from the progressive reform tradition of A.A. Berle. On the whole, corporations make life better, she says, and cites a few common examples. She does not want to do away with corporations, prevent corporations from making and distributing profits, or destroying the capitalist system.
Her first example is BP's Deepwater Horizon, where the company took numerous dangerous cost-cutting measures that created a clear disaster in pursuit of 'shareholder value.' Enron, Worldcom, Global Crossing, the subprime crisis and other cases she cites could also be directly attributed to pursuit of short-run profit and 'shareholder value.' Stout makes a strong case that the only beneficiaries of shareholder value are short-term speculators, and that long-term investors are the biggest losers.
Stout makes the clearest and most supportive argument in favor of corporate personhood that I've yet read. I'm still not convinced by her arguments, but she raises enough questions to convince me that ending corporate personhood alone will not stop the criminal and pathological behavior that is so common with corporations. If corporations are considered people, then they need to be held accountable as people. They cannot have it both ways. Stout cites law to say emphatically that shareholders do not own corporations, corporations own themselves. Owning stock is not the same as owning a part of a company. People need to wake up to the fact that corporations are creatures of the state, not property of the shareholders. Once that is understood, then corporate accountability and corporate behavior can be addressed, whether corporations are still considered 'people' or not.
Corporations are created by the State, that is by government, to serve a limited public purpose. They are not created by shareholders or incorporators, and they are not owned by the shareholders. They are not required by law to maximize profits or to make the shareholders rich.
In this brief and accessible book, Lynn Stout effectively makes the case that corporations can be beneficial to society, but that their behavior has become increasingly sociopathic due to the dangerous myth that their sole purpose is to create shareholder value. Citing law, economics and business case studies, she effectively marshals evidence that corporations have a legal responsibility to serve the public, not to maximize profits for their shareholders. Ideological arguments to the contrary have dominated corporate law and governance for the past 40 years, but the whole concept of shareholder value goes back only to the mid-1950s, and became the dominant corporate ideology only during the Reagan years. Before Gordon Gekko, there was a sense of public purpose in most corporations.
Stout is pro-capitalism, pro-business and pro-corporation, but is from the progressive reform tradition of A.A. Berle. On the whole, corporations make life better, she says, and cites a few common examples. She does not want to do away with corporations, prevent corporations from making and distributing profits, or destroying the capitalist system.
Her first example is BP's Deepwater Horizon, where the company took numerous dangerous cost-cutting measures that created a clear disaster in pursuit of 'shareholder value.' Enron, Worldcom, Global Crossing, the subprime crisis and other cases she cites could also be directly attributed to pursuit of short-run profit and 'shareholder value.' Stout makes a strong case that the only beneficiaries of shareholder value are short-term speculators, and that long-term investors are the biggest losers.
Stout makes the clearest and most supportive argument in favor of corporate personhood that I've yet read. I'm still not convinced by her arguments, but she raises enough questions to convince me that ending corporate personhood alone will not stop the criminal and pathological behavior that is so common with corporations. If corporations are considered people, then they need to be held accountable as people. They cannot have it both ways. Stout cites law to say emphatically that shareholders do not own corporations, corporations own themselves. Owning stock is not the same as owning a part of a company. People need to wake up to the fact that corporations are creatures of the state, not property of the shareholders. Once that is understood, then corporate accountability and corporate behavior can be addressed, whether corporations are still considered 'people' or not.
Read
February 15, 2017The author, in her capacity as a professor of law, explains that the idea that directors of corporations are bound by law to do anything in their power to increase stock price, is wrong, even though it has floated around in the press and academia for a while now.
Not only is it legally speaking wrong, she tells us, but also ineffective, and even damaging in many ways, towards even the shareholders themselves.
The book proposes that directors should be left to their own machinations, because that will lead corporations to make more responsible decisions, both for themselves but also for various stakeholders, the environment, etc. The author proposes that one important reason that corporations externalize costs is the perceived pressure that directors feel from the shareholders to increase stock price, and that giving them more autonomy will solve that.
I disagree with the author that the solution to corporations misbehaving is to give the few people managing them a free hand to do whatever they want, but I think that doesn't negate the author's main and important thesis: that not only is this legal obligation to raise stock price false, it is also damaging.
The book is also short and easy-ish to read, even for someone who is familiar with these matters only broadly.
Not only is it legally speaking wrong, she tells us, but also ineffective, and even damaging in many ways, towards even the shareholders themselves.
The book proposes that directors should be left to their own machinations, because that will lead corporations to make more responsible decisions, both for themselves but also for various stakeholders, the environment, etc. The author proposes that one important reason that corporations externalize costs is the perceived pressure that directors feel from the shareholders to increase stock price, and that giving them more autonomy will solve that.
I disagree with the author that the solution to corporations misbehaving is to give the few people managing them a free hand to do whatever they want, but I think that doesn't negate the author's main and important thesis: that not only is this legal obligation to raise stock price false, it is also damaging.
The book is also short and easy-ish to read, even for someone who is familiar with these matters only broadly.
January 5, 2016
This book was written by an attorney and it shows: although it's only 115 pages, you have to read it slowly to figure out what the author means by her statements. Thankfully (or not), she repeats many of them so you have multiple opportunities to let certain ideas sink in, which also means that this book could have been even shorter. Also, this book seems targeted toward the general public (those who are shareholders, anyway), but the author is noticeably absent in making any recommendations about what a shareholder should do or want beyond believing her insistent claim that "the shareholder value idea is bad for you".
Her core argument is also something I disagree with. While I accept that corporate law doesn't require a corporation to have "maximizing shareholder value" as its sole purpose, I do think it's a good purpose and I also don't define it the way she does. For her argument, she defines it as taking any and all short-term measures to boost the price of a corporation's stock, especially those which are harmful to others or the long term welfare of the corporation. I feel that particular behavior is a failure to do a good job at maximizing shareholder value because real shareholder value is significantly more long term, so her argument reduces to "many people don't do this well, so no one should be doing it".
Even worse, the author's argument for her vision of corporate responsibility and treating people other than shareholders well is hypocritical and shaky. First she asserts that "universal shareholders" don't really exist, but then excoriates activist hedge funds for pursuing their own interest at the expense of universal shareholders. She claims that people don't want to invest on a purely rational basis -- they want to be socially responsible. But then she wonders why people actually don't invest that way. She explains that shareholders are virtually powerless, but then rails against them for pressuring corporations to make short-sighted decisions.
The author does a decent job of tearing down the idea that maximizing shareholder value should be the only goal of a corporation's directors and executives, but in her effort to demolish it she turns it mostly into a straw man argument, and she falls apart when trying to move beyond that to building something positive or offering solutions.
Her core argument is also something I disagree with. While I accept that corporate law doesn't require a corporation to have "maximizing shareholder value" as its sole purpose, I do think it's a good purpose and I also don't define it the way she does. For her argument, she defines it as taking any and all short-term measures to boost the price of a corporation's stock, especially those which are harmful to others or the long term welfare of the corporation. I feel that particular behavior is a failure to do a good job at maximizing shareholder value because real shareholder value is significantly more long term, so her argument reduces to "many people don't do this well, so no one should be doing it".
Even worse, the author's argument for her vision of corporate responsibility and treating people other than shareholders well is hypocritical and shaky. First she asserts that "universal shareholders" don't really exist, but then excoriates activist hedge funds for pursuing their own interest at the expense of universal shareholders. She claims that people don't want to invest on a purely rational basis -- they want to be socially responsible. But then she wonders why people actually don't invest that way. She explains that shareholders are virtually powerless, but then rails against them for pressuring corporations to make short-sighted decisions.
The author does a decent job of tearing down the idea that maximizing shareholder value should be the only goal of a corporation's directors and executives, but in her effort to demolish it she turns it mostly into a straw man argument, and she falls apart when trying to move beyond that to building something positive or offering solutions.
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