The “Corporations Exist to Maximize Shareholder Value” Myth

Came across an interesting article on this subject. I was always curious where this idea came from, and was suspicious many years ago when it started cropping up in the media as a way of explaining away the immoral and borderline illegal activities that corporations engage in.

link

bottom line - no such thing.

definitely read the link. and this one too. dumbest idea

excerpt:

=========================================================

So who was the first to insist that the old managerial model needed
to be turned upside down and shareholders interests should be paramount?
It turns out it was Milton Friedman, in a widely-cited 1970 New York Times op-ed. And Friedman being Friedman, he advocated an extreme form of his thesis. A key excerpt:

The businessmen believe that they are defending free
en­terprise when they declaim that business is not concerned “merely”
with profit but also with promoting desirable “social” ends; that
business has a “social conscience” and takes seriously its
responsibilities for providing em­ployment, eliminating discrimination,
avoid­ing pollution and whatever else may be the catchwords of the
contemporary crop of re­formers. In fact they are–or would be if they or
anyone else took them seriously–preach­ing pure and unadulterated
socialism. Busi­nessmen who talk this way are unwitting pup­pets of the
intellectual forces that have been undermining the basis of a free
society these past decades.

The discussions of the “social responsibili­ties of business” are
notable for their analytical looseness and lack of rigor. What does it
mean to say that “business” has responsibilities? Only people can have
responsibilities. A corporation is an artificial person and in this
sense may have artificial responsibilities, but “business” as a whole
cannot be said to have responsibilities, even in this vague sense. The
first step toward clarity in examining the doctrine of the social
responsibility of business is to ask precisely what it implies for
whom….

In a free-enterprise, private-property sys­tem, a corporate executive
is an employee of the owners of the business. He has direct
re­sponsibility to his employers. That responsi­bility is to conduct the
business in accordance with their desires, which generally will be to
make as much money as possible while con­forming to the basic rules of
the society, both those embodied in law and those embodied in ethical
custom

You can see how incoherent this is. Shareholder are not bosses of
corporate executives. They are diffuse and large in number, and if you
got them all in a room to tell the corporate executive what to do, you’d
be more likely to see fisticuffs than agreement.

=================================================

Yup. I read this when it came out. Totally agree. It's this ersatz belief that has irreparably changed our country.

Drummerboy, where your last sentence falls apart is "(shareholders) are diffuse and large in number." This does not take into account the combined voting power of shareholders in shares owned by mutual funds, pension funds and foundations. They are few in number and control the directors. Profit is their only concern. You and I, voting a couple of hundred shares of stock have no matter to the C.E.O. or the board of directors.

Recall when even Steve Jobs was fired by his board of directors.

Is this about the PR value of CSR or about corporate governance?   There's some incoherence going on.

Happy Easter everybody!

That article is totally bunk.  A company can choose to include other goals but the default situation unless a different choice is made by the owners is to maximize profit. 

Maybe DB can start a (small) business and see that as the owner he has no concerns except stuffing his pockets with the millions that the employees make. No responsibility for rent/mortgage, insurance/workers comp., equipment cost, finding reliable "trust worthy" employees, state and federal regulations and the list could go on. But it must be nice to get a check on Friday and not worry about any of that.

maresleg said:

Maybe DB can start a (small) business and see that as the owner he has no concerns except stuffing his pockets with the millions that the employees make. No responsibility for rent/mortgage, insurance/workers comp., equipment cost, finding reliable "trust worthy" employees, state and federal regulations and the list could go on. But it must be nice to get a check on Friday and not worry about any of that.

I like how Frank Zappa explained this. 

https://www.youtube.com/watch?v=TWXUatVuxQg&feature=youtu.be

Formerlyjerseyjack said:

Drummerboy, where your last sentence falls apart is "(shareholders) are diffuse and large in number." This does not take into account the combined voting power of shareholders in shares owned by mutual funds, pension funds and foundations. They are few in number and control the directors. Profit is their only concern. You and I, voting a couple of hundred shares of stock have no matter to the C.E.O. or the board of directors.

Recall when even Steve Jobs was fired by his board of directors.

It only falls apart if you can show that institutional investors like you describe are more a rule than an exception. It's a good point, but I don't know the specifics.

maresleg said:

Maybe DB can start a (small) business and see that as the owner he has no concerns except stuffing his pockets with the millions that the employees make. No responsibility for rent/mortgage, insurance/workers comp., equipment cost, finding reliable "trust worthy" employees, state and federal regulations and the list could go on. But it must be nice to get a check on Friday and not worry about any of that.

I assume there's a point in there somewhere.

Or maybe not.

It is hard to align the interests of owners (whose interests should be primarily)  with professional managers for companies that are not owner run. But the whole trust of management theory is to do that. 

drummerboy said:


The discussions of the “social responsibili­ties of business” are
notable for their analytical looseness and lack of rigor. What does it
mean to say that “business” has responsibilities? Only people can have
responsibilities. A corporation is an artificial person and in this
sense may have artificial responsibilities, but “business” as a whole
cannot be said to have responsibilities, even in this vague sense. The
first step toward clarity in examining the doctrine of the social
responsibility of business is to ask precisely what it implies for
whom….

The Supreme Court of the United States has ruled that a corporation, albeit a closely held corporation can have a Religion that must be protected in accordance with the First Amendment.

I have a different take on the "purpose" of a business. Well maybe it's not different since I think most people see it my way. The purpose of a business is to deliver certain goods or services. That is its business. The "purpose" of the Ford Motor Company is to make and sell cars. The "purpose" of Kim's Nails in Maplewood is to trim customers' nails. If the perform their "purposes" in a satisfactory manner they will earn income and if they manage that income in a prudent manner they will generate profit.

That's about all I know about Capitalism. The rest is commentary.  

bramzzoinks said:

That article is totally bunk.  A company can choose to include other goals but the default situation unless a different choice is made by the owners is to maximize profit. 

No  maximize shareholder value.   There is a huge difference.   

No one has really addressed the issue raised by my question though. So let me rephrase it:

Assuming the "maximize value" stricture is true, what exactly does it mean in terms of morality and legality of the corp's behavior? Obviously "maximize value" can not be literally taken to be true by any significant number of people, because that means that any law which produces more of a reward when broken than it does a penalty, would have to be broken, unthinkingly, so as to meet the primary directive.

Well, that's obviously not true for 99% of corporations. (95% you say? OK) So if it's not true, there are clearly limits placed on the rule by corporations or their spokespeople - it's just that these limits  happen to be arbitrarily placed at the point where monetary value would be sacrificed for a clear public good.  Anything that happens to fall in that category falls in the "nope, that would be asking us to break our fiduciary responsibility". This excuse is, for example, often used to defend the predatory tactics of banks.

Monetary value.  Not touchy feely shyt. 

drummerboy said:

No one has really addressed the issue raised by my question though. So let me rephrase it:

Assuming the "maximize value" stricture is true, what exactly does it mean in terms of morality and legality of the corp's behavior? Obviously "maximize value" can not be literally taken to be true by any significant number of people, because that means that any law which produces more of a reward when broken than it does a penalty, would have to be broken, unthinkingly, so as to meet the primary directive.

Well, that's obviously not true for 99% of corporations. (95% you say? OK) So if it's not true, there are clearly limits placed on the rule by corporations or their spokespeople - it's just that these limits  happen to be arbitrarily placed at the point where monetary value would be sacrificed for a clear public good.  Anything that happens to fall in that category falls in the "nope, that would be asking us to break our fiduciary responsibility". This excuse is, for example, often used to defend the predatory tactics of banks.

The reality is that poor behavior and immorality may cost an organization dearly.   Check Volkswagens stock price.   VW is worth $120 BILLION less than 1 year ago.   There were people in VW being immoral.  It is arguably the worst event shareholders could have ever feared.   Your original post is overly simplistic.  In the long run, moral behavior is good for shareholder value (which again is wildly different than profitability).  Again, shareholders want value, not profitability.  

I would contend that VW is far more the exception than the rule. Witness Goldman Sachs.

Breaking the law is a risky way to try to maximize value. 

But the Volkswagen board is controlled by the State of Lower Soxony and its German unions so maybe that is why they took foolish risks. 

bramzzoinks said:

Breaking the law is a risky way to try to maximize value. 

But the Volkswagen board is controlled by the State of Lower Soxony and its German unions so maybe that is why they took foolish risks. 

You are insane.  It has nothing to do with unions.   

drummerboy said:

I would contend that VW is far more the exception than the rule. Witness Goldman Sachs.

Goldman only trades at 12x earnings.  That's not a high multiple.  What would it be worth if its reputation were still pristine, like in the 80s.  Trust me, the board discusses reputation as a strategic risk.  

Woot said:

bramzzoinks said:

Breaking the law is a risky way to try to maximize value. 

Zee But the Volkswagen board is controlled by the State of Lower Soxony and its German unions so maybe that is why they took foolish risks. 

You are insane.  It has nothing to do with unions.   

In terms of productivity Volkswagen is close to the bottom because of union and state control making adjustment impossible.  So it had to cheat to make up for that. 

bramzzoinks said:

Woot said:

bramzzoinks said:

Breaking the law is a risky way to try to maximize value. 

Zee But the Volkswagen board is controlled by the State of Lower Soxony and its German unions so maybe that is why they took foolish risks. 

You are insane.  It has nothing to do with unions.   

In terms of productivity Volkswagen is close to the bottom because of union and state control making adjustment impossible.  So it had to cheat to make up for that. 

Delusional.   

You realize that VW owns over 60 plants with the majority outside of Germany.   Do you really know anything?   They are the worlds largest producer of automobiles and one of the words most productive organizations.  

You really are the Washington Generals of MOL.  

http://www.economist.com/news/business/21693947-german-carmaker-will-escape-its-emissions-scandal-largely-unscathed-bad-news

"...The most intractable problem is low productivity, especially at the mass-market VW brand. The group’s labour costs have risen from around 13% of sales in 2007 to almost 17%. Outside China (where it makes cars in joint ventures with local firms), the group’s 520,000 workers made 6.7m vehicles in 2014, or about 13 each. That is about the same productivity as at Daimler’s Mercedes division, which makes only high-margin premium models (see chart 2).

As other carmakers have shifted production to low-wage countries, VW has remained largely stuck in Germany. Some 45% of its employees are based there, many enjoying a four-day work week. The VW brand’s German factories are “among the highest-cost plants in the industry”, says Patrick Hummel of UBS, a bank.

But VW’s commitment to Germany is absolute. “We are a German company”, says Mr Müller, and will “preserve German jobs”. Powerful unions would be sure to resist job cuts. Mr Müller says that they agree on the need for reform but admits to disagreement over how it might happen. Unions could also prevent a wider rethink that might shift investment from the VW brand to others that are more profitable. The supervisory board, made up largely of union representatives and nominees of the state of Lower Saxony, which holds a 20% stake in VW, has the power to resist most changes of strategy...."

Cars per employee is a horrible metric.   VW is vertically integrated.  The Economist should know better.  

and VW made more money per car than GM despite using more employees per car   

it has already been established that part of the problem at VW was poor management structure.   The engineering groups that designed parts were the same people that approved them for production.   Most automakers have a check and balance system in house.  I can't see how to blame that on the average union member.

There are far, far more intricate factors at play with VW and its mgmt than the works councils.  Family, for starters.  How VW relates to the OP is a bit of a sidebar IMO.

bramzzoinks said:

Woot said:

bramzzoinks said:

Breaking the law is a risky way to try to maximize value. 

Zee But the Volkswagen board is controlled by the State of Lower Soxony and its German unions so maybe that is why they took foolish risks. 

You are insane.  It has nothing to do with unions.   

In terms of productivity Volkswagen is close to the bottom because of union and state control making adjustment impossible.  So it had to cheat to make up for that. 

Um, no.

drummerboy said:

No one has really addressed the issue raised by my question though. So let me rephrase it:

Assuming the "maximize value" stricture is true, what exactly does it mean in terms of morality and legality of the corp's behavior? Obviously "maximize value" can not be literally taken to be true by any significant number of people, because that means that any law which produces more of a reward when broken than it does a penalty, would have to be broken, unthinkingly, so as to meet the primary directive.

Well, that's obviously not true for 99% of corporations. (95% you say? OK) So if it's not true, there are clearly limits placed on the rule by corporations or their spokespeople - it's just that these limits  happen to be arbitrarily placed at the point where monetary value would be sacrificed for a clear public good.  Anything that happens to fall in that category falls in the "nope, that would be asking us to break our fiduciary responsibility". This excuse is, for example, often used to defend the predatory tactics of banks.

Legality is a line that shouldn't be crossed in any pursuit of shareholder value or profit.  Not to say it doesn't happen, of course, but it's hardly written into the charter.

Not sure about those last two sentences... I can't think of one scenario where predatory lending was (or could be) defended by or on behalf of a bank from a position as fiduciary.

The initial idea of corporations had nothing to do with maximizing profits.  The initial idea was to be able to accomplish something as a cooperative that could not be done by an individual.  By pooling investors you could produce something that an individual investor would not have the means to do.  Yes profit was desired but the accomplishment of something bigger was the goal.  For this reason, corporations should be limited to one line of business.