This is my second Blog Post… please be easy on me. :)
I keep seeing people go on and ON about how Hillary supported TPP, and that was reason enough to NOT support her.
One things that is strangely missing from the conversation regarding our economy, aside from Hillary mentioning this, is Quarterly Capitalism aka Shareholder Value Maximization.
Here are a few articles that talk about this is better detail than I’m able to. It’s 12: Noon, my time and I haven’t slept yet. :)
When I wake up, I will post more info.
I hope you find these articles as interesting as I do.
How the cult of shareholder value wrecked American business
In the recent history of management ideas, few have had a more profound — or pernicious — effect than the one that says corporations should be run in a manner that “maximizes shareholder value.”
Indeed, you could argue that much of what Americans perceive to be wrong with the economy these days — the slow growth and rising inequality; the recurring scandals; the wild swings from boom to bust; the inadequate investment in R&D, worker training and public goods — has its roots in this ideology.
and another article:
Consider the example of the United States.
The idea that corporations should be managed to maximize shareholder value has led over the past two decades to dramatic shifts in U.S. corporate law and practice. Executive compensation rules, governance practices, and federal securities laws, have all been “reformed” to give shareholders more influence over boards and to make managers more attentive to share price.2 The results are disappointing at best. Shareholders are suffering their worst investment returns since the Great Depression;3 the population of publicly-listed companies has declined by 40%;4 and the life expectancy of Fortune 500 firms has plunged from 75 years in the early 20th century to only 15 years today.5
Maximizing Shareholder Value: A Dumb Idea?
The purpose of a company is to serve its customers. Its obligation is to not harm everyone else. And its opportunity is to enrich the lives of its employees.
Somewhere along the way, people got the idea that maximizing investor return was the point. It shouldn’t be. That’s not what democracies ought to seek in chartering corporations to participate in our society.
The great corporations of a generation ago, the ones that built key elements of our culture, were run by individuals who had more on their mind than driving the value of their options up.
Maximization of Shareholder Value: Flawed Thinking That Threatens Our Economic Future
One of the most widely promulgated falsehoods in investing is the notion that those managing publicly held companies are obligated to maximize shareholder value. In recent years, US companies have taken on record amounts of debt to fund share repurchases on a scale only exceeded in 2007, in the name of enhancing shareholder value.* Often undertaken at the behest of a vocal minority, these buybacks have served to enrich CEOs at the expense of other important stakeholders, diminish the health of our economy, and threaten the long-term future of our corporations. That there is no legal basis for this fixation on shareholder value is either poorly understood or conveniently ignored by much of the investing public. Thankfully, the doctrine of shareholder primacy is now being challenged with more vigor and frequency than ever before. It’s time to put to rest an idea that too often promotes myopic thinking and imperils long-term value creation.
Many observers trace the rise of shareholder primacy theory to the influence of economist Milton Friedman. In 1970, Friedman argued that the social responsibility of business is to increase profits. Six years later, in “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” academics Michael C. Jensen and William H. Meckling turned to agency theory to explain why it was the sole obligation of corporations to maximize profits. They posited that corporate executives acted as agents for the owners of the business, the principals. Maximizing shareholder value became a shared goal that served to align the interests of shareowners and management, the latter via generous incentive compensation plans.
Maximizing shareholder value: The goal that changed corporate America
The main street, once swarming with International Business Machines employees in their signature white shirts and dark suits, is dotted with empty storefronts. During the 1980s, there were 10,000 IBM workers in Endicott. Now, after years of layoffs and jobs shipped overseas, about 700 employees are left.
Investors in IBM’s shares, by contrast, have fared much better. IBM makes up the biggest portion of the benchmark Dow Jones industrial average and has helped drive that index to record highs. Someone who spent about $16,000 buying 1,000 shares of IBM in 1980 would now be sitting on more than $400,000 worth of stock, a 25-fold return.
It used to be a given that the interests of corporations and communities such as Endicott were closely aligned. But no more. Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.
Driving this change is a deep-seated belief that took hold in corporate America a few decades ago and has come to define today’s economy — that a company’s primary purpose is to maximize shareholder value.
The belief that shareholders come first is not codified by statute. Rather, it was introduced by a handful of free-market academics in the 1970s and then picked up by business leaders and the media until it became an oft-repeated mantra in the corporate world.
Together with new competition overseas, the pressure to respond to the short-term demands of Wall Street has paved the way for an economy in which companies are increasingly disconnected from the state of the nation, laying off workers in huge waves, keeping average wages low and threatening to move operations abroad in the face of regulations and taxes.
Tarnished Ideas: Free-Trade and Shareholder Wealth Maximization
Shareholder Wealth Maximization as Corporate Purpose
What is the purpose of business? There was a time when corporate purpose was tied to customers, employees, and the communities in which they operated, as well as benefit to their owners. This appears to be a quaint notion to some. Drug companies implement colossal price increases simply because they can. Multi-national corporations structure transactions to keep income in a low tax country. So-called tax inversions are mergers that achieve the same purpose. Such behavior undermines socio-economic confidence.
In a compelling article called How the Cult of Shareholder Value Wrecked American Business, Washington Post columnist Steven Pearlstein writes:
“In the history of management ideas, few have had a more profound — or pernicious — effect than the one that says corporations should be run in a manner that ‘maximizes shareholder value.’ Indeed, you could argue that much of what Americans perceive to be wrong with the economy these days — the slow growth and rising inequality; the recurring scandals; the wild swings from boom to bust; the inadequate investment in R&D, worker training and public goods — has its roots in this ideology.
The funny thing is that this imperative to ‘maximize’ a company’s share price has no foundation in history or in law. Nor is there any evidence that it makes the economy or the society better off. What began in the 1970s and ’80s as a corrective to managerial mediocrity has become a corrupting, self-interested dogma peddled by finance professors, money managers and over-compensated corporate executives.”
Signs of rebellion to this dogma are developing. Since 2010, nearly thirty states have authorized a form of corporate charter known as a benefit corporation or B Corp for short. It can protect boards of directors from shareholder lawsuits for considering social matters in a decision. Another development is increased interest in social entrepreneurship. Also, an increasing number of investors express a desire to support companies that strive to make positive contributions to society.
Now, I don’t know why this is not talked about more, well again, Hillary did, but it did not get much notice.… my guess is that it would not get huge cheers at rallies, and people would hear that.. and say… Huh?
It’s easier to say: NAFTA screwed our economy!!!
“Shareholder Value Maximization is what is bringing our economy to it’s knees.!!” Just doesn’t have the same ring.
We are in the time of short Bumper Sticker, type slogans, if it can’t be said in less than 6 words, people don’t pay attention.
I do know, that more people need to understand this, so that the myth that Trade Deals are what wrecked our economy, will be laid to rest.