A new book by Cornell Law School Professor Lynn Stout explores the concept of “shareholder value” and how it endangers not only investors, but also anyone involved in the economy.
Stout laid out that one of the many issues involved in the idea of “shareholder primacy” was a change in the tax code in 1993:
We also changed the tax code in 1993 to require companies to tie executive pay to an objective performance metric. The favorite metric was share price and, buy, that did as much as anything to make executives pay attention to shareholder value more than anything else including employee security, customer satisfaction, or even the company’s long-term future.
In her book Stout lays out how the focus on increasing shareholder value contributed to the BP Gulf Cost disaster.
Stout added:
Unfortunately it’s not only a disaster for BP shareholders. It was a disaster for their bondholders, their employees, other people who worked in the Gulf, fisherman, the tourist industry and the eco-system itself.
Studies have suggested that if a corporation is a person that person would like be considered a psychopath.
Stout explained that’s partially to do with shareholders who act in a psychopathic manner:
The reason public corporations do some of these psychopathic things is because they’re responding to psychopathic investor pressure. There’s some very interesting data that suggests so-called private companies that have controlling shareholders may be more socially responsible and take better care of their employees and the reason is because they’re not responding to these pressures, especially the pressure of the short term hedge fund.
Stout doesn’t simply criticize shareholder primacy in her book, but also offers potential solutions to the problem. One solution is a tax on stocks.
Stout added:
If we put in place a stock trading tax that would slow down some of that short term trading and would give corporate managers and executives more leisure to think for the future. Another thing to do would be to undo some of these changes that were made in the name of so-called “shareholder Democracy.” The reality is the only shareholders who really try to exercise influence under these rules are the hedge funds. They’re very undiversified, they only own stock in two or three corporations, and they have very big positions. But your average investor who owns stock in several companies or who owns stocks through a mutual fund which might own stock in a hundred companies, they’re not going to get involved in a corporation’s day-to-day, because they’re much too diversified. The irony is when we’re talking about shareholder power we’re really talking about hedge fund power and we would do well to reduce hedge fund power.
Corporations go public by selling common stock to raise money for expansion. In the process, the ownership of the company is taken over by shareholders who are primarily hedge and mutual funds.
Public corporations must declare quarterly earnings which puts tremendous pressure on both executives and workers to constantly excel.
Some public corporations have bough common stack back to regain control o their companies.
This not only makes the stock more valuable, it can also prevent a hostile takeover of the company by a venture capitalist like Mitt Romney.
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