Investing
corporate purpose, shareholder primacy and directors' duties
When managers judge success by today's share price, Stout argues, they raise it by spending the company's future. They sell key assets, cut research, customer support and staff, delay replacing unsafe equipment, and borrow to buy back shares until the firm is close to insolvency. These moves discourage investment and innovation and can pile up risks large enough to threaten the whole financial system.
Stout argues that US corporate law does not, and never has, required directors of public companies to maximize shareholder value. The belief that it does is a widespread perception, and she traces much of it to one old, widely misunderstood court opinion. That case came from a state court with a minor role in corporate law and concerned a fight between controlling and minority shareholders.
The standard story says a public company belongs to its shareholders, so managers are simply their hired agents. Stout rejects this. She argues that shareholders are not, in a legal or economic sense, owners of the company, its principals, or the sole claimants to whatever is left over after others are paid.
Long-term shareholders fear corporate short-sightedness, while short-term traders welcome it, and many powerful shareholders today are short-term. A rule that puts 'the shareholder' first in practice serves the shareholder who is impatient, opportunistic, holds few other investments, and has no conscience. It works against the patient, the trustworthy, and the socially minded.
A single fund that invests by ethical standards does so at its own financial cost, and coordinating all investors is impractical and threatens freedom. The book therefore holds that lasting change needs commitments built into the company itself. One example is a stated corporate purpose written into its founding documents, which unites shareholders around the long term.
Shareholders differ from one another. Some hold shares briefly and others for decades, some own one company and others own the whole market, and some care about more than money. A strategy that pays one shareholder today can give dismal results to another over a longer time, so in Stout's view one measurable 'shareholder value' read off the share price is incoherent.
Most investors, and especially large funds, own small pieces of the entire market rather than one company. Research the book draws on finds that for such 'universal owners' more than 80 percent of returns come from how the market as a whole performs. A company that lifts its own share price by harming workers, communities, or other firms can therefore cost these same shareholders money elsewhere.
Stout presents the corporation as a way to bind together the commitments of several groups, including investors, employees, customers and communities. Their interests cannot be reduced to one number. She argues it is more valuable for managers to balance several goals than to treat the firm as a bundle of assets that exists only for shareholders.
The strongest objection to Stout is that a manager told to serve several masters is freed from all of them and answers to none. Her reply is that the single goal of share price is itself a poor test of success. The evidence does not clearly show that putting shareholders first produces better results.
The push toward shareholder value came less from the law than from incentives. Managers were given stock options and large share-linked pay, which gave them strong personal reasons to run companies by share price. Meanwhile many directors privately sense that this narrow focus serves neither society, the company, nor shareholders themselves.