Name: The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public
Author: Lynn Stout (Author)
ISBN: 9781605098135

The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public book cover

The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public

Author(s): Lynn Stout (Author)

Publisher: Berrett-Koehler Publishers
Publication Date: 7 May 2012
Edition: 1st
Language: English
Print length: 120 pages
ISBN-10: 1605098132
ISBN-13: 9781605098135

Book Description

An in-depth look at the trouble with shareholder value thinking and at better options for models of corporate purpose.

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.

“A must-read for managers, directors, and policymakers interested in getting America back in the business of creating real value for the long term.” —Constance E. Bagley, professor, Yale School of Management; president, Academy of Legal Studies in Business; and author of Managers and the Legal Environment and Winning Legally

“A compelling call for radically changing the way business is done… The Shareholder Value Myth powerfully demonstrates both the dangers of the shareholder value rule and the falseness of its alleged legal necessity.” —Joel Bakan, professor, The University of British Columbia, and author of the book and film The Corporation

“Lynn Stout has a keen mind, a sharp pen, and an unbending sense of fearlessness. Her book is a must-read for anyone interested in understanding the root causes of the current financial calamity.” —Jack Willoughby, senior editor, Barron’s

“Lynn Stout offers a new vision of good corporate governance that serves investors, firms, and the American economy.” —Judy Samuelson, executive director, Business and Society Program, The Aspen Institute

Editorial Reviews

Review

“A must-read for managers, directors, and policymakers interested in getting America back in the business of creating real value for the long term.”
—Constance E. Bagley, Professor, Yale School of Management; President, Academy of Legal Studies in Business; and author of Managers and the Legal Environment and Winning Legally

“A compelling call for radically changing the way business is done…, The Shareholder Value Myth powerfully demonstrates both the dangers of the shareholder value rule and the falseness of its alleged legal necessity.”
—Joel Bakan, Professor, The University of British Columbia, and author of the book and film The Corporation

“Lynn Stout has a keen mind, a sharp pen, and an unbending sense of fearlessness. Her book is a must-read for anyone interested in understanding the root causes of the current financial calamity.”
—Jack Willoughby, Senior Editor, Barron’s

“Lynn Stout offers a new vision of good corporate governance that serves investors, firms, and the American economy.”
—Judy Samuelson, Executive Director, Business and Society Program, The Aspen Institute

“This book threatens to trigger an avalanche of new thinking about corporations. Written by one of the most respected theorists in corporate governance, it takes aim at the smug ‘profit-only’ complacency found in business schools and boardrooms. Anyone who reads it will be forced to think—and think again.”
—Thomas Donaldson, Mark O. Winkelman Professor, The Wharton School, University of Pennsylvania

“The only antidote to prevailing bad theory is calm, careful, plainspoken, and relentless argumentation that peels away the distracting layers of abstract mumbo jumbo to expose the lunacy of the underlying theory for all to see. Lynn Stout does the world a great favor in exposing shareholder value theory for what it is: flawed and damaging theory. Comprehensive yet brief, profound yet enjoyable, this is a must-read for anyone who cares about the future of democratic capitalism.”
—Roger Martin, Dean, Rotman School of Management, University of Toronto, and author of Fixing the Game

“It is widely believed that corporations exist solely to maximize profits. It is also widely believed that this corporate purpose is prescribed by law. Lynn Stout shows that these influential beliefs are both wrong and very likely destructive.”
—Ralph Gomory, Research Professor, New York University; President Emeritus, Alfred P. Sloan Foundation; and former Senior Vice President for Science and Technology, IBM Corporation

“Professor Stout is a leader of a growing group of corporate executives, economists, lawyers, and thoughtful investors who have embraced the concept that corporations should, and indeed must, be managed in the interests of all their constituents. This book is a very readable explanation of the adverse impact that ignoring the interests of all constituents and short-termism have had on not just employees, customers, suppliers, communities, and the economy as a whole but the very shareholders themselves.”
—Martin Lipton, Senior Partner, Wachtell, Lipton, Rosen & Katz

“Lynn Stout raises a critical question about American capitalism: what is the purpose of the public corporation? For too many years there has been an uncontested assertion that all that matters is creating shareholder wealth. This is an underlying cause of many of the ills facing American society, and this is therefore a critically important book!”
—Jay Lorsch, Louis Kirstein Professor of Human Relations, Harvard Business School, and author of Back to the Drawing Board (with Colin B. Carter) and Pawns or Potentates

“Lynn Stout presents a thoroughly researched and articulated case against shareholder value exclusivity. It serves the grand purpose of illuminating the debate in the hope of finding a reasoned result.”
—Ira Millstein, Director, Columbia Law School and Columbia Business School Program on Global, Economic, and Regulatory Interdependence. and Theodore Nierenberg Adjunct Professor of Corporate Governance, Yale School of Management

“Lynn Stout’s engaging book deals a knockout blow to the mantra of ‘shareholder value’ that has come to dominate corporate boardrooms in the last two decades. While she makes her case in a readable and entertaining way, her message is very serious: the obsession that the business community has with maximizing shareholder value is making US corporations weaker, not stronger.”
—Dr. Margaret M. Blair, Professor of Law, Milton R. Underwood Chair in Free Enterprise, Vanderbilt University Law School

“Lynn Stout kicks another brick off of the mantle of short-termism, showing again why choosing to myopically focus on short-term value not only can destroy longer-term performance but also is legally inconsistent with leading corporate governance principles, incentives, and actions that aspire to more sustainable value creation—over the long term and for all stakeholders, including shareholders.”
—Dean Krehmeyer, Executive Director, Business Roundtable Institute for Corporate Ethics

About the Author

Lynn Stout is the Distinguished Professor of Corporate and Business Law, Clarke Business Law Institute, at Cornell Law School. Her work on corporate theory was cited by Supreme Court Justice John Paul Stevens in his dissent in Citizens United.

Excerpt. © Reprinted by permission. All rights reserved.

INTRODUCTION
“The Dumbest Idea in the World”

The Deepwater Horizon was an oil drilling rig, a massive floating structure that cost more than a third of a billion dollars to build and measured the length of a football field from bottom to top. On the night of April 20, 2010, the Deepwater Horizon was working in the Gulf of Mexico, finishing an exploratory well named Macondo for the corporation BP. Suddenly the rig was rocked by a loud explosion. Within minutes the Deepwater Horizon was transformed into a column of fire that burned for nearly two days before collapsing into the depths of the Gulf of Mexico. Meanwhile, the Macondo well began vomiting tens of thousands of barrels of oil daily from beneath the sea floor into the Gulf waters. By the time the well was capped in September 2010, the Macondo well blowout was estimated to have caused the largest offshore oil spill in history.1

The Deepwater Horizon disaster was tragedy on an epic scale, not only for the rig and the eleven people who died on it, but also for the corporation BP. By June of 2010, BP had suspended paying its regular dividends, and BP common stock (trading around $60 before the spill) had plunged to less than $30 per share. The result was a decline in BP’s total stock market value amounting to nearly $100 billion. BP’s shareholders were not the only ones to suffer. The value of BP bonds tanked as BP’s credit rating was cut from a prestigious AA to the near-junk status BBB. Other oil companies working in the Gulf were idled, along with BP, due to a government-imposed moratorium on further deepwater drilling in the Gulf. Business owners and workers in the Gulf fishing and tourism industries struggled to make a living. Finally, the Gulf ecosystem itself suffered enormous damage, the full extent of which remains unknown today.

After months of investigation, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling concluded the Macondo blowout could be traced to multiple decisions by BP employees and contractors to ignore standard safety procedures in the attempt to cut costs. (At the time of the blowout, the Macondo project was more than a month behind schedule and almost $60 million over budget, with each day of delay costing an estimated $1 million.)2 Nor was this the first time BP had sacrificed safety to save time and money. The Commission concluded, “BP’s safety lapses have been chronic.”3

The Ideology of Shareholder Value

Why would a sophisticated international corporation make such an enormous and costly mistake? 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. Even if following proper safety procedures had delayed the development of the Macondo well for a full year, BP would have done much better. The gamble was foolish, even from BP’s perspective.

This book argues that the Deepwater Horizon disaster is only one example of a larger problem that afflicts many public corporations today. That problem might be called shareholder value thinking. According to the doctrine of shareholder value, public corporations “belong” to their shareholders, and they exist for one purpose only, to maximize shareholders’ wealth. Shareholder wealth, in turn, is typically measured by share price—meaning share price today, not share price next year or next decade.

Shareholder value thinking is endemic in the business world today. Fifty years ago, if you had asked the directors or CEO of a large public company what the company’s purpose was, you might have been told the corporation had many purposes: to provide equity investors with solid returns, but also to build great products, to provide decent livelihoods for employees, and to contribute to the community and the nation. Today, you are likely to be told the company has but one purpose, to maximize its shareholders’ wealth. This sort of thinking drives directors and executives to run public firms like BP with a relentless focus on raising stock price. In the quest to “unlock shareholder value” they sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, outmoded, and unsafe equipment; shower CEOs with stock options and expensive pay packages to “incentivize” them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency; and lobby regulators and Congress to change the law so they can chase short-term profits speculating in credit default swaps and other high-risk financial derivatives. They do these things even though many individual directors and executives feel uneasy about such strategies, intuiting that a single-minded focus on share price may not serve the interests of society, the company, or shareholders themselves.

This book examines and challenges the doctrine of shareholder value. It argues that shareholder value ideology is just that—an ideology, not a legal requirement or a practical necessity of modern business life. United States corporate law does not, and never has, required directors of public corporations to maximize either share price or shareholder wealth. To the contrary, as long as boards do not use their power to enrich themselves, the law gives them a wide range of discretion to run public corporations with other goals in mind, including growing the firm, creating quality products, protecting employees, and serving the public interest. Chasing shareholder value is a managerial choice, not a legal requirement.

Nevertheless, by the 1990s, the idea that corporations should serve only shareholder wealth as reflected in stock price came to dominate other theories of corporate purpose. Executives, journalists, and business school professors alike embraced the need to maximize shareholder value with near-religious fervor. Legal scholars argued that corporate managers ought to focus only on maximizing the shareholders’ interest in the firm, an approach they somewhat misleadingly called “shareholder primacy.” (“Shareholder absolutism” or “shareholder dictatorship” would be more accurate.)

It should be noted that a handful of scholars and activists continued to argue for “stakeholder” visions of corporate purpose that gave corporate managers breathing room to consider the interests of employees, creditors, and customers. A small number of others advocated for “corporate social responsibility” to ensure that public companies indeed served the public interest writ large. But by the turn of the millennium, such alternative views of good corporate governance had been reduced to the status of easily ignored minority reports. Business and policy elites in the United States and much of the rest of the world as well accepted as a truth that should not be questioned that corporations exist to maximize shareholder value.4

Time for Some Questions

Today, questions seem called for. It should be apparent to anyone who reads the newspapers that Corporate America’s mass embrace of shareholder value thinking has not translated into better corporate or economic performance. The past dozen years have seen a daisy chain of costly corporate disasters, from massive frauds at Enron, HealthSouth, and Worldcom in the early 2000s, to the near-failure and subsequent costly taxpayer bailout of many of our largest financial institutions in 2008, to the BP oil spill in 2010. Stock market returns have been miserable, raising the question of how aging baby boomers who trusted in stocks for their retirement will be...

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