Why Debunking the “Myth of Shareholder Value” is so Critical

Steve Pearlstein’s column in Sunday’s Post Business section (with a related story by Jia Lynn Jang) is an excellent deconstruction of the “myth of shareholder value” and a must read for readers of this site.
Pearlstein not only reviews the sources of the shareholder value myth and its malicious consequences for the broader economy, but points to a few useful and practical reforms that if adopted would add some salutary friction to the perpetuation of the myth, which continues to serve as a flywheel in the center of the merry-go-round of corporate governance.
At this point the destructive consequences of the shareholder value myth should be obvious to any honest person who has looked at the corporate system and parsed through the evidence.  But few have faith that anything can be done. Even corporate executives regularly bewail the pressure of “short-termism” that hamstrings their ability to make long-term strategic plans, and claim they’d love to put customers and employees before investors, but then they point the finger elsewhere, including institutional investment fund managers and the almighty business media (including cable news) with its obsessive focus on quarterly earnings.
But it’s a rare CEO who even tries to stands up to denounce the values-stripping dynamic, and there are clearly few incentives for them to do so.
“[I]t turns out that even as they proclaim their unwavering dedication to the interest of shareholders, corporate executives and directors have been doing everything possible to minimize and discourage shareholder involvement in corporate governance. This blatant hypocrisy is most recently revealed in the all-out effort by the business lobby to prevent shareholders from voting on executive pay or having the right to nominate a competing slate of directors. … For too many corporations “maximizing shareholder value” has also provided justification for bamboozling customers, squeezing suppliers and employees, avoiding taxes and leaving communities in the lurch. For any one profit-maximizing company, such behavior may be perfectly rational. But when competition forces all companies to behave in this fashion, it’s hardly clear that society is better off.”
If corporate leaders had any real civic courage and concern for the broader society, then they’d have at least pulled their companies out of the US Chamber and themselves dropped out of the Business Roundtable — the two biggest obstacles to modest corporate reform and accountability in Washington today.
No, instead, the passive acquiescence on that front perpetuates the problem and makes so many corporate leaders seem fundamentally sociopathic.
Pearlstein also pins much of the blame on the education corporate leaders received at the leading business schools, who certainly have helped perpetuate the myth. But equally culpable are the nation’s law schools. After all, how many lawyers do you know who would actively dispute the notion that corporations are required by law to maximize profits?  As we pointed out last year, Prof. Lynn Stout (mentioned in passing by Pearlstein) published a series of articles puncturing this delusion, including one that meticulously decontructs the misleading presumption that the decision in “Dodge v. Ford”  established the doctrine as a matter of well-settled law.
Apart from omitting the legal question, Perlstein leaves few stones unturned and gets all of them right, while showing how the question is connected to incendiary injustices such as outsized executive pay.
Finally, and no less usefully, Pearlstein also points to a few practical policies that would significantly reform the system without requiring that be entirely torn apart:  He endorses a financial transactions tax (FTT) as a way to reduce speculation and suggests that the capital gains tax loophole (“carried interest rule”) favoring speculation over productive investment be closed.  These are not new ideas, but linking them to the many destructive consequences of the myopic myth of shareholder value brings new urgency to their adoption.

But how?  Pearlstein’s suggestion that employee discontent will ultimately drive these and other changes might be true, even if there’s little populist clamor for such measures as the FTT (apart from enlightened unions like National Nurses United).

Softening up the underbelly of the beast is equally important:  CEOs must understand that getting behind these reforms is their civic duty:  They will not only help shore up the broader legitimacy that corporations themselves have lost, but  they’d better understand that the Occupy movement could be a faint harbinger of things to come, should they continue to shred the entire middle class.

But let’s face it:  Most CEOs have no  more sociological horse-sense than a Manhattan supermodel on a coke binge.  Popular discontent is clearly necessary for far-reaching changes, but it will also take a well-organized movement for economic justice to drive such productive (and non-violent) changes into the system.

That’s why we have a lot of work to do to raise broader awareness of the importance of corporate reforms.