The Shareholder Return Lie

Alternet:

“It is literally – literally – malfeasance for a corporation not to do everything it legally can to maximize its profits. That’s a corporation’s duty to its shareholders.”

Since this sentiment is so familiar, it may come as a surprise that it is factually incorrect: In reality, there is nothing in any U.S. statute, federal or state, that requires corporations to maximize their profits. More surprising still is that, in this instance, the untruth was not uttered as propaganda by a corporate lobbyist but presented as a fact of life by one of the leading lights of the Democratic Party’s progressive wing, Sen. Al Franken. Considering its source, Franken’s statement says less about the nature of a U.S. business corporation’s legal obligations – about which it simply misses the boat – than it does about the point to which laissez-faire ideology has wormed its way into the American mind.
The notion that the law imposes a duty to “maximize shareholder value” – a phrase capturing the notion that profits are mandatory and it is the shareholders who are entitled to them – is so readily accepted these days because it jibes perfectly with assumptions about economic life that constantly come down to us from business and political leaders, from academia, and from the preponderance of the media. It is unlikely to occur to anyone under the age of 40 to question this idea – or the idea that the highest, or even sole, purpose of a corporation is to make a profit – because they have rarely if ever been exposed to an alternative view. Those in middle age or beyond may have trouble remembering a time when the corporation’s focus on shareholders’ interests to the exclusion of all other constituencies –customers, employees, suppliers, creditors, the communities in which it operates, and the nation – did not seem second nature.
This narrow conception of corporate purpose has become predominant only in recent decades, however, and it flies in the face of a longer tradition in modern America that regards the responsibilities of a corporation as extending far beyond its shareholders. Owen D. Young, twice chairman of General Electric (1922-’40, 1942-’45) and 1930 Time magazine Man of the Year, told an audience at Harvard Business School in 1927 that the purpose of a corporation was to provide a good life in both material and cultural terms not only to its owners but also to its employees, and thereby to serve the larger goals of the nation:

“Here in America, we have raised the standard of political equality. Shall we be able to add to that, full equality in economic opportunity? No man is wholly free until he is both politically and economically free. No man with an uneconomic and failing business is free. He is unable to meet his obligations to his family, to society, and to himself. No man with an inadequate wage is free. He is unable to meet his obligations to his family, to society, and to himself. No man is free who can provide only for physical needs. He must also be in a position to take advantage of cultural opportunities. Business, as the process of coordinating men’s capital and effort in all fields of activity, will not have accomplished its full service until it shall have provided the opportunity for all men to be economically free.”

I think this maxim has been used to justify really poor business decisions in this country. Employees are treated like shit.  Customers are ripped off.  If shareholder value was the ultimate goal, it would seem that justifiable executive compensation would be called for.  Instead, a company is run into the ground by its CEO, and he leaves with a golden parachute.  The culture of greed in this country is a real problem.  People think as long as they are ok, everybody else can go to hell.  Unfortunately, society is a little more complicated than that, and people need to give a little to get a little.  Next time somebody tells you shareholder value is paramount, tell them to fuck off.