In case you were wondering if the purpose of corporations is constrained to making as much money as fast as possible, economics professor Steven Pearlstein is here to set you right.
MYTH NO. 2
Corporations must be run to maximize value for shareholders.This is an almost universal belief among corporate executives and directors — that it is their principal mission and legal obligation to deliver the highest possible return to their shareholders. The economist Milton Friedman first declared in the 1970s that the “one social responsibility of business [is] . . . to increase its profits,” but the corporate raiders of the 1980s were the ones who forced that view on executives and directors, threatening to take their companies or fire them if they didn’t go along. Since then, “maximizing shareholder value” has been routinely used to justify layoffs and plant closings, rationalize an orgy of stock buybacks, and defend elaborate corporate schemes to avoid paying taxes. It is now widely taught by business schools, ruthlessly demanded by Wall Street’s analysts and “activist” investors, and lavishly reinforced by executive pay packages tied to profits and share prices.
In fact, corporations are free to balance the interests of shareholders with those of customers, workers or the public, as they did routinely before the 1980s, when companies were loath to boost profits if it meant laying off workers or cutting their benefits. Legally, corporations can be formed for any purpose. Executives and directors owe their fiduciary duty to the corporation, which is not owned by shareholders, as widely believed, but owns itself (in the same way that nobody “owns” you or me). The only time a corporation is obligated to maximize its share price is when it puts itself up for sale. [WaPo]
It’s a mostly reassuring view, except for the part where he states that “Executives and directors owe their fiduciary duty to the corporation, which is not owned by shareholders, as widely believed, but owns itself …“, a view which is certainly not taught to shareholders, at least by The Motley Fool, who does teach investors to consider their stock holdings to a share in ownership of the corporation, and to evaluate their potential investments accordingly (also known as fundamental investing, vs technical investing, which looks for patterns in investor behaviors as found in pricing charts, and results in rapid-fire buying and selling).
But, more importantly, that last view reminds me of the dubious view that corporations are people. I acknowledge this is a difficult subject, and I’ll desist from further commentary.
Instead, I’ll just note that, as an Econ professor, Pearlstein carries a certain amount of authority when he notes that corporations are under no obligation to maximize their profits, and that organizations can have many goals. It makes for an effective rejoinder to those who’d stamp their feet and demand more, more, more!
