A ‘Stout’ Argument Against the Shareholder Value Myth
Summertime means a lot of things to different people: Family vacations... summer camps for the kids... cookouts... fireworks... baseball games... summer blockbuster movies... a(nother) trip to rehab for some artist whose summer concert tour might not be selling as well as hoped... time to catch up on books you've been meaning to read...
Let me add one book to your list (or start your list for you magazine-only readers): The Shareholder Value Myth by Lynn A. Stout, a law professional at Cornell. Don't believe me? Read this write-up by The New York Times... she's bringings the heat, am I right? And the fact that she is willing to point the finger at her academic brethren clearly shows there's no half stepping allowed with Professor Stout.
For those of you who tire easily after reading 140-characters, let me cull some soundbites from the NYT article for you:
- "The blame lies with economists and business professors who have pushed the idea, with generous enabling from the corporate governance do-gooder movement, Ms. Stout contends. Stocks, as a result, have become the playthings of hedge funds, warping corporate motivation and eroding stock market returns.."
- " ... the idea that shareholders "own" their companies isn't actually so set in the law, Ms. Stout argues... what the law actually says is that shareholders are more like contractors, similar to debtholders, employees and suppliers. Directors are not obligated to give them any and all profits, but may allocate the money in the best way they see fit. They may want to pay employees more or invest in research. Courts allow boards leeway to use their own judgments."
- "The professor's argument is that as companies have increasingly focused on their stock prices... they have inadvertently empowered hedge funds that push for short-term solutions...the average holding period of a stock was eight years in 1960; today, it's four months."
- "The biggest ill has been to align top executives' pay with performance, usually measured by the stock price. This has proved to be 'a disaster,' Ms. Stout says. Managers have become obsessed with share price. By focusing on short-term moves in stock prices, managers are eroding the long-term value of their franchises... Ms. Stout also blames the corporate governance movement, which pushed for such alignment. It has 'proven harmful to the very institutions that it is seeking to benefit,' she says. 'Investors are actually causing corporations to do things that are eroding investor returns.'"
- "[Companies should ]... think about their customers and their employees and even to start acting more socially responsible. Shareholders... would be 'relatively weak - and that's a good thing.'"
Obviously, there are two sides - if not more - to every story... how would you counter this argument?
