OPINION: Shareholder value thinking has captured modern business. Fifty years ago, corporate managers thought they should run firms to serve the interests not just of investors but also of customers, employees and the larger society. Today executives, journalists, and academics alike believe public corporations ''belong'' to their shareholders and exist for one purpose only - to maximise shareholder wealth. Shareholder wealth in turn is measured by share price today, not share price next year or next decade.
This strategy does not seem to be working too well, either for the global economy or for the average investor. It drives directors and executives of public companies to run their firms with a relentless focus on raising the share 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 customer assistance and research and development; delay replacing outworn and unsafe equipment; shower executives with stock options to ''incentivise'' them; leverage firms until they teeter on the brink of insolvency; and lobby regulators to change the law so they can chase short-term profits speculating in high-risk financial derivatives.
It's time to recognise shareholder value ideology is just that - an ideology, not a legal requirement or a practical necessity of modern business life. In the US in particular, corporate law has never required directors of public corporations to maximise shareholder wealth. To the contrary, an essential legal doctrine called the ''business judgment rule'' gives boards a wide range of discretion to run public corporations with other goals in mind - including expanding the firm, creating high-quality products, protecting employees and serving the public interest. Chasing shareholder value is a managerial choice, not a legal requirement.
There's reason to think it's a choice that often harms not only employees, customers and society but shareholders. To understand why, it's important to recognise ''the shareholder'' is an artificial and a misleading idea.
Most economic interests in corporate stocks are ultimately held by human beings, either directly or indirectly through pensions and mutual funds. Some plan to own only briefly and care only about tomorrow's stock price, while others hope to hold shares for decades and worry about the company's long-term future. Investors buying shares in new ventures want their companies to make commitments that attract the loyalty of customers and employees, those who buy shares later may want the company to renege on those commitments. Some investors are highly diversified and worry how the company's actions will affect the value of their other investments and interests, others are undiversified and unconcerned. Finally, many investors are willing to sacrifice at least some profits to allow the company to act in an ethical and socially-responsible fashion. Others care only about their own material returns.
By pressuring corporate managers to focus only on today's share price, shareholder value thinking assumes away all these differences. Instead, it assumes the question of corporate purpose must be viewed only from the perspective of a hypothetical entity that cares only about one company's stock price today. This reduces investors to their lowest possible common human denominator.
Consider the case of the BP oil spill. By constantly cutting safety corners, BP for years provided its shareholders with substantial dividends and a rising share price. If you were lucky or smart enough to have sold before the Deepwater Horizon disaster, this strategy seemed a brilliant way to ''maximise shareholder value''.
But if you also happened to work in the Gulf of Mexico fishing industry, or if you owned stock in other oil companies whose Gulf operations were suspended along with BP's in the wake of the disaster, or if you were a long-term investor who kept your shares until after the spill, or if you cared about the ecology of the planet, BP's quest to ''maximise shareholder value'' proved disastrous.
It's time for corporate directors and executives to free themselves from the tyranny of simplistic shareholder value thinking. This would benefit not only many of their investors but the rest of us as well.
Professor Lynn Stout of UCLA is in Sydney as a guest of the Centre for Law, Markets and Regulation at the Faculty of Law, UNSW.
This opinion piece first ran in the Sydney Morning Herald.