Saturday, 3 November 2012

The Shareholder Value Myth

A few quick observations about Lynn Stout's recent short book (or long essay) The Shareholder Value Myth. First, one of the points she makes early is on is that it is a misconception that there is any kind of duty for companies or directors to maximise shareholder value to the exclusion of other concerns. This, according to Stout, is based on a misunderstanding of very limited case law. It also overlooks that fact that, even that though they could, most corporations do not adopt byelaws that could make the single-minded pursuit of shareholder value their mission.

What I find interesting about this is that it sounds very similar to the situation in the UK regarding the fiduciary duty of trustees. Once again very limited case law, which doesn't say what many people assume it says, has been misread as saying that trustees have a duty to focus on maximising returns to their pension funds to the exclusion of other considerations. Fair Pensions have done a great job of demolishing this one, and I highly recommend their report on fiduciary duty (though the idea that there is such a duty on trustees continues to lumber on as a zombie idea).

Secondly, Stout also makes the point that investors in the US don't seem that bothered about having ownership rights, as evidenced by the fact that they continue to support IPOs where the company adopts a dual class share structure etc. Once again the parallels with the UK are interesting. Two recent significant reforms that give shareholders more power - a binding vote on remuneration and annual election of directors - were opposed by many investors (the large majority in the case of the binding vote, including the investor trade bodies).

So given that the law doesn't compel companies to focus on shareholder value, and shareholders don't seem that bothered about acting like owners, why do these ideas dominate. Part of the answer is ideological - the success of agency theory as a way of looking at public companies means that empowering shareholders and making companies accountable has become 'common sense'. There may also be some politics here, some people would rather prioritise capital over labour (or at least undermine the legitimacy of the role of labour) and agency theory can assist that. More generally, Stout argues, a fixation on shareholder value is a simplifying way of making sense of corporate mission. It's easily grasped, to say the least, even if it does mean that other concerns/interests are overlooked.

The problem, Stout says, is that a focus on shareholder value can mean that corporations (and the directors that manage them) to behave more like the model than they would otherwise. Most of us (directors, shareholders etc) balance self-interest with a pro-social nature - we care what people think, and frequently behave in a way that is not purely self-interested. However, the simple shareholder value conception of corporate purpose does not allow for this. In passing this looks to me like another version of the 'self-interest as a norm' idea that I've written about previously.

One final tiny point - as is probably obvious, Stout is coming at these questions from a left-of-centre perspective. It's also notable that she has collaborated with Margaret Blair, who is someone any Labour/TU types interested in corp gov & related questions should have a read of. There are some interesting ideas here, and we could do with making them more visible.

No comments: