Sunday, 13 May 2018

Lynn Stout and shareholder capitalism

Lynn Stout, one of the most interesting thinkers/writers on corporate governance, sadly died recently at the ridiculously early age of 60. She was definitely someone who has had an influence on my thinking, and I strongly recommend her books (which are very readable) to anyone who shares my interest in corporate governance and related topics.

What is particularly striking is how her perspective has gradually come into vogue. When I first got seriously interested in the various schools of thought around governance about 15 years ago I remember some people suggesting she was a fringe thinker and/or not helpful in terms of practical advances in governance reform.

The reason for this is pretty clear: she was a strong opponent of shareholder-focused governance. More recently she did some terrific work showing that some of our assumptions about this model - like that directors have legal duties to act in the interests of shareholders - are very wonky. The longer I have looked at these issues, the clearer it has become that foundational beliefs in 1990s corporate governance model (like that shareholders 'own' companies) are highly contentious, if not flat out wrong. Yet they are treated by far too many people as Gospel truths.

Well, Lynn Stout was one of the heretics, and it's a shame she died too young to see the governance debate reorient towards her views.

Here are a few excerpts from The Shareholder Value Myth that give you an insight into her perspective:

“The standard shareholder-oriented model of the corporation teaches that it is not only acceptable but morally correct for shareholders to pressure managers to raise share price in any way possible, without regard for how the corporation’s actions impact stakeholders, society, or the environment. Shareholder value rhetoric also inevitably signals that most other investors are behaving selfishly. Finally, the standard model teaches that selfish investing, far from harming others, actually benefits them by promoting better corporate performance and economic efficiency.”

“[D]iversified shareholders who are uninvolved in and ignorant of a company’s day-to-day business decisions are in no position to police against, or even know about, antisocial corporate behaviour. To the contrary, because the only thing most investors see i stock price, they are likely to pressure corporate directors and executives to adopt strategies that… make corporate harms to third parties more likely. And when disaster strikes, uninvolved shareholders are unlikely to feel personally responsible. How many BP shareholders felt responsible for the Deepwater Horizon disaster.”

“[T]he lack of information and rational apathy that makes individual investors poor guardians of their universal portfolios also makes beneficiaries of pension and mutual funds poor judges of whether their portfolio managers are doing a good job of stewarding their universal interests. Just as retail investors default to the cheap, easy strategy of judging corporate performance by whether the share price went up or down yesterday, pension and mutual fund beneficiaries judge the performance of fund managers according to whether the value of the fund went up or down yesterday.”

“[E]ven when directors have perfectly well-tuned moral compasses, shareholder value thinking subjects them to relentless shareholder pressure from investors who may act as if they have no moral compass at all.”

And a bit from Cultivating Conscience:

"Corporations are legal fictions, but they are also very real social institutions. More specifically, they are very real social contexts. The employee who walks through the front door of the corporate headquarters and takes the elevator upstairs to his office enters a world that provides a powerful mix of social signals about what is expected, what others are doing, and how his actions affect others. If he does not become as purely self-interested as Economic Man, he may at least behave like his second cousin, Corporation Man. In other words, it is true that corporations act only through 'their ' people. But corporations also influence how 'their' people act.

"Sometimes the corporate context pushes human behaviour in a conscientious direction. Inside the firm, corporations often try to encourage trust, co-operation and dedication to team goals through inspirational posters, motivational team meetings, and team-building in its most obvious and hilarious form, the corporate retreat... When it comes to dealing with those outside the firm, however, the story may be quite different. Especially in large public companies, the corporate environment often channels human behaviour in a direction that moves it closer to the psychopathic ideal of the homo economics model. This is because business typically employ the familiar social levers of obedience, imitation and empathy to encourage employees think primarily about the welfare of those 'inside' the corporation (executives, employees), not those 'outside' it (customers, the community, outside investors)."  

No comments: