The ShareHolder Fallacy

Forum adverts like this one are shown to any user who is not logged in. Join us by filling out a tiny 3 field form and you will get your own, free, dakka user account which gives a good range of benefits to you:

No adverts like this in the forums anymore.
Times and dates in your local timezone.
Full tracking of what you have read so you can skip to your first unread post, easily see what has changed since you last logged in, and easily see what is new at a glance.
Email notifications for threads you want to watch closely.
Being a part of the oldest wargaming community on the net.

If you are already a member then feel free to login now.

**Easy E**

I thought this article about Corporate Responsibility/Governance might stir the pot and lead to intereting discussions here.

Link: http://www.salon.com/2012/04/04/the_shareholder_fallacy/singleton/

Historically, corporations were understood to be responsible to a complex web of constituencies, including employees, communities, society at large, suppliers and shareholders. But in the era of deregulation, the interests of shareholders began to trump all the others. How can we get corporations to recognize their responsibilities beyond this narrow focus? It begins in remembering that the philosophy of putting shareholder profits over all else is a matter of ideology which is not grounded in American law or tradition. In fact, it is no more than a dangerous fad.

The Myth of Profit Maximizing

“It is literally – literally – malfeasance for a corporation not to do everything it legally can to maximize its profits. That’s a corporation’s duty to its shareholders.”

Since this sentiment is so familiar, it may come as a surprise that it is factually incorrect: In reality, there is nothing in any U.S. statute, federal or state, that requires corporations to maximize their profits. More surprising still is that, in this instance, the untruth was not uttered as propaganda by a corporate lobbyist but presented as a fact of life by one of the leading lights of the Democratic Party’s progressive wing, Sen. Al Franken. Considering its source, Franken’s statement says less about the nature of a U.S. business corporation’s legal obligations – about which it simply misses the boat – than it does about the point to which laissez-faire ideology has wormed its way into the American mind.

The notion that the law imposes a duty to “maximize shareholder value” – a phrase capturing the notion that profits are mandatory and it is the shareholders who are entitled to them – is so readily accepted these days because it jibes perfectly with assumptions about economic life that constantly come down to us from business and political leaders, from academia, and from the preponderance of the media. It is unlikely to occur to anyone under the age of 40 to question this idea – or the idea that the highest, or even sole, purpose of a corporation is to make a profit – because they have rarely if ever been exposed to an alternative view. Those in middle age or beyond may have trouble remembering a time when the corporation’s focus on shareholders’ interests to the exclusion of all other constituencies –customers, employees, suppliers, creditors, the communities in which it operates, and the nation – did not seem second nature.

This narrow conception of corporate purpose has become predominant only in recent decades, however, and it flies in the face of a longer tradition in modern America that regards the responsibilities of a corporation as extending far beyond its shareholders. Owen D. Young, twice chairman of General Electric (1922-’40, 1942-’45) and 1930 Time magazine Man of the Year, told an audience at Harvard Business School in 1927 that the purpose of a corporation was to provide a good life in both material and cultural terms not only to its owners but also to its employees, and thereby to serve the larger goals of the nation:

“Here in America, we have raised the standard of political equality. Shall we be able to add to that, full equality in economic opportunity? No man is wholly free until he is both politically and economically free. No man with an uneconomic and failing business is free. He is unable to meet his obligations to his family, to society, and to himself. No man with an inadequate wage is free. He is unable to meet his obligations to his family, to society, and to himself. No man is free who can provide only for physical needs. He must also be in a position to take advantage of cultural opportunities. Business, as the process of coordinating men’s capital and effort in all fields of activity, will not have accomplished its full service until it shall have provided the opportunity for all men to be economically free.”

This holistic declaration was echoed, albeit in more specific and practical terms, by the chairman of another massive US corporation, Johnson & Johnson, during World War II. In his 1943 “Credo,” a somewhat modified version of which can be found on the company’s Web site today, Robert Wood Johnson II identified five distinct constituencies and established an order of priority in which they would be served by his firm. Johnson & Johnson’s “first responsibility,” he wrote, was to its customers: “the doctors, nurses, hospitals, mothers, and all others who use our products.” In second place came employees; in third, management; and in fourth, “the communities in which we live.” The interests of the stockholders, the corporation’s “fifth and last responsibility,” appear subordinate in his mind both to the firm’s sound operation, which depends on attention to the interests of the other constituencies, and to its long-term welfare:

“Business must make a sound profit. Reserves must be created, research must be carried on, adventurous programs developed, and mistakes paid for. Adverse times must be provided for, adequate taxes paid, new machines purchased, new plants built, new products launched, and new sales plans developed. We must experiment with new ideas. When these things have been done the stockholder should receive a fair return.”

A Shift in Accountability

By 1978 the era of deregulation had begun and signs had appeared that corporate attitudes were shifting. In that year another GE chief executive, Reginald H. Jones, wrote that the “central principle of the present system is that a director’s accountability is to the owners of the enterprise.” Having set aside the broader visions of corporate duty held by his GE predecessor Young and by Johnson, Jones in effect moved the firm’s responsibility to its shareholders from last on the list to first: “If this principle is abandoned, if other corporate constituencies are placed on a plane with shareowners, if directors are required to represent directly the interests of nonshareowner groups…there will be no clear measure of directors’ responsibility because there will be no clear consensus on primary corporate goals.”

His personal preferences aside, however, Jones realized that Americans were not yet ready to accept firms’ turning their backs on the general good, and that he and his fellow executives had something to gain from being accommodating:

“If the concern is social responsiveness, or ‘public accountability,’ the short answer is that in this country at this time, no large corporate enterprise can afford to be perceived as oblivious or contemptuous of matters of genuine social or public concern. These enterprises have to earn from the general public and their political representatives – and earn from year to year – the right to continue to function without radical new governmental constraints.”

The dawn of Ronald Reagan’s presidency found the corporate community on the fence. The “Statement on Corporate Responsibility” issued in October 1981 by the Business Roundtable, which groups the CEOs of the largest US firms, recognizes six constituencies – customers, employees, communities, society at large, suppliers, and shareholders – as forming the “web of complex, often competing relationships” within which corporations operate. It accepts the idea that “shareholders have a special relationship to the corporation” but doesn’t allow their interests to trump all others:

“Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholders must receive a good return but the legitimate concerns of other constituencies also must have appropriate attention. Striking the appropriate balance, some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate needs for goods and services and to earn a reasonable return for the shareholders in the process. They are aware that this must be done in a socially acceptable manner. They believe that by giving enlightened consideration to balancing the legitimate claims of all its constituents, a corporation will best serve the interest of the shareholders.”

Even after eight years of Reagan and amid the burgeoning of free-market ideology, the Business Roundtable remained reluctant to place shareholders first, affirming in 1990 that “corporations are chartered to serve both their shareholders and society as a whole” and adding creditors to the 1981 list of constituencies, which it otherwise retained intact. It was only in 1997, in a new statement whose title substituted “Corporate Governance” for “Corporate Responsibility,” that it renounced attempts to balance the interests of corporate constituents and, having reversed its view, argued that taking care of shareholders was the best way to take care of the remaining stakeholders, rather than the other way around:

“In the Business Roundtable’s view, the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders. The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors.”

This doctrine, known as “shareholder primacy,” now reigns in the corporate world today, and it has so increased the power of those whom it has benefited that it will not be easy to dislodge. Those who propagate it believe, or would have us believe, that it is based in law; in fact, it is supported by no more than ideology. They believe, or would have us believe, that it reflects incontrovertible and eternal truths; in fact, it is an expression of transient self-interest. They believe, or would have us believe, that it honors long precedent – but, as we have seen, its ascendency is recent, and, rather than honor it undermines precedent. Yet despite these contradictions, corporations and their allies have been exceedingly successful at selling their viewpoint to the American people.

An important step toward countering their influence can come in refusing to accept the legitimacy of shareholder primacy. Up to now, this fad has had the power to neutralize opposition in part because it has obscured the tool needed to challenge it: a clear understanding of the economic realities. For this reason, we must learn what contributions all stakeholders – not just the shareholders, but all the others as well – make to the corporation, and the extent of the risks and rewards those contributions truly entail. We must learn about the interrelation of business and government in all its complexity, going far beyond the headlines about taxes and regulation to discover who needs whom for what, and who does what for whom. And we must learn what rights corporations legitimately hold, what privileges they enjoy, and what duties they are obliged to carry out.

Without this effort, without this knowledge, we are in danger of continuing to be held captive by a fad.

**Frazzled**

Your article is grossly wrong in its very first sentence. I don't think thats a new record but its probably the first in 2012.
Historically they were responsible to the shareholders and the Crown (often one and the same). Thats it.

**sourclams**

Yeah I gotta question the notion of 'history' here. Historically we've got mercantilism, colonialism, and imperialism prior to/during the industrial revolution.

**Kilkrazy**

It depends on how you define "historically".

The amount of legislation such as contracts, consumer rights, payment terms, union rights, anti-trust, whistleblower, environmental standards, etc. clearly shows that there are many social constraints on companies.

Some of these have existed for a long time, e.g. the Sherman Act of 1890.

**Frazzled**

Kilkrazy wrote:It depends on how you define "historically".

The amount of legislation such as contracts, consumer rights, payment terms, union rights, anti-trust, whistleblower, environmental standards, etc. clearly shows that there are many social constraints on companies.

Some of these have existed for a long time, e.g. the Sherman Act of 1890.

Yes corporations have to abide by the relevant laws. That doesn't mean they are stakeholders. Its a nonsensical argument. Indeed contract law arose before the concept of joint stock companies was a gleam in the Virgin Queen's eye.
Legally, and this is affirmed by case law and governmental power (Da Queenie) the only stakeholders in a corporation were the stockholders and any duties they had to the Crown (usually monetary).

EDIT: I am assuming we're talking British corporations initially and then US corps when they were started. I don't know about other European corporations when they were first formed.

**Easy E**

I think they are talking post-assembly line to today.

**Frazzled**

Easy E wrote:I think they are talking post-assembly line to today.

Thats even easier. Literally to the shareholders only. All other considerations rescinded. I'm looking at Nostromo crew!

**sourclams**

Easy E wrote:I think they are talking post-assembly line to today.

I think you're right which is exactly why 'historically' is an interesting concept. Through the '50s and '60s, manufacturing was the biggest sector in the economy with companies who'd buy raw materials and turn them into finished goods. You need a lot of people to make stuff, and you need a lot of people to buy stuff (consumer culture).

Today the market structure is very different. The largest companies are generally raw material companies (mostly tied to oil) and the most valuable companies, especially on an employee headcount basis, are generally technology (Apple being an obvious example). Neither of those companies need masses of 'regular people' to work the lines. Masses of regular people are actually somewhat antithetical to the technology sector which was more or less founded on superior ideation by innovative individuals.

The market not only needs "normal people" less than when the manufacturing plants of yesteryear were sovereign, it can actually be the market's role to ration limited resources by raising prices above what "normal people" can comfortably afford, especially if we're talking raw materials which are prone to periods of scarcity (either from excess demand or lack of supply).

Edit: And then you get into the whole issues of pensions and investment funds. "Share holders" are not limited Gordon Gecko-esque personalities; your Grandma and school teachers are probably pension holders, and pensions are invested directly into a number of venues that bank on price appreciation like crude oil and equities.

**Kilkrazy**

Frazzled wrote:
Kilkrazy wrote:It depends on how you define "historically".

The amount of legislation such as contracts, consumer rights, payment terms, union rights, anti-trust, whistleblower, environmental standards, etc. clearly shows that there are many social constraints on companies.

Some of these have existed for a long time, e.g. the Sherman Act of 1890.

Yes corporations have to abide by the relevant laws. That doesn't mean they are stakeholders. Its a nonsensical argument. Indeed contract law arose before the concept of joint stock companies was a gleam in the Virgin Queen's eye.
Legally, and this is affirmed by case law and governmental power (Da Queenie) the only stakeholders in a corporation were the stockholders and any duties they had to the Crown (usually monetary).

EDIT: I am assuming we're talking British corporations initially and then US corps when they were started. I don't know about other European corporations when they were first formed.

I think you are arguing from the narrow definition of "stakeholder" as a person who owns a share in a company.

**Frazzled**

Kilkrazy wrote:
Frazzled wrote:
Kilkrazy wrote:It depends on how you define "historically".

The amount of legislation such as contracts, consumer rights, payment terms, union rights, anti-trust, whistleblower, environmental standards, etc. clearly shows that there are many social constraints on companies.

Some of these have existed for a long time, e.g. the Sherman Act of 1890.

Yes corporations have to abide by the relevant laws. That doesn't mean they are stakeholders. Its a nonsensical argument. Indeed contract law arose before the concept of joint stock companies was a gleam in the Virgin Queen's eye.
Legally, and this is affirmed by case law and governmental power (Da Queenie) the only stakeholders in a corporation were the stockholders and any duties they had to the Crown (usually monetary).

EDIT: I am assuming we're talking British corporations initially and then US corps when they were started. I don't know about other European corporations when they were first formed.

I think you are arguing from the narrow definition of "stakeholder" as a person who owns a share in a company.

If by narrow you "only legal one" you're right on the money.

The managers of the company and the Board only have a fiduciary duty to the shareholders.

**Melissia**

Frazzled wrote:If by narrow you "only legal one"

No, legally speaking a stakeholder is something entirely different (relating to who holds disputed property while its owner is being determined).

The original definition of stakeholder in this context was "those groups without whose support the organization would cease to exist."

IE the customers, the government, the employees, stockholders, etc.

**Frazzled**

Melissia wrote:
Frazzled wrote:If by narrow you "only legal one"
No, legally speaking a stakeholder is something entirely different (relating to who holds disputed property while its owner is being determined).

The original definition of stakeholder in this context was "those groups without whose support the organization would cease to exist."

IE the customers, the government, the employees, stockholders, etc.

Blah blah. Nonsense. Which one can get you sued for not representing the best interests of? A. shareholders.
As Frazzled the lesser once said "if everything is a priority, nothing is a priority."

**Easy E**

Frazzled wrote:If by narrow you "only legal one" you're right on the money.

The managers of the company and the Board only have a fiduciary duty to the shareholders.

The jist of the article is that the idea that it is the "only legal one" is a myth and a fad.

@Sourclams- Nice post. I don't know if I completely agree with you, but it was a strong post.

**Melissia**

Frazzled wrote:Blah blah. Nonsense. Which one can get you sued for not representing the best interests of?

You realize that the government, the customers, and the employees can and DO all sue if the company does them wrong?

**Frazzled**

Easy E wrote:
Frazzled wrote:If by narrow you "only legal one" you're right on the money.

The managers of the company and the Board only have a fiduciary duty to the shareholders.

The jist of the article is that the idea that it is the "only legal one" is a myth and a fad.

@Sourclams- Nice post. I don't know if I completely agree with you, but it was a strong post.

To proponents of this, if you think its a myth act not in the interests of the shareholders. After they sue you, use the "its a myth and a fad" defense and tell us how it works out.

Automatically Appended Next Post:

Melissia wrote:
Frazzled wrote:If by narrow you "only legal one"
No, legally speaking a stakeholder is something entirely different (relating to who holds disputed property while its owner is being determined).

The original definition of stakeholder in this context was "those groups without whose support the organization would cease to exist."

IE the customers, the government, the employees, stockholders, etc.

Again, thats nonsensical socialist nonsense. Using that argument everyone is a stakeholder in everyone else. Melissia, give me your car. After all its in my interest too.

**Melissia**

Frazzled wrote:Again, thats nonsensical socialist nonsense.

Seriously Frazzled? Socialist? Is that what you're going with?

**Frazzled**

Melissia wrote:
Frazzled wrote:Blah blah. Nonsense. Which one can get you sued for not representing the best interests of?
You realize that the government, the customers, and the employees can and DO all sue if the company does them wrong?

1. That doesn't make them staekholders
2. Everyone can sue averyone for anything. I know. Now you'll only win if you've violated the law or trespassed on their property rights.

Thats not "stakeholding" thats the claim of tresspass on your own property.

**Melissia**

Frazzled wrote:1. That doesn't make them staekholders

No, but it does make them stakeholders by your definition, which was a really bad definition I'll admit, but it was yours.

**Frazzled**

Melissia wrote:
Frazzled wrote:Again, thats nonsensical socialist nonsense.

Seriously Frazzled? Socialist? Is that what you're going with?

You betcha. If you claim everyone has some sort of esoteric bull

interest in a corporation, in a person as it will, that means you are controlled and your productivty stolen by others. Pro-tip if you can do it to a corporation you can do it me and to you.

As I said, I have stake in you too Melissia. Can you park your car out front tomorrow morning say 10.00ish? Just leave the keys in it. I know you need it and worked to get it, but hey, I'm a stakeholder too. So sorry, don't be a greedy capitalist dog now.

Automatically Appended Next Post:

Melissia wrote:
Frazzled wrote:1. That doesn't make them staekholders

No, but it does make them stakeholders by your definition, which was a really bad definition I'll admit, but it was yours.

Not my definition baby.

**Easy E**

Call me old fashion, but shouldn't the customer be the primary interest of the business?

**Frazzled**

Easy E wrote:Call me old fashion, but shouldn't the customer be the primary interest of the business?

That is their interest yes. Its not who they have a fiduciary relationship with. The problem of course is that the original article is purely wrong from the get go. It changes the whole initial point. We're not going back to what was, we're talking something new.

Now if we broaden this to say companies have all sorts of intereactions, which what is really being argued, then so what? Its no different then a person.

Beware people trying to push agendas of controlling companies with multiple interests. they have no problem doing the same and taxing the same as you. They want a handout.

**Melissia**

Frazzled wrote:Not my definition baby.

The way you explained it?

Yes.

**Frazzled**

What part where I said the company is only responsible to stockholders and the Crown (later just stockholders)? that doesn't support your argument about...anything.

EDIT: Now we can move forward and ask "should other parties be stakeholders" and "how" and "what does that do" but lets proceed from a proper start thank you.

Frazzled (who is of course always right, and especially dashing in Hawaiian shirt and matching wiener dogs) proffers that their fiduciary relaitonship should remain only to shareholders. They remain subject to the law of the land (and personally am not into this fiction that they are "persons" under the law any more than a simple partnership) but have no duties to anyone otherwise. Else there is chaos. Cats and dogs living together under one roof. Shocking just shocking.

**Melissia**

Yes, you did say it.

Frazzled wrote:Which one can get you sued for not representing the best interests of?

Right here.

**Frazzled**

Melissia wrote:Yes, you did say it.

Frazzled wrote:Which one can get you sued for not representing the best interests of?

Right here.

Oh the part where you are WRONG. gotcha.
please explain how you can successfully sue a company for not representing your best interests if:

1. you are not a shareholder
2. they have violated now laws or ordinances
3. they have not committed trespass to property or person under common law.

This will be interesting.

Protip Melissia, if you agree to act in the best interests of another party, and instead act in the interests of another, you've just opened yourself up to funtastic civil and potentially criminal liability under Texas law depending on what you signed for. That includes being something like an executor (had to swear to a judge on that one), trustee, cetrain types of financial advisors, representing a client legally, most agencies etc. etc.

Further edit: I am more exercised about this and coming off too hostile. I take responsibilities extremely seriously (as in more than your lives). Duties and obligations under the law are simple, and designed to be so. The proposed (or whatever it is) "expansion" of that muddies the waters without benefit and opens up the Board (and Company) to great liability. That may be the idea.

**sourclams**

Easy E wrote:Call me old fashion, but shouldn't the customer be the primary interest of the business?

In the real world where business is done, I think you'll find this is basically the case. To stay in business, you need somebody to be willing to give you actual money for the good or service you provide. Whether you're Sam's Club or Apple or Maersk, somebody needs to perceive you as better than your competition and give you money for the good or service you provide.

Where people like the author in the OP get disconnected from reality is when they try to speak on behalf of the customer for the 'benefit of society' as they define it. Because in general, these social advocates/activists are pushing for something that degrades the service or costs money to somebody. We all hate Wal-mart because its basic employees can't make a livable wage, local small retailers get put out of business, and they sell cheap crap that breaks a lot. AND YET, in spite of everyone hating Wal-mart, it's still the predominant retailer in the US if not the world. Even though Wal-mart customers know that they pay crap, their gak breaks, and they killed the local main street, they obviously don't consider that meaningful enough to shop somewhere else. Wal-mart is going to keep doing what it's doing because its customers tell it that it should do so by giving Wal-mart their money instead of Bob's Lettuce and Carrot stand on Main Street. Intellectuals like the author in OP would generally like to see every Wal-mart turn back into a 'thriving main street Americana-throwback'. Well, what if I want to do all of my shopping in half an hour and not drive up and down 3 miles of main street? What if that is worth more to me than ensuring my town has a thriving main street for the next fifty years? Suddenly the OP breaks down in the face of the actual opportunity cost traded by the market (individual consumers) versus what the OP author perceives the value of the opportunity cost to be.

Apple is an excellent example of this idealism-failing-the-reality test. How many Apple customers--generally young, "hip", socially conscious and active individuals--would openly be in favor for Chinese labor, enormous profit margins, and massive 'concentration of wealth'? And yet this is exactly what Apple is.

**Frazzled**

sourclams wrote:
Easy E wrote:Call me old fashion, but shouldn't the customer be the primary interest of the business?

In the real world where business is done, I think you'll find this is basically the case. To stay in business, you need somebody to be willing to give you actual money for the good or service you provide. Whether you're Sam's Club or Apple or Maersk, somebody needs to perceive you as better than your competition and give you money for the good or service you provide.

Where people like the author in the OP get disconnected from reality is when they try to speak on behalf of the customer for the 'benefit of society' as they define it. Because in general, these social advocates/activists are pushing for something that degrades the service or costs money to somebody. We all hate Wal-mart because its basic employees can't make a livable wage, local small retailers get put out of business, and they sell cheap crap that breaks a lot. AND YET, in spite of everyone hating Wal-mart, it's still the predominant retailer in the US if not the world. Even though Wal-mart customers know that they pay crap, their gak breaks, and they killed the local main street, they obviously don't consider that meaningful enough to shop somewhere else. Wal-mart is going to keep doing what it's doing because its customers tell it that it should do so by giving Wal-mart their money instead of Bob's Lettuce and Carrot stand on Main Street. Intellectuals like the author in OP would generally like to see every Wal-mart turn back into a 'thriving main street Americana-throwback'. Well, what if I want to do all of my shopping in half an hour and not drive up and down 3 miles of main street? What if that is worth more to me than ensuring my town has a thriving main street for the next fifty years? Suddenly the OP breaks down in the face of the actual opportunity cost traded by the market (individual consumers) versus what the OP author perceives the value of the opportunity cost to be.

Apple is an excellent example of this idealism-failing-the-reality test. How many Apple customers--generally young, "hip", socially conscious and active individuals--would openly be in favor for Chinese labor, enormous profit margins, and massive 'concentration of wealth'? And yet this is exactly what Apple is.

Here endeth the lesson.

**dogma**

Frazzled wrote:
Thats even easier. Literally to the shareholders only. All other considerations rescinded. I'm looking at Nostromo crew!

Well, sort of. Minimum wage laws, laws regarding working conditions (basically OSHA), and unions, among other things, have added a responsibility to employees.

There's a reason that a cadre of people will refuse to shop at Walmart, after all.

Automatically Appended Next Post:

sourclams wrote: Because in general, these social advocates/activists are pushing for something that degrades the service or costs money to somebody. We all hate Wal-mart because its basic employees can't make a livable wage, local small retailers get put out of business, and they sell cheap crap that breaks a lot. AND YET, in spite of everyone hating Wal-mart, it's still the predominant retailer in the US if not the world.

Funnily enough, there's an argument to be made that Walmart is one of the primary factors driving the artisanal food craze, both in terms of giving us cheaper, better food, and in terms of strengthening "artisanal" (along with "organic", and "natural") as a branding term.

Hell, I'd even bet that brand name clothing has gotten stronger in the wake of Walmart. It used to be that people talked about jeans going on sale, now I hear even my parents refer to brand names over the article of clothing, and they shop at Kohl's (old school department store).

**sebster**

Easy E wrote:Historically, corporations were understood to be responsible to a complex web of constituencies, including employees, communities, society at large, suppliers and shareholders.

Actually, that's a very modern definition that's attempted to explain exactly what a corporation is, and why they're useful.

There is no real historical understanding of what a corporation is, because they're really quite a modern invention, and up until very recently have had very little academic study.

“It is literally – literally – malfeasance for a corporation not to do everything it legally can to maximize its profits. That’s a corporation’s duty to its shareholders.”

Since this sentiment is so familiar, it may come as a surprise that it is factually incorrect: In reality, there is nothing in any U.S. statute, federal or state, that requires corporations to maximize their profits.

It's the default common law understanding of a corporation's purpose, which is found under protection of minority interests. That is, if a company does something that a minority interest in the company thinks is favouring the majority shareholders at the expense of the minority shareholders, then the minority can seek remedy in a court of law. When the court decides on the matter, it will default to assuming the company is there to provide the maximum return for shareholders, and apply a remedy for minority shareholders when the company has acted otherwise (though courts are quite rightly apprehensive to begin questioning business decisions, they really only step in when actions clearly benefit a majority shareholder at the direct expense of minority shareholders, such as the sale of a company asset to the majority shareholder at a considerable discount).

And it is a good, sensible default assumption for a company. It's what almost all of them are set up to do. Where it isn't what the shareholders want for their company, they are free to specifically state the company's aim in its constitution. or make a sufficient argument in court that it's actions indicate it operated with other priorities.

This narrow conception of corporate purpose has become predominant only in recent decades, however, and it flies in the face of a longer tradition in modern America that regards the responsibilities of a corporation as extending far beyond its shareholders. Owen D. Young, twice chairman of General Electric (1922-’40, 1942-’45) and 1930 Time magazine Man of the Year, told an audience at Harvard Business School in 1927 that the purpose of a corporation was to provide a good life in both material and cultural terms not only to its owners but also to its employees, and thereby to serve the larger goals of the nation:

Yes, and it's an excellent point, and an argument that really needs to be made. It's a shame so much of the rest the essay is so loose with the facts.

By 1978 the era of deregulation had begun and signs had appeared that corporate attitudes were shifting.

That deregulation was tied to controls on industry as a whole (such as tight controls on liquidity levels in banks), or the participation of government owned or government sanctioned corporate bodies (dairy board, stuff like that). In terms of actual, direct control over boards and executive staff, control has only grown over time. You will not find a time in history where corporate malfeasance is likely to result in criminal charges, or result in the lifting of the veil to allow creditors access to director's personal assets. That isn't to say this is still very likely today, it's just more likely than it's been in the past.

The author is using a very hazy definition of 'deregulation' to sidestep the simple fact that when it comes to examining the actions of people in charge of companies we've increased our scrutiny and our power to affect that.

Now, you might point out that corporate behaviour has declined considerably over the years, and I'd agree. But the point to understand is that it isn't legal changes that have led to that decline, but cultural changes. There used to be more emphasis placed by managers on corporate governance, on the welfare of workers, and that has simply declined over time.

And the reality is that it is probably impossible to regulate a better environment, we must rely on culture to produce a better standard of corporate management.

Automatically Appended Next Post:

Frazzled wrote:Yes corporations have to abide by the relevant laws. That doesn't mean they are stakeholders. Its a nonsensical argument.

You don't understand the terms at hand.

If the only stakeholders were shareholders, then we'd just use the term shareholder and move on. The existance of the word stakeholder is used because we recognise parties other than shareholders. Now, exactly what say they ought to have in the goevrnance of the company is up for grabs, but to deny their existance is non-sensical.

Automatically Appended Next Post:

Frazzled wrote:Blah blah. Nonsense. Which one can get you sued for not representing the best interests of? A. shareholders.

The idea that the only responsibilities people have are legal ones is just terrible.

Automatically Appended Next Post:

Easy E wrote:Call me old fashion, but shouldn't the customer be the primary interest of the business?

No, there shouldn't be 'an interest'. There should be a recognition that in operating the company builds relationships of various levels of importance with different groups, and that while the company is there to make a profit, only a sociopathic loon would consider profit and profit alone the absolute, and only matter of importance.

And then a study of the systems driving corporate behaviour begin to notice that individuals within the company have their bonuses and chance of promotion driven by finding any increase in profit they can, and while individually they might recognise the importance of things other than company profit, the net effect of the actions of each individual is for the company to act very much like a sociopath.

**sourclams**

dogma wrote:Funnily enough, there's an argument to be made that Walmart is one of the primary factors driving the artisanal food craze, both in terms of giving us cheaper, better food, and in terms of strengthening "artisanal" (along with "organic", and "natural") as a branding term.

Hell, I'd even bet that brand name clothing has gotten stronger in the wake of Walmart. It used to be that people talked about jeans going on sale, now I hear even my parents refer to brand names over the article of clothing, and they shop at Kohl's (old school department store).

Which further degrades the argument that top-down approaches like this social engineering of the marketplace are even needed, let alone whether or not they work.

If there is demand, somebody creates supply.