Saturday, February 22, 2014

Stockholder? Stakeholder? Bagholder?


No law requires a corporation to make as much profit as possible in the next quarter, or next year, or whenever.

In fact, a corporation isn’t legally required to be “profitable” an any particular quantifiable way.


Harold Meyerson put a fine point on this obscure fact a few days ago on WashingtonPost.com.

He threw cold water on the rather modern business buzz of “maximizing shareholder value,” in short, driving the price of the company’s stock ever higher.

Meyerson said:
“ . . . the fact is that there is no legal requirement for for-profit companies to maximize returns to shareholders. When a company is for sale, its directors are required to do all they can to maximize its value. 
At any other time, corporate law simply dictates that directors are supposed to help the company prosper and do nothing to benefit themselves at the company’s expense. But no law requires corporations to maximize returns to shareholders. Say a company would prosper by hiring more skilled but more costly workers, by building a new factory or outlet, by spending more on research and development — even if such actions reduce returns to shareholders in the next dividend payment. Those actions are entirely legal, not to mention existentially smart . . .”

The idea of “maximizing shareholder value” is not uniquely American, but in most other countries it is not viewed as a divinely inspired idea.

Meyerson of course makes the followup point: since Milton Friedman got the “maximize profits” ball rolling in 1970, American corporate leaders and corporate directors have twisted the idea into a popularly respectable coverup—for their greedy manipulation of stock prices and pay packages to give CEOs and directors and top execs those multi-million dollar pay packages. This ripoff is sometimes euphemistically called “shareholder capitalism,” but shareholders aren’t really the beneficiaries.

Meyerson sums up: “Shareholder capitalism is sustained not by law but by an institutional edifice of greed. The U.S. economy will not work again for the American people until they tear down that edifice.”







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