2013 Millstein Forum: Beyond Shareholder Primacy

Beyond Shareholder Primacy

The following are cryptic notes and a few photos taken at the 2013 Millstein Forum held June 24 & 25 at Columbia Law School. Be sure to check out the Forum’s photo gallery

Moderator: Harvey J. Goldschmid, Dwight Professor of Law, Columbia Law School; Former Commissioner, Securities Exchange Commission.


  • William E. McCracken, Former Chief Executive Officer, CA Inc.
  • Elliot Schwartz, Vice-President / Director of Economic Studies, Committee for Economic Development
  • Lynn Stout, Distinguished Professor of Corporate and Business Law, Cornell Law School
  • Simon Wong, Executive Partner, Governance for Owners, UK

The predominant view seems to be that shareowners have the right priorities under primacy because residual value flows to them. Corporate governance drive was to create checks and balances on the imperial CEO… a monitoring model. One pivotal moment was the Penn Central bankruptcy. At that time, the average board member worked 30-40 hours a year. Pragmatic public policy view is to stick with shareholder primacy. However, most also agree there is too much emphasis on the current share price. The SEC, as a regulator, focuses on past and current but not the future.

Another speaker favors a business equilibrium. Pays attention to all shareowners. Lots of judgment. Bet the company on the cloud to move from the past into the future. Met continuously with shareowners that wanted a pop, share buy-backs, etc.. Moved from junk bond status and almost doubled margins. Earnings per share growth double digit for several years.  13d filer came after them but after they succeeded they sold and went on to the next company. Going against shareowners but later worked with and for them. Companies don’t know their strategy, We need to know more about institutional investors. Favors transparency for investors. No supreme roles for anyone. Did shareowners change?  Growth investors carry too much weight. We need more value investors.

Add “long-term” does that solve the problem? Not quite everything. Shift to long-term does solve some problems and you can then worry about other stakeholders who might have a long-term impact. But corporations have other purposes beyond making a profit. They must live long and prosper. Shareholder value is one of the constraints that must be satisfied to live long and prosper. It is on the left side of the equation with other constraints. Need clear interim guidance. Long-term relies too much on business judgement rule. Share price is one metric that informs our judgement. No matter what happens, we are all still going to look at share price. Cited Harvard law school’s Dean Clark. His mediating hierarchs model ends up in the same place… therefore traditional model may be superior. What next?  Shareowner primacy model leads us to put more power with shareowners. Not so much about where we’ve been, rather than where we need to go.

Lynn Stout

Lynn Stout

In 1993 executives were tied by the tax code to “objective” performance metrics, which ended up being share price for most. Corporate law changed to allow institutional investors to talk to each other to disclose votes. Now we have proxy access. Shareholder primacy has become a norms in the boardroom. Professors teach that shareowners own corporations and shareholder primacy has taken hold. The cure for imperial CEOs and entrenched boards may be worse than the disease. Aligning with share price should have resulted in more productivity. However, the population of US companies has declined by 55%. The life expectancy of Fortune 500 companies is now 15 years.

Investor returns? Over the last 30 years corporate bonds have outperformed equity. Institutional investors have rushed to other funds – commodities, bonds, derivatives. And primacy may have increased tension between shareowners themselves. We are now experience an investing tragedy of the commons. Pursuing self-interest has made it worse for all because of externalized costs. Investors pursuing maximizing wealth is like fishing with dynamite. 30 years of empirical studies. If one person fishes with dynamite, they do great. If everyone fishes with dynamite, we’ll all get a lower return.

When you buy stock, it is in your personal interest to get the stock up so you can sell and buy something else. Dividends, cutting expenses, buy-backs, etc. can all harm long-term returns. Too many are focusing on the near term. You sell before the company explodes. There are fewer and fewer opportunities because everyone else is also fishing with dynamite. Need to give up the idea of maximizing. Mathematically tractable but real ecosystems satisfice; they don’t maximize.

The problem is institutional investors are too diversified and there are too many intermediaries between investors and companies. Everything is measured on a short-term basis. Pension fund trustees are ill-equipped for the task and must rely on advisors who face conflicts of interest. There is a difference between shareholder primacy and shareholder rights. The rationale for shareholder primacy is that shareholders get to elect the board. If you believe in stakeholder rights, give those stakeholder interests board seats. Shareholder value provides a good rationale for pricing and continuous improvement.

However, even shareholder primacy doesn’t mean maximizing share price. We have a quantification fetish. We can’t measure everything through share price. Not all material information is disclosed publicly. Momentum investing leads to herding. Investor myopia, irrationally high discounting rate.  Long-term good. Granting restricted stock that vests a few years after executives and directors leave is a good idea. Boards tend to follow the largest vocal holder.  We should be strengthening pension funds, ensuring they are professional.  If they concentrated their portfolios, they could serve as anchor investors. Reduce chain of intermediaries. Sunlight may be best disinfectant but the tools aren’t available so what good does it do to know if you can’t do anything about it.

Others chime in: What about time-weighted dividends? First do no harm. Shareholder value is not the same as shareholder price. Conversations continue into the corridors. 

Directors & Boards named Lynn Stout’s The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public as its governance book of the year. Well deserved. While I haven’t met anyone other than Stout who agrees with everything she wrote, she did get us all talking. John Wilcox adds his voice with a mixed review in which he concludes:

Stout’s myth of shareholder culpability is no more valid than the myth of shareholder primacy she so ably discredits.

Supplementary materials:

  • Reberioux, Antoine.  Does Shareholder Primacy Lead to a Decline in Managerial Accountabilty? Cambridge Journal of Economics.  May 2007.  Click here to view.
  • Stout, Lynn.  The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.  Berrett-Koehler Publishers.  Apr. 2012.  Click here to view excerpt.
  • Stout, Lynn.  New Thinking on Shareholder Primacy.  Feb. 2011.  Click here to view.
  • Wong, Simon.  How Conflicts of Interest Thward Institutional Investor Stewardship.  Butterworths Journal of International Banking and Financial Law.  Sep. 2011.  Click here to view.

See also Millstein Forum 2013: The Impact of New Patterns of Corporate Ownership and 2013 Millstein Forum: Dual-Class Structures, Pro and Con.

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