Video Friday: The Myth of Maximizing Shareholder Value With Bill Lazonick

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In the video below, Bill Lazonick talks about government’s historic involvement in the economy and the role of workers. Executives say workers are their most important assets but Lazonick reminds us they are not on the balance sheet; we abolished slavery long ago. Since the 1980s, there has been less emphasis on investing in workers. The ideology of ‘shareholder value’ actually has influenced how business allocates profits.

Stock buybacks are symptomatic of the ideology of ‘shareholder value’ and financialization of the economy. Money used to get stock up contributes very little to the economy compared to dividends, research and development, training, or expansion. Before 1982 the SEC viewed buybacks as manipulation of the market but they then gave companies safe-harbor for buybacks. Stock-based pay of executives encourages them to concentrate on stock buybacks and accounting gimmicks to move the price of their company’s stock, maximizing shareholder value, rather than investing in and recreating middle class jobs. Between 2001-2010, 94% of profits of the S&P 500 went to buybacks and dividends. 54% buybacks 40% dividends with 6% left over for building the company.

First, we have to recognize the false underpinnings of the ideology. Second, we have to recognize what is actually determining shifting competitive advantage. What follows below is the Institute’s most recent blog post and a video interview with Bill Lazonick.

In 2010, the 500 largest companies in the United States, otherwise known as The Fortune 500, generated $10.7 trillion in sales, reaped a whopping $702 billion in profits, and employed 24.9 million people around the world.

Historically this has been good news. After all, when these corporations have invested in the productive capabilities of their U.S. employees, Americans have typically enjoyed plentiful well paying and stable jobs. That was the case a half century ago.

Unfortunately, as Bill Lazonick points out in the interview below, it’s not the case today.

For the past three decades, top executives have been rewarding themselves with mega-million dollar compensation packages while American workers have suffered an unrelenting disappearance of middle-class jobs. Since the 1990s, this hollowing out of the middle-class has even affected people with lots of education and work experience.

As the Occupy Wall Street movement correctly recognized, the concentration of income and wealth of the economic top “one percent” of society has left the rest of us largely high and dry. Corporate profits are increasingly going to share buybacks or dividend distribution, but very little is going back into research and development efforts, capital reinvestment, and employment.

Corporations, in other words, are devoting increasing amounts of their considerable and growing financial resources to redistribution rather than innovation. And they are doing so based on the justification of “increasing shareholder value.”

However, as Lazonick points out, when the shareholder-value mantra becomes the main focus for companies executives usually concentrate on avoiding taxes for the sake of higher profits and don’t think twice about permanently axing workers. They also increase distributions of corporate cash to shareholders in the form of dividends and, even more prominently, stock buybacks.

When a corporation becomes financialized in this way, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards. Instead they become focused on generating financial profits that can justify ever higher stock prices — in large part because, through their stock-based compensation, high stock prices translate into megabucks for these corporate executives themselves.

It’s not a pretty state of affairs. Lazonick discusses how we evolved from a society in which corporate interests were largely aligned with those of broader public purpose into a state where crony capitalism, accounting fraud, and corporate predation are predominant characteristics.

Lazonick makes a very powerful case that the ideology of “maximizing shareholder value” primarily works to the benefit of the very corporate executives who make corporate resource allocation decisions, and who derive high levels of remuneration from munificent stock option awards. As for the rest of us, we’re left to fight over the crumbs.

See also, Lynn Stout, Distinguished Professor of Corporate and Business Law, Cornell Law School; Author, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (Berrett-Koehler, 2012). Can corporations’ relentless focus on maximising shareholder wealth actually harm investors? UNSW’s Centre for Law, Markets and Regulation presents Prof Lynn Stout, the Paul Hastings Distinguished Professor of Corporate and Securities Law at UCLA, in the second seminar of the series “In Who or What Do We Trust?”

Lynn Stout has been described as “the closest thing to a rockstar in corporate governance.” Professor Stout advocates the end of shareholder primacy where public corporations belong to their shareholders and firms exist for one purpose only – to maximise shareholder wealth. However, modern corporate practice needn’t be this way. Professor Stout argues that shareholder value thinking actually harms investors, over time and as a class.

The CLMR in association with Allens Arthur Robinsion and the Centre for International Finance and Regulation is delighted to welcome Professor Stout to lead the second seminar in the series ‘In Who or What Do We Trust.’ UNSW’s Faculty of Law.

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