On Thursday, Washington Post Columnist Steven Pearlstein sat with Charlie Rose to discuss the myth of maximizing shareholder value—and why taking a step back from that idea may help revitalize American capitalism. Pearlstein argues that the dominance of the shareholder-value mentality blinds us to the variety of other things business can maximize—the quality of their products or services, customer satisfaction, providing good jobs, and creating long-term market value. Promoting these things in tandem creates thriving, sustainable businesses; and the role of a good CEO, Pearlstein suggests, is balancing them adequately to ensure the long term health of a business.
Pearlstein explains clearly that the idea of maximizing shareholder value is actually a relatively recent phenomenon, one that gained popularity in the 1980s, due in part to Milton Friedman’s explosive article on the subject. Yet “maximizing shareholder value” has become the default discourse, both in corporate governance and business schools, since its introduction. However, Pearlstein says, “corporations can be organized for any purpose,” as Lynn Stout’s recent book thoroughly documents. There is a myth that the law dictates corporations must maximize shareholder value, but it is just that – a myth.
He goes on to articulate how social capital has been eroded by the outsized emphasis on shareholder value. When customers, employees, and taxpayers see that the sole goal of a corporation is to increase the wealth of its shareholders, it erodes our collective trust in big business. It may be part of the reason the public’s trust in business as an institution is only slightly higher than their trust in Congress.
This is further underscored by the pressure for CEOs to return consistently high quarterly earnings. While “shareholders” can refer to anyone holding stock in the company—for a day, week, or lifetime—the emphasis on maximizing shareholder value has, in Pearlstein’s view, given directors the license to run their business on behalf of those shareholders that trade most frequently. This has had a tendency to focus corporate leaders on maximizing returns in the short term, but often at the expense of long term value creation. Pearlstein cites recent surveys of executives that show willingness to forego a net-positive investment if it means missing a quarterly earnings target.
The idea came about as a reaction to what Pearlstein calls “managerial capitalism,” where companies were run by a managerial class and were less focused on providing returns to shareholders, and ushered in an era of shareholder activism. Managerial capitalism wasn’t perfect either, says Pearlstein, and activist shareholders were a necessary corrective. But we’ve moved much too far now in the other direction. Instead of imposing one single metric on businesses, Pearlstein concludes by suggesting we should allow companies to be dedicated to maximizing a variety of purposes.
Watch the full interview below:
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On the one hand the U.S. wants to be defending U.S. companies overseas and they are going to see this as vindictive, particularly in going after Apple’s profits retroactively. But in the bigger picture the U.S. is taking moves to fight inversions and improve the global system.