Potentially Big News: Top CEOs Realizing That 'Maximizing Shareholder Value' Isn't A Great Idea

Say That Again

from the well-look-at-that dept

For the better part of two years, I’ve been noodling on a post (I’ve half written it a bunch of times) talking about how perhaps the biggest problem with so much of what we see today can be tied up in two related concepts: “fiduciary duty to shareholders” and the idea of “maximizing shareholder value.” I talked a little about this a few weeks back in highlighting how almost all of the problems that people talk about when they complain about big tech can really be traced back to Wall Street and this idea of maximizing shareholder value.

Conceptually, maximizing shareholder value makes some sense, but only if you don’t think about it for more than a few minutes. Because the whole thing falls apart as soon as you ask “over what time frame?” I first wrote about this back in 2006, in what I called the “time function of profits,” in trying to understand why so many people were claiming that Craigslist’s approach to grow slowly (but massively) by leaving most of their site free and not doing all sorts of icky stuff, was seen by some as “leaving money on the table” or even being anti-capitalist. As I pointed out then, that only made sense if you thought in the very short-term. Taking a longer term view suggests that “maximizing” profits in the short run is likely to create significant problems in the long run, whether it be competition or customers annoyed at you and the like. In a follow up post I did in 2008, I pointed out that maximizing profits shouldn’t mean screwing your customers. The real issue is the time frame. If you want to maximize profits for just this quarter, then, yes, screwing over your customers is a viable strategy.

However, if it’s more long term, then the incentives should change quite a bit. It’s just like the Prisoner’s Dilemma. If you are playing that game once, the incentives are heavily weighted towards cheating. However, if you’re playing it many, many times, the incentive structure changes, and it should move to a more cooperative model. For some reason, however, this hasn’t happened that much in real life. Many businesses (and many folks on Wall Street) assume that having a “fiduciary duty” to “maximize shareholder value” or “shareholder profits” means squeezing out every penny of profits right away, with no concern for the future.

Perhaps stating this backwards thought process most clearly was former big record label exec Dick Morris who once famously told Wired magazine that if someone is asking you to give up some money now to make more later, it means that “someone, somewhere, is taking advantage of you.” And, of course, one of the foremost proponents of this theory was Milton Friedman, who argued that the only responsibility of a company is to its shareholders, and that companies need to maximize the return to those shareholders. Friedman trashed the idea of social responsibility for corporations, but he, himself, didn’t seem to recognize how the long term played against the short term here. Ignoring any sense of social responsibility, in favor of short term maximization, would lead not just to long term social harms, but also to limits on the long term value for shareholders.

In recent years, we’ve started to see some pushback on these ideas. A few months ago, there was the announcement of a new Long Term Stock Exchange, designed to respond to these challenges, by giving companies more time to accomplish stuff than the usual quarterly heartbeat. But perhaps much bigger news is that the Business Roundtable, a gathering of top CEOs, has now put out a letter saying that shareholder value cannot and should not be the only focus of a corporation.

I’d argue that the letter is not that well-written, and given the signatories, I’m sure it went through millions of dollars worth of lawyering before anyone agreed to sign onto it. However, it does set up a much more thorough framework for thinking about all of the stakeholders that a company should consider in doing business: customers, employees, suppliers, communities, and shareholders. It’s signed by a bunch of big company CEOs (the letter itself is one page, then there are 11 more with signatures).

Of course, it pays to be cynical about such things. It’s one thing to say all of this, another thing altogether to actually walk the walk. And, certainly, some of the signatures come from CEOs who run companies who don’t exactly have a strong history of paying attention to most of the stakeholders listed above. Indeed, if you want to find some of the worst behaving companies — especially towards customers, employees, and communities — this is a ready-made list (I mean, AT&T’s and Comcast’s CEOs, Randall Stephenson and Brian Roberts, both signed on to this). So, no one should take this as a real commitment to change.

That’s only going to come if the companies are seen to be putting this into action, and that’s where the public (and the media) need to come into play. When companies — especially those who signed onto this document — are seen behaving badly, it should be called out, and this letter should be referenced. Yes, it’s quite probable that many signed onto this thinking that it’s a good PR effort to pretend to be good corporate citizens for a day or two. But if we want to enact real change, and have companies get past the short term view of screwing over everyone to “maximize shareholder value,” it’s only going to happen if these execs are held to the very standards they claim to support.

Filed Under: business roundtable, maximizing shareholder value, priorities, profits, shareholder value, shareholders, stakeholders