Why the “Maximizing Shareholder Value” Theory of Corporate Governance is Bogus

One mantra you see regularly in the business and popular press goes something along the lines of “the CEO and board have a fiduciary duty to maximize shareholder value.”

That is untrue. Moreover, the widespread acceptance of that false notion has done considerable harm.

If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that.

Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular.

And where do shareholders fit in this picture? Corporations have a host of obligations they are required to meet, contractual and regulatory, such as paying suppliers, honoring terms of warranties, complying with environmental, product, and workplace safety laws, paying creditors (bondholders, banks, owners of rental property), paying taxes, and for public companies, fulfilling their obligations under state and Federal securities laws. Shareholders are at the very back of the line. They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit “don’t go bankrupt” duty clearly trumps concerns about shareholders.

This makes perfect sense. An share in a company is a very weak and ambiguous legal promise. Consider: a bond is an obligation to pay interest and principal on specific dates. It may have other provisions (“indentures”) to prevent the corporation from taking financial risks to assure that the bondholders will indeed be paid as stipulated. Or it could be secured, as in have specific collateral pledged to give the bondholder some recourse if the company does not make payment on a timely basis.

By contrast, a share means “you have a vote that we the company can dilute whenever we feel like it. And we might pay you dividends if we make enough money and are in the mood.” In the stone ages of my youth, one of the widely-accepted ways for valuing stock was using a dividend discount model (as in looking at a company’s history of paying dividends, forecasting what future dividends would be, and discounting that back to the present), so companies were under more pressure from analysts and fund managers to pay dividends than they are now.

Disenfranchised shareholders are an inherent feature of liquid stock markets. In 1994, Amar Bhide argued in a Harvard Business Review article that efficient equity markets inevitably led inevitably to deficient corporate governance. Bhide explained that an ambiguous promise like equity is not suitable to be traded on an arm’s length basis. Historically, equity investors typically acted like venture capitalists: they knew the owners personally and were involved in the company’s affairs. The securities laws of 1933 and 1934 tried to make it safe for distant, transient shareholders to invest by providing for timely, audited financial statements, disclosure of information about top executives and board members, and prohibiting insider trading and other forms of market manipulation.

But that turns out to be inadequate. No outsider can be told enough to make an informed judement about a company’s prospects; critical information, like acquisition and plans for new products, must be kept secret until well advanced because they are competitively sensitive. Boards are protected from liability by directors’ and officers’ insurance (plus hardly anyone even bothers pursuing board members. For instance, have any Lehman board members been sued?). Moreover, only a comparatively small cohort of people are deemed public-company-board worthy. Their incentives are to make nice in their community and not rock the boat, which means not making life difficult for the CEOs, since a nominating committee (of the current board) is responsible for nominating directors, which means the entire process is incestuous.

This system has been fairly impervious to outside challenge. Once in a while, a company is so abysmally run that an activist investor will take up a proxy fight. But that dog seldom catches the car; instead, they might get a bad CEO to exit or force a restructuring. The stock trades up and the rabble-rousers take their winnings and depart. More polite efforts, even by large, powerful shareholders, are much less effective. For instance, some major institutional investors met with Goldman to object to the idea that the firm would pay lavish bonuses for 2009. The session appears to have had no impact.

Amusingly, board members themselves promote the “maximize shareholder value” canard. For instance, I was at a conference and chatted up one of the better-known panelists (odds are high you would recognize her name), an economist who has held important policy positions and sits on the boards of several public companies. Somehow the magic “maximizing shareholder value” phrase came up and I took issue with it. She said, “Under Delaware law, directors have a duty to consider….” I gave her a hard look and said, “Equity is a residual claim.” That silenced her, for indeed there is no rebuttal to that. Equity holders are at the bottom of the obligation chain. Directors do not have a legal foundation for given them preference over other parties that legitimately have stronger economic interests in the company than shareholders do.

So how did this “the last shall come first” thinking become established? You can blame it all on economists, specifically Harvard Business School’s Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.

A terrific 2010 paper by Frank Dobbin and Jiwook Jung, “The Misapplication of Mr. Michael Jensen: How Agency Theory Brought Down the Economy and Might Do It Again,” explains how this line of thinking went mainstream. I strongly suggest you read it in full, but I’ll give a brief recap for the time-pressed.

In the 1970s, there was a great deal of hand-wringing in America as Japanese and German manufacturers were eating American’s lunch. That led to renewed examination of how US companies were managed, with lots of theorizing about what went wrong and what the remedies might be. In 1976, Jensen and William Meckling asserted that the problem was that corporate executives served their own interests rather than those of shareholders, in other words, that there was an agency problem. Executives wanted to build empires while shareholders wanted profits to be maximized.

I strongly suspect that if Jensen and Meckling had not come out with this line of thinking, you would have gotten something similar to justify the actions of the leveraged buyout kings, who were just getting started in the 1970s and were reshaping the corporate landscape by the mid-1980s. They were doing many of the things Jensen and Meckling recommended: breaking up multi-business companies, thinning out corporate centers, and selling corporate assets (some of which were clearly excess, like corporate art and jet collection, while other sales were simply to increase leverage, like selling corporate office buildings and leasing them back). In other words, a likely reason that Jensen and Meckling’s theory gained traction was it appeared to validate a fundamental challenge to incumbent managements. (Dobbin and Jung attribute this trend, as pretty much everyone does, to Jensen because he continued to develop it. What really put it on the map was a 1990 Harvard Business Review article, “It’s Not What You Pay CEOs, but How,” that led to an explosion in the use of option-based pay and resulted in a huge increase in CEO pay relative to that of average workers.)

To forestall takeovers, many companies implemented the measures an LBO artist might take before his invading army arrived: sell off non-core divisions, borrow more, shed staff.

The problem was to the extent that the Jensen/Meckling prescription had merit, only the parts that helped company executives were adopted. Jensen didn’t just call on executives to become less ministerial and more entrepreneurial; they also called for more independent and engaged boards to oversee and discipline top managers, and more equity-driven pay, both options and other equity-linked compensation, to make management more sensitive to both upside and downside risks.

Over the next two decades, companies levered up, became more short-term oriented, and executive pay levels exploded. As Dobbin and Jung put it, “The result of the changes promoted by agency theory was that by the late 1990s, corporate America’s leaders were drag racing without the brakes.”

The paper proceeds to analyze in considerable detail how three of the major prescriptions of “agency theory” aka “executives and boards should maximize value,” namely, pay for (mythical) performance, dediversification, and greater reliance on debt all increased risk. And the authors also detail how efforts to improve oversight were ineffective.

But the paper also makes clear that this vision of how companies should be run was simply a new management fashion, as opposed to any sort of legal requirement:

Organizational institutionalists have long argued that new management practices diffuse through networks of firms like fads spread through high schools….In their models, new paradigms are socially constructed as appropriate solutions to perceived problems or crises….Expert groups that stand to gain from having their preferred strategies adopted by firms then enter the void, competing to have their model adopted….

And as Dobbin and Jung point out, the parts of the Jensen formula that got adopted were the one that had constituents. The ones that promoted looting and short-termism had obvious followings. The ones for prudent management didn’t.

And consider the implications of Jensen’s prescriptions, of pushing companies to favor shareholders, when they actually stand at the back of the line from a legal perspective. The result is that various agents (board compensation consultants, management consultants, and cronyistic boards themselves) have put incentives in place for CEOs to favor shareholders over parties that otherwise should get better treatment. So is it any surprise that companies treat employees like toilet paper, squeeze vendors, lobby hard for tax breaks and to weaken regulations, and worse, like fudge their financial reports? Jensen himself, in 2005, repudiated his earlier prescription precisely because it led to fraud. From an interview with the New York Times:

Q. So the maximum stock price is the holy grail?

A. Absolutely not. Warren Buffett says he worries as much when one of his companies becomes overvalued as undervalued. I agree. Overvalued equity is managerial heroin – it feels really great when you start out; you’re feted on television; investment bankers vie to float new issues.

But it doesn’t take long before the elation and ecstasy turn into enormous pain. The market starts demanding increased earnings and revenues, and the managers begin to say: “Holy Moley! How are we going to generate the returns?” They look for legal loopholes in the accounting, and when those don’t work, even basically honest people move around the corner to outright fraud.

If they hold a lot of stock or options themselves, it is like pouring gasoline on a fire. They fudge the numbers and hope they can sell the stock or exercise the options before anything hits the fan.

Q. Are you suggesting that executives be rewarded for driving down the price of the stock?

A. I’m saying they should be rewarded for being honest. A C.E.O. should be able to tell investors, “Listen, this company isn’t worth its $70 billion market cap; it’s really worth $30 billion, and here’s why.”

But the board would fire that executive immediately. I guess it has to be preventative – if executives would present the market with realistic numbers rather than overoptimistic expectations, the stock price would stay realistic. But I admit, we scholars don’t yet know the real answer to how to make this happen.

So having led Corporate America in the wrong direction, Jensen ‘fesses up no one knows the way out. But if executives weren’t incentivized to take such a topsy-turvey shareholder-driven view of the world, they’d weigh their obligations to other constituencies, including the community at large, along with earning shareholders a decent return. But it’s now become so institutionalized it’s hard to see how to move to a more sensible regime. For instance, analysts regularly try pressuring Costco to pay its workers less, wanting fatter margins. But the comparatively high wages are an integral part of Costco’s formula: it reduces costly staff turnover and employee pilferage. And Costco’s upscale members report they prefer to patronize a store they know treats workers better than Walmart and other discounters. If managers with an established, successful formulas still encounter pressure from the Street to strip mine their companies, imagine how hard it is for struggling companies or less secure top executives to implement strategies that will take a while to reap rewards. I’ve been getting reports from McKinsey from the better part of a decade that they simply can’t get their clients to implement new initiatives if they’ll dent quarterly returns.

This governance system is actually in crisis, but the extraordinary profit share that companies have managed to achieve by squeezing workers and the asset-goosing success of post-crisis financial policies have produced an illusion of health. But porcine maquillage only improves appearances; it doesn’t mask the stench of gangrene. Nevertheless, executives have successfully hidden the generally unhealthy state of their companies. As long as they have cheerleading analysts, complacent boards and the Fed protecting their back, they can likely continue to inflict more damage, using “maximizing shareholder value” canard as the cover for continuing rent extraction.

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  1. Clive

    I’ve commented before about how a chance encounter led to my surprising discovery that His Royal Highness the Prince of Wales is an unlikely ally in the global struggle against inequality meted out by this corrupt distorted cadaver of capitalism. Ironic maybe, given that Prince Charles is most people’s idea of the 0.1%. But as I mentioned in a previous post seeing the real 0.1% holding court (literally !) in the face of an actual, genuine, “court” was a bit of a revelation. Sometimes when you witness a dynamic unfold in person, the interplay amongst the actors in it hits you in ways which, well, you just have to see for yourself to appreciate.

    So it was interesting to read how Charles has gone pretty public in highlighting this very issue:


    My reason for drawing attention to this here is, as Neil Collins (an FT journalist) points out, short-termism is a symptom, not a cause of an underlying problem.

    The actual underlying problem is pretty obvious and covered in the above feature. Short version: the game is rigged. The beneficiaries are not about to play fair. The agencies which can put a stop to this are unwilling to do so at present.

    1. Hayek's Heelbiter

      Dear Clive,

      The reason is that the British aristocracy has an ancient policy of Noblesse Oblige, whereas the American innovation for the 1% is “Vous m’oblige.”

      This was really brought home to me last fall at local village fete [fair, c.f., MIDSOMMER MURDERS], where one of the wealthiest titled lords in the country strolled around with straw in his boots, chatting with any and all sundry and awarding the prize for the best scarecrow costume.

      One can’t conceive of Bill Gates or the Koch Brothers or any of the other 1% aristocracy deigning to even visit such an event.

      1. from Mexico

        Hayek’s Heelbitersays:

        The reason is that the British aristocracy has an ancient policy of Noblesse Oblige, whereas the American innovation for the 1% is “Vous m’oblige.”


        As if American exceptionalism was not enough, we now get served up a liberal portion of British exceptionalism.

        1. Clive

          But… suppose it is really an exception ?

          I’m all for shoving my opinions out willy-nilly, but I try really, really hard to confine my comments about other country’s societies to actual, real-world first-hand experience. I’m not always able to keep to my own rules but generally, I’m very guarded about saying things like “In the US they do X-” or “In Columbia they act like Y-” or “Germans are always up to Z-” simply because I don’t know. I read stuff and have suppositions but I simply don’t know as a fact what this- or that- country does or what happens there.

          England has a long, long (l-o-ooo-ng) history of the ruling classes being much more open and engaged with the societies they function is. There is, here as everywhere, a mix of good and bad. And ugly.

          But it has not and never has been a case of every single member of the aristocracy crushing the faces of the proletariat into the ground. In some instances, it has been the exact opposite.

          Maybe come and live here for a while, then make up your own mind. Then you can comment with authority.

          If I ever start saying “oh, well, in Mexico, it’s all this- and it’s all that-” by all means shoot me.

          1. from Mexico

            Clive says:

            I’m all for shoving my opinions out willy-nilly, but I try really, really hard to confine my comments about other country’s societies to actual, real-world first-hand experience.


            Maybe come and live here for a while, then make up your own mind. Then you can comment with authority.

            Now the chavinistic bullsh*t is really getting deep, as if one man’s anecdotal experiences trump objective data, whether it be macroeconomic or otherwise.

            Let’s take this 24kt piece of rancid bovine feces, for example:

            England has a long, long (l-o-ooo-ng) history of the ruling classes being much more open and engaged with the societies they function is. There is, here as everywhere, a mix of good and bad. And ugly.

            But it has not and never has been a case of every single member of the aristocracy crushing the faces of the proletariat into the ground. In some instances, it has been the exact opposite.

            “The share of British capital in the hands of the top 1 percent probably peaked in 1911-1913, when that segment commanded a stunning 69 percent,” Kevin Phillips observes in Wealth and Democracy.

            But even in the darkest hour for America’s great unwashed, or conversely the most halcyon days for its lords of capital, such as in 1929 or 2013, did the share of American capital in the hands of the top 1 percent ever exceed 44%:


            And if we want another glimpse of how your hallowed English ruling classes and aristocracy don’t “crush people’s faces into the ground,” all we have to do is take a look at how they treated the indigenous people’s of the Americas. How the Spanish treated the native populations was downright benevolent in comparison to how the British treated them. All this is thoroughly documented by one of your fellow countryment, J.H. Elliott, in Empires of the Atlantic World: Britain and Spain in America 1492-1830

            1. Clive

              The proletariat I was talking about were the English living in England.

              Britain’s treatment of the populations of the counties in it’s former empire were amongst to worst example of inhumanity in recorded history.

              If it helps, I for one am deeply sorry and ashamed of Britain’s mistreatment of colonies.

              But with respect, you’ve got a chip on your shoulder that all the vinegar in Manchester couldn’t cover.

              I think fundamentally we agree — we both want a fairer system and better apportioning of what the have’s and the have not’s get.

              A flat out refusal to contemplate that older societies (like England) are irredeemably decadent, discovered nothing in over a millennia of ongoing development worth knowing, have nothing to offer from their pasts, have learned nothing of value and the study of which will only bring endless examples of what *not* to do… well, all I can say is that the world has got a lot of rediscovering to do then. Because the lessons learned have wrought some painful discoveries along the way.

              Oh, and endlessly clipping links from the internet as if they confer anything other than a selective illustration of our points — which we all do but, is nevertheless a long way from “proving” something — reminds me of my mother’s friend who would relay tales of implausible happenings like hauntings, messages from celebrities from beyond the grave and unlikely sounding miracles but when questioned as to their authenticity simply retort “well, it was in the National Enquirer, it must be true”.

              Don’t get me wrong Mex, I love the work you do here and the place wouldn’t be the same without you, but sometimes, like all of us, you need to not be so dogmatic.

              Believe me, I’m the Crowned Prince of Dogma-land.

              1. from Mexico

                Clive says:

                The proletariat I was talking about were the English living in England.

                Me too.

                But I also believe that when one just creates a history out of whole cloth, it serves no good purpose. For as James Baldwin wrote in The Fire Next Time:

                To accept one’s past — one’s history — is not the same thing as drowning in it; it is learning how to use it. An invented past can never be used; it cracks and crumbles under the pressures of life like clay in a season of drought.

                The inconvenient truth for the British jingoist is that when it comes to fair treatment for the proles, the British landed aristocacy and its industrial-merchant patriciate were never exceptional at walking the walk. What they were exceptional at, however, was talking the talk. Take Adam Smith, for instance.

                All of Smith’s speculations concerning a rational, all-knowing and benevolent market – the same traits which the Scholastics had assigned to God – sounded great in theory. But in practice they proved chimerical.

                Following the defeat of Napoleonic France in 1815, Britain enjoyed a century of almost unchallenged dominance and expanded its imperial holdings across the globe. Between 1820 and 1870 per capita GDP almost doubled ( http://dev3.cepr.org/meets/wkcn/1/1679/papers/Pamuk-van-Zanden-Chapter.pdf ). Fabulous fortunes arose in Britain. George Dangerfield, in The Strange Death of Liberal England, 1910-1914, described 1911 as the year of London “climbing towards its peak of plutocratic splendor, and tales of ballrooms banked high with the loot of hothouses, of champagne flowing like a sea, of bare backs, jeweled bosoms and fabulous expenditure.”

                But none of this great wealth seemed to trickle down to the workers as Smith’s theory had predicted. It should come as no surprise, then, that it was the empiricists who would be the first apostates from the free market faithful.

                Simonde de Sismondi “became the first, and for a time the only, heretic among Smith’s disciples” (Jacques Barzun, From Dawn to Decadence). As Jacques Barzun explains, Sismondi

                urged factual observation in what he was the first to call “the social sciences”; and when the Encyclopedia Britannica asked him for an article on political economy, further thought and documentation led him to question the validity of liberal economics….

                Sismondi had visited England and had been struck by the misery resulting from industrial progress. Why did the seemingly beneficial production of goods by machinery bring on “poverty in the midst of plenty”? The answer was: free competition keeps wages low, free enterprise makes for overproduction, which leads to recurrent “crises” – shutdowns or failure entailing unemployment and starvation.

                His detailed criticism of the new society includes the observation that it splits labor from capital and makes them enemies, with all the power on one side. The idea of their “bargaining” over wages is absurd. Tyrant and victim describes the relation, yet without cruel intent of the one or knowledge by the other of who his oppressor is. Again, with overproduction the capitalist must seek foreign markets and precipitate national wars, while at home a class struggle goes on without end.

                More recent empirical studies confirm de Sismondi’s observations. The quasi-religious adherence to the capitalist faith had the same impact on workers in Britain as it had had in the Netherlands in the 16th, 17th and 18th centuries. As Şevket Pamuk and Jan Luiten van Zanden explain:

                The fruits of the Industrial Revolution were spread very unevenly…. [S]ocial inequality exploded, in particular in those parts of Europe that profited most from the new industrial age (Williamson 1985). This increase in inequality came on top of an already rising inequality in distribution of income and wealth, the result of economic expansion and urbanization in the centuries before 1700. In particular in the most dynamic parts of the Continent, in England, Holland, France, levels of inequality in the 18th century were already very high – due to the concentration of land ownership and or mercantile wealth (Van Zanden 1995)….


                The living conditions of the workers, meanwhile, suffered under the “new” capitalist faith. Soaring inequality meant the workers’ standard of living would, at best, be stagnant for the next 100 years. It would not be until after 1870, a full century after Adam Smith penned his Capitalist Bible, that the workers’ standard of living would begin to improve. Whether quantified in terms of real wages or biological standard of living, adherence to the one true faith spelled stagnation and austerity for workers. Charles H. Feinstein concluded that

                For the majority of the working class the historical reality was that they had to endure almost a century of hard toil with little or no advance from a low base before they really began to share in any of the benefits of the economic transformation that they helped to create.

                –Charles H. Feinstein, “Pessimism Perpetuated: Real Wages and the Standard of Living in Britain during and after the Industrial Revolution,” The Journal of Economic History, Vol. 58, No. 3 (Sep., 1998)

                And when after 1870 the condition of the workers began to improve, it certainly had absolutely nothing to do with a sense of Noblesse Oblige on the part of Britain’s merchant and industrial patriciate. The correction came from below, not from above. Do I really have to go through the nuts and bolts of British political history of this period too?

              2. from Mexico

                And Clive, your ad hominem (e.g., “you’ve got a chip on your shoulder that all the vinegar in Manchester couldn’t cover” and “you need to not be so dogmatic”), straw manning* and attacks on reference and citation** do not bolster your argument. They are rhetorical and lacking in substance.

                I do think you’re right that we fundamentally agree, that “we both want a fairer system and better apportioning of what the have’s and the have not’s get.”

                But that does not mean I’m going to engage in the orgy of US bashing which another US expatriot living in Mexico, Moris Berman, does. I won’t do it, neither to ease the conscience of some British exceptionalist nor for any other reason, because I consider it to be a distortion which departs too radically from the whole truth.

                And let me assure you, Berman does not have his finger on the pulse of the Mexican left. You wouldn’t believe how many Mexicans, because the British were the intellectual fathers of liberalism, believe the UK is still the senior partner in anglosajón world, that the UK tail somehow wags the US dog. I don’t buy into the Versailles Thesis, which believe it or not is very popular in Latin America, any more than I do the Black Legend.

                *This, for instance, is pure straw man argumentaiton, since I argued nothing of the sort:

                A flat out refusal to contemplate that older societies (like England) are irredeemably decadent, discovered nothing in over a millennia of ongoing development worth knowing, have nothing to offer from their pasts, have learned nothing of value and the study of which will only bring endless examples of what *not* to do… well, all I can say is that the world has got a lot of rediscovering to do then. Because the lessons learned have wrought some painful discoveries along the way.

                **And here you attack the use of reference and citation:

                Oh, and endlessly clipping links from the internet as if they confer anything other than a selective illustration of our points — which we all do but, is nevertheless a long way from “proving” something — reminds me of my mother’s friend who would relay tales of implausible happenings like hauntings, messages from celebrities from beyond the grave and unlikely sounding miracles but when questioned as to their authenticity simply retort “well, it was in the National Enquirer, it must be true”.

                1. steelhead23

                  Sir (or Madam), I simply wish to thank you for spending your time on this blog. I frequently chase down your references and always learn something from your posts. Your student thanks you. Muy gracias.

                2. PaulArt

                  Everything I needed to know about England and how they treat the poor there I learnt from a steady diet of P.G.Wodehouse and Upstairs Downstairs, not to mention ‘Are you being Served and ‘Only Fools and Horses’. The jewel in the crown of course is Yes Minister and Yes Prime Minister. The 0.1% in America have been around only very recently whereas the British aristocracy – now they know how to really create poverty and build a class ridden society with stone masonry and concrete. Their belief in ‘class’ parallels the GOPer idiot’s belief in DSGE models or self correcting free markets. They are the masters and inventors of the permanent ‘servant’ class. They have brainwashed the unwashed so much over the years that 40-50% of the morons there think the Royal family are, as Angus Hudson the Butler in Upstairs Downstairs says, ‘my betters’. Even ‘Are you being Served’ makes a perfunctory bow towards the Royal Family in one of its episodes. It is ‘Jackass’ writ large in this day and age. Yes I know Charles has imbibed much good in Organic farming and other good things but that does not impress me in the least besides someone using his public image to promote social responsibility. The Royal Family should have retired themselves a long time back instead of hanging around like Museum pieces. In today’s age what dignity do you have when you are so blatantly an expense on the public purse? Does Cameron for instance or Murdoch really believe in ‘Royal’?

          2. Nathanael

            The British nobility established “noblesse oblige” as a deliberate policy in order to avoid getting their heads whacked like the French nobility. They still teach their kids about that, you know.

            “Noblesse oblige” might better be thought of as “basic political survival skills for noblemen”.

            There have always been British noblemen who opposed the idea — but they were trounced by Lord Grey in 1832, and since then the “noblesse oblige” types have been ascendant in the British nobility. As a result, the British still *have* a nobility, while most countries don’t. So it is wise of them to teach their children basic political survival skills.

            The old butcher Assad in Syria didn’t teach his kid these basic survival skills, and now the kid is just a Russian puppet — and probably will eventually get tossed anyway.

            Noblesse oblige shouldn’t be glamorized — it is basic, practical long-term thinking. Our problem today is that our 0.1% are short-term thinkers who give nary a thought to whether their children’s heads will be whacked off by the angry mob.

        2. With Cat as my CEO

          Not quite; Japan has that, too. I was raised with a sense of public service and collective responsibility that most Americans find peculiar. For us, responsibility increases with rank.

          Whenever I hear a little girl exclaiming that she wants to be a princess, I always interject that my mother was born a princess; it’s more hard work than fun. it’s all about duty, responsibility, studying hard and maybe having to marry your idiot cousin. Commoners have more freedom to be themselves. The harassed parents always smile.

          1. from Mexico

            So now we’re talking about Japan?

            I don’t know if these sort of ad hoc rescues work with other people, but they certainly don’t work with me.

            But I suppose it’s asking too much to expect a jingoist to make an honest argument.

              1. David Habakkuk

                From Mexico,

                You write as though the landed aristocracy and commercial elites of nineteenth-century England formed a coherent whole with common attitudes and values. In fact the history is immensely complicated. The preface to a major study of English landownership stresses the diversities:

                “Capitalists were, of course, a diverse group: coal-owners differed from cotton-masters and industrialists from bankers. But their diversity was limited by the exigencies of their occupations. By contrast, landowners were men of leisure and characteristically they inherited their wealth. Though most of them took an active interest in the management of their estates and shared rural pursuits, they were free, to an extent to which capitalists and professional men were not, to follow their personal inclinations. Their faculties were not focused on a specific function. In their ranks, therefore, are to be founded saints and sinners, profligates and misers, poets and philistines, ignorant backwoodsmen and sagacious statesmen or great proconsuls, men locked in ancient routines as well as some of the most adventurous entrepreneurs of the age.”

                By the same token, the author – the grandson of a Welsh tenant farmer – notes, the social relations in which they were involved varied immensely, and were often intensely complex:

                “Even in Montgomeryshire, from which my maternal ancestors came, and which was the scene of intense conflicts between landlord and tenant, the old order as it died left a residue of regret. In his classic study of Llanfihangel yng Ngwynfa, Alwyn Rees remarks that the general attitude of the community towards the last Sir Watkin Williams Wynn to own the local estate was ‘one of ‘kindliness and respect’; and when on his death in 1944 news came that the estate was to be sold to pay death duties, the general reaction was one of apprehension.”

                (J.H. Habakkuk, Marriage, Debt and the Estates System, English Landownership 1650-1950, pps. x-xi.)

                1. from Mexico

                  Pure straw man.

                  Is it possible for you sycophants of the British aristocracy and commercial-merchant patriciate to make an honest argument?

            1. Yves Smith Post author

              I don’t read his comment as bad faith and therefore your ire looks mean-spirited.

              There’s a lot of halo effect in dealing with the period when white men ran the US. You can correctly accuse them of a lot of bad behavior. However, one of the offsets was indeed the concern for preserving the community and community service. The old Wall Street guys (both WASPs and Jews) adhered to that code, which meant the greediness even in a very money oriented business was kept to a contained level at the big established firms. The old farts (from my era and earlier) are utterly appalled by the conduct now, both the pay levels and the vile sense of entitlement.

              1. from Mexico

                Another ad hoc rescue, huh?

                Well if we want to switch the topic to the existence of Noblesse Oblige across cultures, and not just how the British landed aristocracy and industrial-merchant patriciate had and still have more of it than anybody else, which was the original assertion, then let’s do so.

                The problem I have with these balmy and romanticized notions of the elite, of whatever culture or nationality, is that not only are they a partial truth, having just enough truth to them to make them verisimilar, but they also teach those without political power that they do not need it, either that or that political power (and/or the benefits that go along with having it) can and should be bestowed on them by elite benefactors.

                Me, I’ve never been that great a fan of paternalism. And even the Rev. Martin Luther King, Jr., who was hardly the most notorious firebrand known to history, rejected the notion. As he wrote in his “Letter from Birmingham City Jail”:

                History is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily. Individuals may see the moral light and voluntarily give up their unjust posture, but as Reinhold Niebuhr has reminded us, groups are more immoral than individuals.

                We know through painful experience that freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.

                Even if one is a fan of Noblesse Oblige such as Peter Turchin, who in War and Peace and War gives a thorough history of where the notion comes from (we inherited it from Roman culture), he must nevertheless admit that it is highly cyclical, inconstant, and capricious.

                You just happened to have had the good fortune to have worked on Wall Street when a sense of Noblesse Oblige was at its apogee in the entire history of the United States. Just how much Noblesse Oblige exists on Wall Street now? How much existed during the Gilded Age? The Roaring Twenties? Certainly it is not something the great unwashed can hang their hat on.

                As Sydney Smith, the seminal British “Radical” and probably the greatest parliamentarian and advocate of popular democratic governance the English ever had put it:

                The talk of not acting from fear is mere parliamentary cant. From what motive but fear, I should like to know, have all the improvements in our constitution proceeded? If I say, Give this people what they ask because it is just, do you think I should get ten people to listen to me? The only way to make the mass of mankind see the beauty of justice is by showing them in pretty plain terms the consequence of injustice.

                –SYDNEY SMITH, in a speech to British Parliament in 1929 in favor of the Reform Bill, which enlarged the electorate to include those who owned or rented middling amounts of property, and eliminated the sparsely populated rotten boroughs from which so many members of the House of Lords were “elected,” while other heavily populated boroughs — Birmingham, Manchester, Leeds, and others — had no representation whatsoever.

                1. Nathanael

                  It’s not ad hoc, “from Mexico”. It’s plain practical fact which applies to all times and places. Yves understands it — you should try to understand it.

                  Try looking at it from the point of an elite, a nobleman, a 0.1%er — but a *smart* elite, one who wants his grandkids to be elite too. (From any era.)

                  You gotta keep the proles and the professionals happy enough that they don’t whack you. You gotta use the carrot as well as the stick. You gotta maintain community cohesion.

                  The people will, as Machiavelli explained, let you (the Prince) take almost everything — but you have to leave them “their land and their women”, in Machiavelli’s terms, or in modern terms, they have to have sufficient food, clothing, shelter, entertainment, and free association. They also need to feel as though you are doing something important, as though they would miss something if you were gone, as though you are doing “your part”. And when they get angry, you have to throw them a bone (Great Reform Act of 1832, etc.)

                  Smart, long-term-thinking elites cultivate this attitude. Our current short-term-thinking elites are so focused on short-term greed that they’re completely ignoring all of this basic “kingdom maintenance”. It’s *incompetent*.

                  You, “from Mexico”, may consider both the long-term-thinking elites and the short-term-thinking elites to be evil. But only the short-term-thiking elites are *incompetent*. Only the short-term-thinking elites are creating something *unsustainable* which will *inevitably collapse and destroy them*.

                  The long-term-thinking elites, with their “noblesse oblige”, are setting up a form of feudalism which can go on for many generations — and which But we don’t seem to have hardly any of those left. Instead we have these short-term blunderers who *will* blow the whole system up.

                  1. Nathanael

                    I have to say, as someone in the modern US equivalent of the “landed gentry”, I am *seriously ticked off* at the financier crooks (with the unquenchable thieving attitudes described in Veblen’s _Theory of the Leisure Class_) who are wrecking the system.

                    The New Deal was pretty comfy for the landed gentry, and even pretty comfy for the upper classes, *and these crooks are going and wrecking it*. Whatever replaces the New Deal after the revolution may completely destroy the position of both the elites and of the landed gentry, as it did in Russia in 1918. This is an insane and dangerous risk for these crooks to take — and if they hadn’t taken it, if they had just been able to have some limits to their greed, they could have lived comfortably for generations.

                    1. David Habakkuk


                      As Tocqueville stressed, European aristocracies were intensely conscious both of their ancestors and their descendants. So, yes, they were disposed to play things for the ‘long haul’.

                      In relation to England, incidentally, it has been argued by Alan Macfarlane that the departure from traditional ‘collectivist’ practices was already strong as far back as the thirteenth century. However, the characteristic pattern of aristocratic landholding up until relatively recently was not ‘individualist’ – the whole purpose of the ‘strict settlement’ was to keep an intact estate in the male line of the family. The classic book on this is my father’s work, from which I quoted above. The restrictions of the ‘strict settlement’ are of course, a central background to the plot of Jane Austen’s ‘Pride and Prejudice’.

                      In relation to the likes of Jamie Dimon, it is not clear that they are simply ‘incompetent’. From his point of view, the systemic effects of his actions may well be what the economists call ‘external effects’. If he did not gamble and loot, other key players would still be doing so. Accordingly, individual rational calculation provides no reason for him and his like to act in ways that minimise chances of systemic collapse.

                      Meanwhile, institutions have tended to become ‘hollowed out’ – a staff of transitory employees is not likely to have any strong concern for the long-term prospects of survival of the organisations for which they work.

                      In Britain, as in Germany, a great deal of social reform was the product of conservatives – obvious examples being Disraeli and Bismarck. Other critical measures were the product of Liberal governments – Lloyd George being an obvious example.

                      Clearly, a central concern of conservatives was to head off challenges from radicals, and subsequently socialists, and so to try to retain the influence of their own social class. However, one can take reductivism too far.

                      So, for example, the ‘municipal socialism’ pioneered in Birmingham by the screw-manufacturer Joseph Chamberlain – who started as a Liberal and moved towards the Conservatives – was, as Wikipedia puts it, ‘influenced by the strong radical and liberal traditions among Birmingham shoemakers and the long tradition of social action in Chamberlain’s Unitarian church.’ Cultural factors really are critical.

                      As regards the kind of popular movements for emancipation championed by ‘from Mexico’, the record is mixed. The new elites created by the Russian Revolution, for instance, were not exactly more benevolent to Russian peasants than their aristocratic predecessors.

                      The British Labour movement brought no such disasters. However, it has been, and continues to be, remarkably intellectual sterile. The thinking behind its principal constructive achievement, the creation of the welfare state by the 1945 Labour Government, came from the elitist Liberals William Beveridge and John Maynard Keynes.

                      The distinctive contributions of Labour intellectuals – belief in state ownership of and intervention in industry and unqualified support for trade unions – had increasingly malign effects on the British economy, and had produced a state of near-scelerosis by the time Mrs Thatcher became Tory leader in 1975.

                      It was precisely the political and intellectual bankruptcy of Labour, and total failure of the ‘New Left’ intelligentsia of the Seventies to face up to the problems of the British economy, which led to the success of the ‘market fundamentalism’ embraced by Thatcher. After repeated failures to make their brands of socialism attractive to the electorate, erstwhile left-wingers like Tony Blair finally ended by swallowing the same toxic brew whole.

                      Completely absent in the thinking of either Blair or Gordon Brown was any awareness of the kind of pathological forms which self-interest was coming to take in a financial sector increasingly unrestrained alike by regulations and by traditional codes. After all, it was they, who in 2002, knighted Alan Greenspan, in recognition of his ‘contribution to global economic stability.’

                      It was only after the Libor scandal broke that people started reflecting on the cultural differences between figures like Bob Diamond and the Quaker families who created Barclays. Again however there are links to social reform — one can find ‘affordable housing’ built by the trust created by the Quaker grocer Joseph Rowntree all over London.

        1. hunkerdown

          I suppose Triple Canopy and other high-end private security firms are more “efficient” than noblesse oblige in that regard.

      2. Kunst

        “Vous m’obligez.”

        “Oblige” is first-person singular (I). Vous is second-person (you), singular (formal) or plural (formal and familiar).

      3. vlade

        Actually, 10 or so years ago I run into Bill Gates (or at least his double as well as his wife’s double) in Wellington, New Zealand, Starbucks when he was there to watch an All-Black game (his CFO at the time was a Kiwi IIRC). He was dressed in sweatpants and a M$ T-shirt. And either no-one else recognized him or no-one cared.

    2. Alejandro

      “The agencies which can put a stop to this are unwilling to do so at present.”

      One can argue that these “agencies” are not just “unwilling” but complicit. Otherwise, if they “can” why wouldn’t they?

    3. craazyman

      You can’t win Clive. :)

      Humanity is a fallen angel. That’s why.

      You’re right. I remember reading some years ago about the British bankers who’d come over and get their Hamptons summer houses.

      Apparently they were rich upper crust types but they’d be chummy with the locals, the local dogcatcher somehow made an appearance in the story as one of their regular drinking buddies. But the dogcatcher said none of the other Hamptons money would even look at him, unless their dog was loose.

      It was a humorous mental picture — the British aristocrats tipping beers with the dogcatcher and local workmen, all together laughing at the 1st generation money who didn’t know what to do other than be “elite”.

      It wasn’t this way in The Great Gatsby — at Gatsby’s house anyway, although it might have been that way at the Buchanans. That’s one thing that made Gatsby “great”. Anybody was welcome when he threw a party, even Tom Buchanan was welcome, even without Daisey. Gatsby would talk to anybody, with poise and elocution, and make them feel a warmth like they were blessed by some divine intervention. Maybe F. Scott just made it up, but it was pretty good while it lasted.

      1. Nathanael

        F. Scott didn’t make it up. He knew that class of people, remember, and he went to that sort of party.

        He really was describing the difference between two different *attitudes* among the rich — Gatsby’s attitude vs. Buchanan’s.

        It’s not consistently tied to “old money” vs. “new money”. It is a cultural thing which depends on how the rich people were brought up and how they made their money. Buchanan is, notably, specified as the direct descendant of slaveholders, who tend to be exceptionally nasty. Gatsby made his money off bootlegging, which tended to be more “equitable” in attitude.

  2. John Jones

    I was thinking the other day if it was even worth
    investing in the stock market? Can someone do it the
    way Warren Buffett did it with all that value investing stuff and actually get rich? Or is it all a lie?

    1. Clive

      Hi John, no, in my humble opinion you cannot. And yes, it is a lie. Buffet is one of the worst offenders ! Wish I had the time to talk this out long form but hopefully if you keep digging you’ll come across the reality.

      1. John Jones

        Thanks Clive
        If you ever do get the time and want to talk about this in
        long form please let us know if you write anything.

        1. Clive

          The estimable Francine McKenna probably did a better job than I can. Her excellent shredding of Buffet’s embroilment in an insider trading scam by an at-the-time anointed successor was masterful. It’s available at Forbes (if you can avoid the avalanche of click-throughs to get to it):


          How he escaped more widespread censure for that one I’ll never know. Oh, wait a minute… I do know *exactly* how ! #FriendsInAllTheRightPlaces

            1. Nathanael

              The insurance transactions are, on the whole, legal. (Insurance as a whole is a shady operation, of course.) The thing about the insurance transactions is this — and Buffett is very plain about this in his annual reports —

              You don’t get the opportunity to do these insurance transactions unless you’re Buffett.

              In short, now that he’s sufficiently rich, he gets offered free-money transactions. Sweet deal if you can get it. But only the very rich can get it.

            2. Nathanael

              Having followed that at the time, the actually-fraudulent General Re “reinsurance” ops were done by the management prior to Buffett’s purchase of the company.

              The reason Buffett didn’t get hit with charges is that he actively assisted the DOJ in arresting the former management.

              Again, the thing about this is that if you’re in Buffett’s position, you can do this and still profit off the former management’s crimes. Poor people don’t get that opportunity.

              The crazy thing about our culture is that rich people just get free money shoved at them. This seems backwards.

          1. s spade

            Reading the McKenna piece, it seems Buffet did nothing other than deny he had approved a tender for Lubrizol until after Sokol bought the stock. Of course, it looks smelly, but Buffet did nothing illegal and Sokol probably did nothing illegal either, on these facts.

    2. Walter Map

      It’s common knowledge in investor circles that Buffett made his billions on insider trading, as have many others. It’s SOP because it’s difficult to get a conviction because the laws are so weak, for example, insider trading laws do not apply to members of Congress.

      Equity markets are rigged, like the rest of the economy, to enrich the wealthy by ruining everybody else. For small investors it’s about the same as Las Vegas, and for similar reasons.

      1. Banger

        It always strikes me as curious that people don’t see the game is rigged and think these billionaires are just prophets of profits–they aren’t for the most part (some exist of course). They are well connected enough to trade on inside information and have enough political sway to keep regulators at bay. In the U.S. the lapdog press keeps the public in ignorant bliss–though I think that project is fraying at the edges.

        1. s spade

          Buffet started financial life with $250,000 from a collection of friends. He amassed a track record of growth compounded at 39% from 1954 to 1969. Then he closed his partnership and has used Berkshire ever since as his only vehicle. The SEC tried to crush him in 1976 but backed off when it became clear they had no idea what he was doing or why. Certainly up to 1980 his triumphs involved extraordinary intelligence and nothing else. After that I’m not sure.

          Could anyone do this again? Probably not since all earnings growth in large corporations is now looted by executive theft. It’s all done with stock options.

          1. John Jones

            S spade could you clarify what you mean by
            “It’s all done with stock options.”

            Do you mean the looting? I didn’t understand that part.

            1. s spade

              Stock options are a device to permit executives a free ride on increases in the stock price. When the price falls, the options are routinely ‘repriced’ to give the looters a better deal. The volume of options issued by your average SP500 company is enormous. The resulting dilution of existing shareholders prevents earnings growth from ever accruing to those who buy the stock in the market. Thus, their only appreciation comes in the bubble phase which can end at any time for any reason. All it takes is nervousness on the part of those extending credit to hedge funds. Suddenly, all the speculators are compelled to sell at once and nobody is there to buy. This is what happened in 2008. It will happen again, although nobody can predict when.

          2. Nathanael

            It’s worth remembering that Buffett’s triumphs relied on *having $250,000 to start with*. Most people in the US can’t even start there.

            There may be someone working at McDonalds who has the investment skill of a Warren Buffett, but he has *no way to get started*.

            1. Nathanael

              FWIW, I understand Buffett’s current investment methodology (not to be confused with his 1960s investment methodology). It’s quite simple:

              (1) Insurance companies get paid premiums upfront, and only have to pay out years in the future.
              (2) People prefer to buy insurance from insurance companies with huge stockpiles of cash and assets (so that it’s guaranteed that the company will pay out).
              (3) Accordingly, insurance companies with lots of cash and assets can charge extra-high premiums.
              (4) Profit.

              Notice that this is basically a matter of making money off the reputation which he gained because his company had gobs of money. Can you or I do this? No — only a very rich insurance company can do this. The rich get richer.

              Oh, the investment bit:
              (A) Find an already-successful, well-run (usually privately-held) company with dedicated management who love the company and want to keep working for it but want some millions of dollars in cash to play with.
              (B) Buy the company from its management, then collect the income from the company — essentially the previous owners trade a profit stream for a lump sum, generally at way below the profit stream’s actual value.
              (C) Profit!

              This is pretty easy to execute — if you have billions of dollars in cash. Pretty hard if you don’t. The rich get richer.

              1. Nathanael

                Buffett got Goldman Sachs to pay him 12% interest *because he was Warren Buffett*.

                When he wrote the letter to his subordinates saying that Berkshire’s reputation was worth more than any minor crime or fraud they might consider committing — *he actually wasn’t kidding*. That reputation causes people to just *hand him money* — to pay him 12% interest rates without blinking.

    3. Nathanael

      “Can someone do it the way Warren Buffett did it with all that value investing stuff and actually get rich? ”

      Oh, it’s possible but it also requires massive doses of good luck. The skill mostly comes in avoiding the worst investments; actual success requires good luck in addition.

      In addition, remember that all stock market gains are percentages of your starting capital. So if you start with Buffett’s rather large initial wealth and income, you have a chance of becoming as rich as Buffett if you’re very lucky.

      But if you start with a fraction of Buffett’s initial salary, divide Buffet’s wealth by that fraction and that’s as good as you can possibly do — your best possible outcome if you get very lucky is going to be, say, 1/1000 of how well Buffett did. Think about it.

      1. John Jones

        “It’s worth remembering that Buffett’s triumphs relied on *having $250,000 to start with*. Most people in the US can’t even start there.

        There may be someone working at McDonalds who has the investment skill of a Warren Buffett, but he has *no way to get started*.”

        Thats the thing I want to know. Is it really an investment skill this value investing or is it based on myth. And its only a game the rich can play? If it is just luck it doesn’t seem like its true then.

        “It’s worth remembering that you don’t need actual insider information to have more information than most people investing in the stock market.

        How many investors make site visits to factories? *You should.) How many investors research the exact details of the chemical processes involved in a manufacturing company? (You should.) How many investors research the exact legal structures of companies they’re investing in? How many investors do any serious fundamentals research at all?”

        That is another thing. Can a regular investor really do all those things?

        It seems like it is next to impossible for a regular investor to have proper access to company info compared to an insider.

  3. Clive

    And talking about the stone age, I used to be a lending officer, so long ago I think that dinosaurs could be offered as collateral. Anyhow, from time to time I’d get a loan request, a big ticket item from a notionally high-ish net worth individual who had a cashflow requirement.

    Often, they’d be reluctant to put up the family manse as security but because of the jumbo loan requested, the bank would ask for security. What was not unusual was there to be shares in the “family” business. That tag is a bit misleading, sometimes these were well-known enterprises with £100M+ turnovers. It’s just that their shares weren’t publically traded, they were a well established legal mechanism for dividing control of the company and distributing profits according to set rules.

    The interesting thing was in the valuation. The bank would need to be able to determine the value of the shares and apply the correct haircut to take them as collateral. Either the relationship manager in the commercial division of the bank would be called upon to give an opinion on what the overall value of the company in question was “worth” (this was classic relationship management and needed a deep insight into the exact working of the business and the people managing it) or it would go off to finance to do a forensic examination of both the publishes accounts and the internal books. The lending institution could — and definitely would — exert significant leverage to get the low down on the data it needed.

    When the lender’s own money was at stake, this really put the “diligence” into “due diligence”. It was only worth the hassle in the case of a large loan (I recall one borrower needing to purchase a stake in a race horse at short notice) where the borrower needed money in a hurry but not the way you and I might need money — or repay it. Sometimes a fee would be charged, but more often than not, it would be waived to keep a juicy commercial account sweet. But even so, a lot of care had to be taken to make sure that how the collateral shares offered as a security was valued stacked up.

    Compare and contrast that approach with a publically traded stock. The ticker comes round and everyone “knows” the value per share. Except that we don’t get access to internal accounts, we don’t get to know the management, we don’t really understand the underlying business in a lot of cases, we don’t know how susceptible the organisation is to loss of key talent, we don’t know what undocumented external support is being relied on etc. etc. etc.

    It is, to me, a mug’s game.

    1. Banger

      One thing we know for sure is that there are people playing the game who DO know quite a lot of what the rest of us do not know. This kind of information and access to it creates a level of “insiders” who trade on their information and who are vested in the political system and thus avoid prosecution–just sayin’…

      1. Nathanael

        It’s worth remembering that you don’t need actual insider information to have more information than most people investing in the stock market.

        How many investors make site visits to factories? *You should.) How many investors research the exact details of the chemical processes involved in a manufacturing company? (You should.) How many investors research the exact legal structures of companies they’re investing in? How many investors do any serious fundamentals research at all?

  4. Eric L

    “So how did this “the last shall come first” thinking become established? You can blame it all on economists, specifically Harvard Business School’s Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream.”

    Thanks for bringing out this side of it. It’s also worth mentioning however that the ground had been prepared earlier for this misplaced emphasis on shareholders by Milton Friedman’s 1970 paper “The Social Responsibility of Business is to Increase its Profits”. Although he paid brief lip service to other stakeholders in a corporation, Friedman identified the owners with stockholders, and made clear that the primary obligation of a business was to them.

    It was a dreadful paper from an ethical theory perspective and rested on a crude model of corporations and corporate governance, but was very influential even so.

    1. from Mexico

      When are we going to wake up to the fact that folks like Jensen and Friedman are the high priests, the casuists and sophists employed by the lords of capital to preside over the madrasas of money worship like Harvard, MIT and the University of Chicago?

      1. from Mexico

        I don’t think we’ve seen anything like it since the 15th century. We really are in the throes of a severe ontological and epistemological crisis. What does Yves call it, “a disturbance in the force”?
        As William Manchester notes of the 15th century in A World Lit Only By Fire:

        The days when the Church’s critics could be silenced by intimidating naïve peasants, or by putting the torch to defiant apostates, were ending. There were too many of them; they were too resourceful, intelligent, well organized, and powerfully connected, and they were far more strongly entrenched than, say, the infidel host the crusaders had attacked.


        Various chronicles enigmatically note “the beginnings” of universities in scattered medieval communities…. In most cities, academic activity had been confined to…heavy emphasis on animism and Scholasticsm… Both were shadowy disciplines, but there was worse: the divine right of sovereigns, for example; astrology; even alchemy; and, late in the period, Ramism.


        Attendance at Oxford fell from its thirteenth-century peak to as low as a thousand in the fifteenth century. Even academic freedom vanished after the expulsion of John Wyclif, master of Balliol, in 1381. Wyclif had denounced the inordinate arrogance, wealth, and power of the Catholic clergy. Five separate bulls had condemned him, and Oxford lectures since then had been subject to rigorous episcopal control.

      2. Nathanael

        My question is, how did these awful people in the positions where they could write such influential papers, even though the papers were pure garbage from the get-go?

        Who paid for it? How did people like Friedman make it past the disgust of the rest of academia? This history is before my time, and yet too recent to be recorded in history books.

  5. GRP

    Shareholders, not creditors nor employees, are the owners of the coproration. The owners appoint agents, executives, to serve their interests. In fact, for a corporation to even exist it requires shareholders, but neither creditors nor employees. That these shares may have changed hands from the original owners to new ones doesn’t change the purpose for which a corporation has been created. How do the owners of the corporations expect the agents to serve their interests? That depends on the owners.

    Shareholders are residuary claimants to the revenues for sure, but that is because they are the owners and like the owner of any business, must meet all statutory and contractual obligations before laying claims to the remaining revenues, if any.

    Whether there exist any explicit laws binding the executives of a shareholder held corporation to serve specific interests of the shareholders (like maximizing share price in the short run) is immaterial. When any businessperson hires an agent, (s)he expects the agent to serve his/her interests while not breaking any laws and meeting all contractual obligations to both employees, creditors, suppliers etc. If the agents break any laws, the law should punish them. If the agents act immorally/unethically in the view of the owners, the owners should fire them. If the agents act immorally/unethically in the view of the public and the owners don’t fire the agents, the public should shun the business and punish the owners.

    1. Pokey

      It is true that shareholders are the owners of corporations, but “maximizing shareholder value” is a lie, a shibboleth used by management intent on maximizing insider value. Obsession with short term profits has characterized American public corporations at least since the 70’s. At the cost of the long term best interest of the company and its shareholders, management preens at shareholder meetings before rigged votes for more pay, options, etc. for the execs.

      Shareholders outside the in group get the crumbs that fall from the mouths of the pigs.

      1. from Mexico


        “Maximizing shareholder value” is a masterstroke of doublespeak, doublethink and doubletalk. Up is down. Black is white. What “maximizing shareholder value” really means is screwing the pants off of shareholders.

        Note that it came of age at the same time the “ownership society” came of age.

        When the great unwashed became shareholders through their pension and retirement plans, it all of a sudden became fashionable to “maximize shareholder value.”

        It really doesn’t get much more Orwellian than this.

        1. thisson

          I think you overlook the essence of GRP’s comment, which I will paraphrase: this article is an incomplete statement of the law.

          The article states that directors do not have a fiduciary duty to shareholders to maximize shareholder value. Directors do have a fiduciary duty to shareholders. Directors act as the agents and trustees of the shareholders. This is a fiduciary relationship defined by corporate law, meaning that the duty of the director is to put the interests of the shareholders ahead of the interests of the director.

          In contrast, the duties of a director to bondholders is a duty defined not by corporate law but by contract law. It is one of good faith and fair dealing, with both the corporation and its creditors being owed the “benefit of their bargain” (at least in most instances, tabling for now discussion of expectation vs reliance damages and the infamous “hairy hand”). Fiduciary duty goes above and beyond that level. Directors’ fiduciaries include, among other things, the duty of care and loyalty, the duty to be informed, certain duties to minority shareholders and, in certain situations, THE DUTY TO MAXIMIZE SHAREHOLDER VALUE (for example, Revlon duties in the context of a merger).

          The fact that equity has the last financial claim on the assets of a firm during insolvency has nothing to do with the legal duties of a corporate director.

          1. Yves Smith Post author


            First, did you actually read the post? It appears not, because it makes very clear that the agency theory you invoke is a theory made up by academics and does not have a legal foundation.

            Second, directors of public companies are most assuredly NOT trustees. Not even close. “Fiduciary duty” is not all of a muchness, even among fiduciaries, there are varying degrees of responsibility that goes with the role. A trustee is the most stringent level of responsibility, in which the agent puts the principal’s interest ahead of his. It has a very specific meaning under most states’ charitable trust law. That law is not applicable to the directors of for profit entities.

            Even though not for profit boards sometimes call their directors “trustees” because they oversee an endowment, lawyers wince at the use of the term because it might convey the impression that the directors really are trustees under state law.


            Third, the tiny part of your discussion that is accurate proves my point.

            The times in which directors have duties that are specific to shareholders, as opposed to the corporation generally, are quite restricted. Mergers are not day to day events, and the way directors protect shareholders’ interests in the event of a merger is generally well codified (as in they get fairness opinions, etc) and actually not meaningful shareholder protections in practice (for instance, the biggest value destroying deal of all time, the AOL-Time Warner, respected all the proper forms. Ditto BofA’s two step acquisition of Countrywide, which was widely criticized in the media and the analyst community at the time). So even in those realms where the fiction allegedly operates, in practice, shareholder interests are not served. Every academic study of mergers done for the last 25 year has found somewhere between 60% and 77% destroy value, yet we’ve seen no changes in board practices around mergers as a result of this well-known result.

            As I said, go read any guide to the duties of directors of public corporations prepared by an expert (as in a well recognized law firm). They are not framed as duties to shareholders.

            1. Thisson

              You’re conflating different topics here. First of all, I agree that as a practical matter, shareholder value can be and often is destroyed by the conduct of the directors. But that is a separate and distinct discussion from what the legal duties of directors actually are.

              Your coverage of the law is dangerously incomplete, and you’ve got it quite wrong. Directors do have “fiduciary duties” to shareholders. The fiduciary obligation is defined under corporate law (the discussion of charitable trust law is not relevant; I was making an analogy).

              I raised the issue of mergers because, there, courts have explicitly stated that the “Revlon duties” impose a specific obligation to “maximize shareholder value.” This refutes your point that this obligation does not exist, and is “made up by academics,” and now you appear to want to reposition your argument to the effect of “the obligation only exists in a very narrow set of circumstances. With all due respect, you do not know that to be true, because corporate law has left this point ambiguous and there is certainly room for folks like Strine down in Delaware to say that the duty to maximize shareholder value does apply in other contexts. The directors are under a general duty to do what is best for the corporation. In ordinary circumstances, that means for its shareholders, because shareholders are OWNERS and bondholders are LENDERS. Yes, the interests of the bondholders cannot be thwarted through bad faith, but that is a matter of contract law (good faith, fair dealing).

          2. Nathanael

            “The duty of the director is to put the interests of the shareholders ahead of the interests of the director.”

            And yet they violate this duty on a routine basis — for instance, every time they give away money or stock to a crooked CEO — and use rigged corporate elections to get away with it.

          3. Nathanael

            “Directors’ fiduciaries include, among other things, the duty of care and loyalty,”

            I’ve never seen a corporate director for a large corporation exercise that duty. Ever. In 30 years. When will the courts consider enforcing that duty?

    2. Banger

      Corporations are all chartered by a political entity and all live within a system of laws and are responsible to society by a whole series of interrelations as Yves pointed out. At one time corporations existed at the “pleasure” of the state and could be disbanded when they became obnoxious and that is the problem we face today.

      1. EricT

        Isn’t it interesting that a corporation exists due to a charter issued by the government. The government has to respect the constitutional rights of the individual, but the chartered entity of the state does not?

    3. Walter Map

      Shareholders, not creditors nor employees, are the owners of the coproration. The owners appoint agents, executives, to serve their interests.

      Another phony meme. Corruption in corporate governance is pervasive. You weren’t really unaware of that, were you?

      1. GRP

        Pervasive corruption does not invalidate the basic intent. In fact, it is only by referring to the basic intent that something can be termed as corruption.

        Pervasive corruption in corporate governance sets in precisly because no one acts like the owner, someone who likes to retain or enhance the value of the asset owned for indefinite time into future. Everyone involved, executives and shareholders alike, look for short term gains, executives for their compensation and shareholders for share price appreciation and neither care for the longterm value of the asset, the corporation.

    4. Larry Barber

      Shareholders do _not_ own anything except (maybe) a claim on any profits left after all other expenses. If you think owning shares in a company make you an owner, try to use a share of stock to do “owner” things, like search through private corporate records or get access to the executive suites.

      1. Yves Smith Post author


        With all due respect, do you live in an alternative universe? Or do you get all your information about corporate governance from the business press?

        You as a shareholder in a public company most assuredly have no say in who is selected to be on the board (you only vote up or down on a pre-determined slate) and have zero say about management. Even the “say on pay” votes are strictly advisory.

        You can’t even attend the annual shareholders’ meetings if the company is in the middle of controversy any more unless you are a BIG holder. See these examples:

        just got a call from the Bank of America’s shareholder meeting in Charlotte from Richard Eskow, a writer for the Campaign for America’s Future. Richard represents 82,000 shares of investor stock of BoA and yet he was turned away with 40 other shareholders just now and he and the others were asked to leave BoA property. Some shareholders who were turned away were elderly.



        In an unprecedented move today, Wells Fargo CEO John Stumpf denied entry to hundreds of community shareholders. Having been waiting for hours to attend the corporation’s annual shareholder meeting, the community shareholders were denied entry by Wells Fargo in an attempt to avoid answering questions from community members that had planned to attend the meeting to hold the corporation accountable for its destructive business practices that profit from communities’ losses.

        Wells Fargo restricted entry to the community shareholders with barricades, claiming they were filled to capacity while they continued to let in shareholders that were not part of the protest through a side door. Wells Fargo also packed the room with its own employees so as to allow no room for additional shareholders to access the meeting, making inaccurate claims about the meeting room’s capacity.


        1. ex-PFC Chuck

          Those pesky shareholders; having their cake and wanting to eat it too. This leads to the issue of active vs. passive ownership, as discussed by Karen Ho in the afore-mentioned Liquidated (http://amzn.to/UAXuNz):

          “Whereas most economists and financiers simply took for granted that managers effectively stole from shareholders and ignored any possibility that new corporate structures transform traditional understandings of private property, [Adolph] Berle and {Gardiner] Means [writing in The Modern Corporation and Private Property, 1933 &1991] saw the importance of interrogating the core of neoclassical thought to question ‘the ends for which the modern corporation can be or will be run,’ as the very ‘nature of the prophet-seeking enterprise’ had changed. Since the historical ‘attributes’ of ownership – investment in, and management of, enterprise – ‘no longer attached to the same individual’ but two separate groups as ‘the stockholder has surrendered control over his wealth,’ they argued, it is crucial to question whether the ‘traditional logic of property’ still applies, as the very relation of entitlement the shareholder-owner had to hit ‘his’ wealth – that is the corporation – has ‘essentially changed.’
          “They [the Berle and Means] caution the reader that Adam Smith wrote during a time when businesses were run by owners of small enterprises with only a few workers and apprentices. Because of the development of the modern corporation and the stock market, there existed different kinds and notions of property, which could not be conflated under the ‘old’ idea of ‘private property’. The business community needed to restructure its categories because ‘we must have in mind primarily the very units which seem to Adam Smith not to fit into the principles which he was laying down for the conduct of economic activity’. Proponents of shareholder value, to the contrary, use Smith’s repudiation of the Corporation to demand the opposite: that the modern corporation be retrofitted according to outdated economic laws and precepts.
          “Berle and Means proposed a different way of thinking about private property. Any understanding of the modern economy, ‘insofar as it deals with the quasi-public corporation, must come to terms with the two forms of property, active and passive, which for the most part lie in different hands’. They drew on a distinction between ‘passive property’ or stocks and bonds, which it ‘xdgives its possessors and interest in and enterprise,’ but ‘practically no control over it’ and ‘no responsibility’; and ‘active property,’ which they defined as entities controlled by ‘individuals who, almost invariably, have only minor interest ownership interest in it’. Although this notion of active and passive property is not a complete rejection of Smith’s version of private property, it is a start. They warned against the conflation of ‘token’ passive property and active property (precisely what the shareholder revolution achieved!) and questioned whether active property should ever be ‘possessed’ and ‘looked upon as private property’ in the neoclassical sense.” P 191-193

          Executives being something less than conscientious in managing corporations in the interest of its absentee owners is not exactly new in American business history. It was present at the creation, as documented by Richard White in his revisionist history of the first transcontinental railroads, Railroaded: The Transcontinental’s and the Making of Modern America (http://amzn.to/1b81xrj):

          “In his unpublished memoir, William Mahl wrote of C.E. Bretherton’s visit to Huntington sometime in the late 1880s. Bretherton was the representative of the English stockholders of the Central Pacific, who had watched their investment decline precipitously in value. Bretherton talked and Mahl ‘listened with much interest to a point of view of our people’s affairs and practices held over there [i.e., in Great Britain] and complaints about its shortcomings.’ The main complaint was that the affairs of the Associates [Huntington, Crocker, Stanford, et al] were arranged so that the Pacific improvement company, the Associates insider construction and finance company, ‘took the cream and [left] only the skim milk for the railroads; also that the properties were not managed as corporations, but at the will and pleasure of the individuals who filled certain positions.’ . . Bretherton cited as an example ‘Mr. Huntington’s office at Mills building, 23, Broad Street.’ The names on the doors of the various offices more only the name of the occupant, none of their corporate affiliation or physician. Mahl – The designer of forms, the standardizer of your stationary, the skilled auditor an accountant – might have been expected to bridle at such a description. Instead, he accepted it is true, but he argued that it was all for the best. What Bretherton failed to understand, Mahl insisted, was that all the officials in the office ‘had in mind solely the interests of Mr. Huntington is an individual and affairs in which he was concerned, and that in all our acts, we always had in mind individual money for which we had a higher sense of responsibility them could be had for D-individualized money, that is money which did not belong to any particular individual and towards which our sense of responsibility would be greatly diminished.’ This did not convince Bretherton, whose clients had good reason to think of Huntington as the Lisbon earthquake of American finance.” p 266-267

          1. Thisson

            Corporations frequently do illegal things. The fact that they may deny shareholders their legal rights does not mean that those rights dont exist, nor that they cannot be enforced in a court of law. For example, as a shareholder, you DO have the right to inspect the books and records of a corporation. If the corporation will not let you do so, you can sue and compel them to do so. Does GRP live in an “alternate universe”? Perhaps — if that is what you call the world as a lawyer views it. (Forgive me for inferring that he is a lawyer, but this is how most lawyers in the business world do see things as it is said: “the law sharpens the mind by narrowing it.”).

            1. Yves Smith Post author

              Please provide me a citation of a single case where a shareholder has brought that sort of suit against a Fortune 500 company and prevailed.

              The precedents I can find indicate that courts are not sympathetic even when the shareholders (a GROUP, not individuals) have cause.


              It appears the most shareholders can demand is to see specific documents, and those ONLY DIRECTLY related to “good faith” inquiries. The shareholder much provide “specific and supported, credible allegations of mismanagment.”

              You most assuredly can’t view books and records because you feel like it. I as Morgan Stanley could otherwise buy 100 shares of Goldman and demand to see its detailed records, which would provide me with sensitive competitive information.

              1. Thisson


                Two that I am familiar with are (1) New York State Common Retirement Fund vs. Qualcomm (A Delaware case concerning the shareholders’ demand to know about the political contributions made by the Company); (2) Danziger vs. Luse, an Ohio case concerning the books and records of Croghan Bancshares’ subsidiary Croghan Colonial Bank.

                Section 220 of Delaware’s corporate law provides shareholders with rights to inspect corporate books and records. I am less familiar with the corporate law of other states but can look into it the matter is of further interest.

                Happy to help,

        2. GRP

          I know how it works in practice. But that is not to say how it should work.

          Should the elected politicians work for the public (shareholders) or the government employees and contractors? Sure few voters have a say in what the government does, but does that make it alright?

        3. Nathanael

          Wells and BoA were actually breaking the law, of course — they’re legally required to let shareholders into the annual meeting to vote their shares.

          Wells and BoA got away with it, of course, as they usually do when they break the law. They should be busted under RICO for their long strings of crimes.

          Most corporate boards are much better at skirting the law, violating the spirit of it but not doing anything you can nail them on.

  6. vlade

    Nothing new here, move along.
    Just joking. This is actually something that bears repeating over and over and over to the ad-nauseam point.
    Publicly traded equity is just plain wrong, and will always be wrong. There just isn’t good enough mechanism to deal with it.
    The “best” publicly traded equity can be, paradoxically, a second class shares – i.e. residual claims with little to no vote attached (where the original owner keeps the decision making rights). At least, there it’s clear that there are vested interests and who they are, and what they do. So you still have a strong owner, but have some upside from the leverage that equity provides.

    1. Nathanael

      Actually, this is true. The best companies to invest in in recent years have often been companies with “A-B” stock structures, where the insiders control the votes and the A shares.

  7. s spade

    It isn’t shareholder value that is being maximized, but rather executive loot. Directors are just statutory enablers. Their gig is providing cover for CEO demands. That’s it.

  8. ex-PFC Chuck

    Great post, Yves. The anthropologist Karen Ho addresses this issue extensively in her book Liquidated: An Ethnography of Wall Street (http://amzn.to/UAXuNz). She shows how the apotheosizing of shareholder value mixed with the corporate cultures of the investment banks and neoclassical economic ideology to form the destructive and counterproductive witch’s brew we’re living with today. From the book:

    “The modern corporation could have revolutionized the dominant economic and business ideologies of the time. [David] Schrader [writing in The Corporation as Anomaly, 1993] describes it as ‘a genuine collective entity that features a very conscious “visible hand” type of coordination of economic activity,’ and argues that ‘a recognition of the collective and consciously coordinating character of modern business must sooner or later force a modification in economic theory.’ What occurred instead was itself revolutionary, for economic theorists and advocates of shareholder value were able to adapt the modern corporation into an ideology that had been ‘designed to talk about individual agents’. In the neoclassical imagination, the goal of all economic enterprises is to be able to narrowly pinpoint and quantify ‘ownership’ of private property, yet the very structures of modern corporations – given their negotiations of multiple constituencies from workers to managers to community – resisted this framework. Faced with this stark conflict of values and organizational form, a choice had to be made – whether to reject neoclassical values is incapable of explaining this new socioeconomic phenomenon, or rather to force these values onto the corporation in an attempt to change the very structure into one governed by the terms of neoclassicism. Instead of abandoning the ‘laws discovered by previous generations of economics therorists,’ which ‘failed to be operative in a world in which a significant number of economic agents were corporate in nature,’ advocates of neoclassical proprietorship used the very theory which predicted the demise of managerial corporations to explain the success of (their version of) the corporation [Schrader]. They extended Adam Smith’s legacy by forging his stamp of approval on a form of organization he believed was destined to fail. This silent revolution for shareholder value came at a great price, sowing the seeds for the dismantling of the corporation in the name of the shareholder. Although this translation, finally accomplished in the late twentieth century, was nominally in favor of the individualized masses of shareholders, ultimately it benefited Wall Street dealmakers and advisors, and, to some extent large-scale investors in the stock market. This discursive and practical reorganization laid the foundations for a form of social violence tantmount to the institutional erasure of interest of all groups concerned beside shareholders – or rather, their proxies.” p 175-176

    1. from Mexico

      ex-PFC Chuck quotes:

      This silent revolution for shareholder value came at a great price, sowing the seeds for the dismantling of the corporation in the name of the shareholder. Although this translation, finally accomplished in the late twentieth century, was nominally in favor of the individualized masses of shareholders, ultimately it benefited Wall Street dealmakers and advisors, and, to some extent large-scale investors in the stock market.


    2. David Habakkuk

      ex-PFC Chuck,

      That all makes excellent sense: rather than beginning by attempting to understand how institutions actually operate, and then considering questions of how they might better operate from the starting point of such an understanding, Western economists started with a view of how institutions should operate.

      The failure of academic economists to renew their intellectual frameworks meant that they were purveying a doctrine which legitimated a wide range of forms of essentially predatory behaviour, creating the pathological institutions which we see all around us. To see economists as simply apologists for and instruments of rapacious elites is however a major error: ideology has its own independent causative role.

      I had some direct experience of intellectual limitations of free-market economists in the Eighties, when the British broadcasting industry was ‘reformed’. At the start of the decade, there were two BBC channels, and one ‘independent’ channel, ITV, organised on the basis of regional franchises. The creation of Channel 4, which commissioned programmes from outside, the replacement of the system of allocating franchises for ITV by one of auctions, and the restructuring of the BBC under John – now Lord – Birt – were all based on ideas deriving from free market economics.

      Sometimes the results were benign, sometimes catastrophic, frequently mixed. What they had in common was that the outcomes had little relation to those anticipated. It became clear to me that academic economists – and their bastard offspring – management consultants – simply lacked the intellectual tools to understand how institutions, and also markets, actually worked. What was required was a dialogue with other ways of understanding human action – including not simply psychology, but also, critically, anthropology. With some salient exceptions, this has never happened.

      But the people involved were not necessarily self-interested or malign. The architects of the catastrophic auction franchise system – Alan Peacock and Sam Brittan – were both thoroughly decent people. And in part they were animated by a justified reaction against the foolish interventionist policies, and absurd restrictive practices, which characterised British society in the Seventies. That said, they failed to notice obvious considerations which were clear to anyone remotely familiar with the industry: such as the absolute impossibility of making rational predictions of an advertising revenue stream over a ten-year period.

  9. Moneta

    The pension system needs to get completely overhauled.

    Funding pensions for the masses is a losing proposition.
    If a growing amount of your paycheck is going to fund your pension, then you are spending less and shrinking the economy which needs to grow to support all the invested dollars looking for rent. At today’s rates, a couple in their 40s needs to save more than 20K per year to be able to retire.

    This increased savings means a growing amount slushing around in capital markets looking for good investment returns. This means a growing business for insatiable investment bankers.

    Pensions should be pay-as-you go and those wanting extra can save on their own. This would starve a good percentage of Wall Street. If you only knew the number of pensions investing in all kinds of esoteric alternatives to try and fund underfunded pensions. These plans are feeding the beast and will lead to disaster.

    If you want to change things, get informed on the mathematics of pension plans. These plans thrive on the maximizing of shareholder value ethos.

    Think about it. Public servants with guaranteed DB plans with 60% invested in equities are asking for profit maximization. Their plans are directly contributing to the squeeze in wages on the private side. These plans look for profit growth in all kinds of ways: M&A, leverage, outsourcing, restructurings, etc.

    As long as these underfunded DB plans stay live, they will strangle the middle class with no pension and fuel the banking sector.

  10. Banger

    Well said!

    This evolution of the “idea” of a corporation has evolved through the situations you describe but also clearly show the cultural changes that have occurred in our world.

    For good or ill, the U.S. went through a period of collective consciousness–the shared disaster of the Depression, the New Deal, fireside chats, WWII, the Cold War, the trauma of the 60s were all things that were clearly etched in the public consciousness despite the usual private concerns. And despite the craziness were were moving somewhere together and becoming a better place to live, or so we thought. Then came the 1970s cocaine replaced LSD–enuff said.

    So the point here is that we live in a culture of selfishness and believe that life is about feeding me–what happens to you is your problem–we are not connected. The cable TV, the internet and so on made us separate nations–and we see the result. Why shouldn’t Wall Street operators game the system? Why shouldn’t CEOs or shareholders demand quick and easy and fast and screw the public and screw the workers. You hire armies of lawyers and lobbyists to write laws that only the army of lawyers understand and viola–paradise for the rich. One way or the other, regardless of what you think corporations ought to do, real people gain by the arrangements and ideologies that dominate that world.

    My view of the elites starts with Christopher Lasch’s The Revolt of the Elites. At one time the elites felt at least some responsibility for the world they lived in, for the people they interacted with everyday because their world was not so segregated by class. Today the elites are stateless–they really don’t care. Stockholders tend to be in that class and most of them don’t care–other than the pension funds and they’re run by operators who look after their own interests.

    This movement has trickled down in society and we are witnessing the slow-motion disintegration of civil society and there is nothing stopping its further movement other than inertia which is, at present, our only ally.

  11. diptherio

    I had a job interview with a national lefty organizing group about 18 months ago. One of their campaigns was to implement the “Triple bottom line,” requiring corporations to consider social and environmental concerns as well as “shareholder value.” I told the organizers that the whole “maximizing shareholder value” meme was relatively recent and that corporations are supposed to have a “triple bottom line” already. These super-sophisticated progressive organizers were rather incredulous, and obviously were under the impression (as most are, in our anhistorical culture) that maximizing shareholder value is the one and only legal requirement for corporate execs and boards.

    This same group was getting ready to stage some type of protest action at the yearly Wells Fargo shareholder meeting. Their org. apparently had stock in Wells or was representing people who did. Their demand was that Wells treat people in foreclosure nicer…I told them that Stampf is a criminal and that if he isn’t held accountable, Wells ain’t gonna change. Again with the incredulity…

    The problem that I’m trying to get at here is that even supposedly-sophisticated political operatives on “our” side have swallowed the corporatist propaganda hook, line and sinker. So when progressives attempt to argue their case, they are already handicapped by allowing the corporatist frame of the debate to go unchallenged. How can we expect to be successful if we start the debate from where the corporatists want us to start it, blindly accepting their deeply-flawed assumptions (i.e. increasing stock price is the CEO’s main job; principals at our major corps are not criminals)? Answer: we can’t.

    Thanks for bringing some much needed light to this topic.

    Repeat after me: “Equity is a residual claim!” (I’m gonna get that tattooed on my neck, it’s that important…)

    1. susan the other

      Makes me remember Paul Harvey – didn’t he used to do a segment called “What’s in a Name?” They should pass a law, say a clarity law, that does not refer to equities as stocks, but as residuals. The Residual Claim Market.

      1. J Sterling

        I don’t think it’s necessary to change the name of shares to pander to people who’ve clearly lost track of who they are as shareholders. They think they’re one of the creditors, and that it’s unfair they should be in back of the line behind the “other” creditors.

        I want to say to them: when the company has to pay its debts, you get what’s left over after all the debts are paid, because you’re not one of the creditors, you’re the debtor.

  12. Moneta

    There are 2 separate aspects to socialism:
    -Social ownership of the means of production
    -Fair distribution of profits on these means of production.

    When the distribution of profits on social assets is skewed, is there a name for that particular type of socialism?

    We can look at capitalism the same way:
    -Private ownership of assets
    -Private ownership of profits.

    When there are a large number of small businesses (baker, butcher, barber, etc.) and they all get a share of the profits, it can resemble socialism with a fair distribution of profits.

    When you get consolidation and large TBTF privately held companies which do not distribute profits throughout the general population, then you get a second type of capitalism which is just as bad as screwed up socialism.

    If you want efficiencies thanks to economies of scale, then you have to embrace nationalization of the means of production because I don’t know many private investors who will want to distribute his/her profits with everyone.

    You can’t have your cake and eat it too. I just don’t see how you can have large efficient well-managed privately owned firms with profits distributed fairly across the population.

    Unless we get nationalization of assets and profits, I just don’t see how the middle class will thrive.

    1. Banger

      It is the dynamic growth of capitalism that enabled the creation of the unusual growth of a large middle class in the industrialized world. The capitalists didn’t necessarily want that result but it turned out to aid them in the end so they could expand even further than many of them thought possible by creating perpetually rising demand through means fair and foul. We are now well past the point of diminishing returns and need a new approach.

  13. Dave

    Another fine read. I have a corollary theory I’m too ignorant to hypothesis, to wit: Early investment mechanics dictated a long term view of wealth creation. Thus, “time is money” was a literal phrase meaning value appreciated over time. Ten, fifteen, thirty year horizons were the norm.

    Many advances in communication, regulation, investor expectations, coagulation of wealth aggregation and the very composition of what constitutes an “investor”….have profoundly changed this. Very little of the total money moving around is individual investors is it not? Seems to me it’s all managed funds of some sort or another all plying hide the willy in short term bets. Thus, “time is money” is contextualized in terms of fractions of a second. Investors are engaged in a purely mercenary arbitrage where they don’t give a farthing about true performance or fundamentals or growth. Bet on both sides of a movement and bail when you’ve hit a range of optimization.

    This paradigm serves no interest well and to chain “management” to the interests of these groups is a recipe for disaster.

    I might be mad as a hatter, but I would love to see more on this idea.

  14. Klassy!

    Speaking as a less sophisticated person on such matters (and travelling in less sophisticated circles) I’m going to point out that I realized, when talking to an acquaintance, that for them “maximizing shareholder value” meant “sell the most stuff”, so maybe we need to stamp out this idea.
    I’m sure there are all sorts of things wrong with that sentence construction but I hope the idea gets through.

  15. two beers

    This dovetails nicely with the fallacy now widely-propagated by power-crazed heads of the executive branch that the primary responsiblity of the President of the United States is to protect the citizens of the United States.

    Fans of the Constitution know that there is no Constitional requirement for POTUS to protect then citizens of the US. The President’s primary responsibility according to the oath of office is to defend the Constitution from enemies, foreign and domestic.

    Of course, the requirement to support and defend the Consitution gets in the way of duplicitious shredders of that now depre3cated document.

  16. Hugh

    It is a propaganda line of kleptocrats that corporations exist to maximize profits/shareholder value. The truth is that the economy is there to serve the needs and wants of society. Corporations are sanctioned within this context, that is they may exist as long as they serve society, in other words, us.

    In a kleptocracy, the rich and corporations seek to destroy the connection between wealth and social purpose because this allows for socially destructive concentrations of wealth.

    1. Thisson

      The kinds of corporations you are describing that “serve the needs and wants of society” are non-profit and municipal corporations.

      The corporations described in this article are those that are funded by investors. Corporations that do not seek to maximize profit and shareholder value will never get funded by investors, as no investor will ever give capital to an enterprise without the expectation of a return on the capital put at risk in the enterprise.

      1. Yves Smith Post author

        The most important sources of funding for public companies are:

        1. Retained earnings

        2. Debt

        As I am sure you know, companies have in fact been buying stock rather than issuing it. The corporate sector has been a net saver since 2003 and is sitting on a massive cash stockpile by virtue of issuing bonds at the recent super low interest rates. The idea that any current shareholder actually provided funds used for general corporate purposes would be an extremely rare and exceptional case (they would have had to have bought shares in an IPO or primary stock offering and still own those shares). Even before public companies quit acting as capitalists and have gone into a stealth liquidation mode, the overwhelming majority of stock trading was in the secondary market, meaning it has nada to do with corporate funding.

        Even in IPOs, a significant portion of the cash goes to buy out selling shareholders, not to provide money to fund corporate activities.

        For instance, Twitter’s main reasons for its IPO have squat to do with funding operations (although it has a laundry list later that includes some possible uses):

        The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders.

        And public markets similarly are not a meaningful source of funding for new ventures. Only ~1% of new ventures are funded by VCs who look for an IPO as one of the main exits. Even of the fastest growing, most successful companies, the Inc 500, only about 1/4 were VC funded. And many of those were very late stage (like Cisco) taking in VCs to get a valuation and a prestigious group in to allow for a bigger, splashier, higher priced IPO. So the role of the VC and the IPO even for some of the VC “funded” Inc 500 companies was not an important element of their success.

        1. Thisson

          What point are you trying to make here? Corporations do not get to the stages you are referring to (IPO, Public Company, Share repurchase programs, etc.) unless entrepreneurs first identify an opportunity to make a profit and establish a start-up venture. Thus the most “important” raising capital is the initial raising of capital, for if that does not happen, none of the other things (IPOs etc) follow.

          Whether we view them as good corporate citizens or not, Apple, Google, Facebook, and Twitter were all founded in order to win profits for their founders.

        2. Nathanael

          I figured out about 10 years ago that the main companies worth investing in as an individual, arms-length investor were capital-intensive companies (heavy manufacturers, railroads, you know, that sort of thing).

          Why? Because capital-intensive companies actually need to issue stock early in order to expand. They need to cut the “average stockholder” in on the profits.

          Non-capital-intensive companies only have IPOs when the insiders are trying to sell OUT of the business.

          But capital-intensive companies still have a reason to have IPOs even though the insiders would love to own all the stock — the insiders just can’t raise enough capital without the IPO.

          1. Nathanael

            If you want a recent example of a capital-intensive company which had an IPO in order to raise working capital (rather than in order to cash out), look no further than Tesla Motors.

            I’ve been watching for other such examples; they are few and far between.

      2. Hugh

        Any corporation, profit or non-profit, that does not serve the interests of society, or as has become the modern paradigm, actively works against them, should not exist. We do not exist to service corporations. They exist to serve us. If they do not, they are no better than thieves and pirates operating among us, and should be treated accordingly.

  17. washunate

    Fantastic piece about governance.

    The angle I come from that’s a bit different, though, is I don’t follow the link from the problems in corporate governance to the concept of maximizing shareholder value. Of course managers who are looting organizations are going to claim that they’re doing it for the shareholders. That doesn’t mean they’re actually doing it.

    Plus, value maximization doesn’t explain the problem because our biggest governance issues are at organizations that don’t have shareholders. Concentration of wealth and power is fundamentally a political problem.

  18. Xelcho

    I feel the call of Bill Black in this article. In order to cloak all of their malfeasance, ineptitude or simply over-hype CEOs usually need to employ some help in the fraud, the CFO, auditors and outside accounts at least. Seeing as these players can all be bought, one would think that this is the Achilles’s heal of the scam.

  19. Thisson

    It also might be relevant to the discussion to note that in some instances, such as with GM, the rule of priority of claims to the assets of the corporation has not been followed, and holders of equity received priority over the assets of the firm above those of holders of debt.

    1. Yves Smith Post author

      Not germane. That was the outcome of a negotiated process under the supervision of a judge, and not a board decision.

      Bankruptcy does not change the general obligation of a director, which is to the CORPORATION, not shareholders in particular. Do you see any mention of shareholders as a special constituency that gets preferential treatment in the eyes of the board?

      A debtor’s board of directors is responsible for making the major decisions in a Chapter 11 case. These decisions, which must be consistent with the goal of preserving the debtor as a going concern (if possible) and maximizing value of the debtor’s estates, are subject to bankruptcy court approval. A board’s adherence to non-bankruptcy corporate governance standards will insulate its decisions from being second-guessed by the bankruptcy court.

      It is widely known that members of a board of directors have fiduciary duties. Specifically, directors have a duty of care and a duty of loyalty. The duty of care requires that directors 1) take informed actions after considering all reasonably available material information and 2) exercise the care that a reasonably prudent person would exercise under similar circumstances. The duty of loyalty requires that directors act in good faith and in the reasonable belief that the action taken is in the best interests of the corporation and on the basis of independent and disinterested judgment. If these duties are fulfilled, decisions made by directors generally will be protected by the “business judgment rule” — a judicially created presumption that in making a business decision, a director of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company — and , therefore, approved by the bankruptcy court.


      The fiduciary duties are and remain a general duty of loyalty and care TO THE CORPORATION, not shareholders in particular.

      1. thisson


        Bankruptcy law and corporate law are two different things. I think we can agree that under both sets of laws, the duty of a director runs to the corporation. However, a director has a fiduciary duty to shareholders and not to debtholders. Instead, the obligations owed to debtholders are defined by contract law and by the terms of the indenture agreement.

        “In general, the officers and directors of a company DO NOT owe duties to bondholders, such as the duty of care, loyalty, and good faith that they may owe to the company’s shareholders.” This is a direct quote from page 3 of a Hunton and Williams client alert. (http://www.hunton.com/files/News/ead127b8-1763-4ac8-a633-05cf3e162302/Presentation/NewsAttachment/505bb99d-f940-4446-b4db-f2da23077cd3/dealing_with_bondholders_in_troubled_times.pdf).

        As the Alert explains, these duties shift and expand in the context of bankruptcy. That is to say, the duty of a director to debtholders outside the “zone of insolvency” is one of contractual obligations, not fiduciary obligations.

  20. peace

    Excellent post Yves. You mention that recently you have been participating in academic conferences. Have you noticed that ego, fame and status rule there as they do most other places. Appearances, identity and style trump substance, logic and facts. Jensen’s arguments can be torn apart by you from the outside, but inside academia your impugning Jensen the giant is called irreverence or just sour grapes. Keep at it and you must be finding similarly minded academics.

    Regarding cabals versus a socially constructed house of cards: With all due respect to Mexico’s intelligence, earnestness and most importantly his irreverence to any person, group, theory or norm – I think Yves realizes that there is no there there holding our house(s) of cards together. Systems and institutions, as well as theories and paradigms are social constructs that can be deconstructed or just plain old torn apart with relevant logic or with well-formed rhetorical arguments. Self-interest may be the glue holding some things together, but I do not believe as Mexico does that there is a cemented cabal or a strongly held set of values that cannot be reformed with effort by people like you and us. Unless the value Mexico believes holds it together is deceit and guile – but that seems like the weakest glue incapable of holding any group together.

    It is not all smoke and mirrors, but our efforts as civically engaged individuals is to create societal structures in our own images that match our own values. But it is a dynamic and inherently flawed as are the dynamic and flawed humans who create societies. We can be frustrated and indignant if that motivates us, but we can also be calm but persistent. The important thing is to attempt to play a role in creating an honest system.

    Honesty, truth and the attendant fairness and justice that truth implies seem to be the guiding values that could underlie any well-constructed system – a system that is admittedly temporary and dynamic due to being socially constructed. Temporary yes, but the best we can imagine compared to “all those other forms that have been tried from time to time.”

    Thank you Yves and Mexico for being earnest and honest. Cheers.

    1. Nathanael

      “I do not believe as Mexico does that there is a cemented cabal or a strongly held set of values that cannot be reformed with effort by people like you and us. Unless the value Mexico believes holds it together is deceit and guile – but that seems like the weakest glue incapable of holding any group together.”

      Veblen would say that the value which holds the current system together *IS* deceit and guile. The leisure class which he describes thrives on “getting one over” on the other guy — that is their sport and their joy.

      I agree that that is a weak glue to hold anything together and that it will be replaced by a different value system pretty darn quick.

  21. peace

    Schooled the expert: “Equity is a residual claim.” You are irreverent but polite and seemingly restrained, thank you for being considerate and polite (local) while attempting to reform our economic system (global). The local part is important because the means should not justify the ends; being mean-spirited would seem to me to result in building a house of bricks using odious, harmful bricks.

    Shareholder and Stakeholder theories: I usually discuss stakeholder theory more often because it includes and empowers a broader set of individuals and groups – to whom boards and CEOs should monitor and be responsible to. I am not sure boards have a direct fiduciary duty towards outside groups but a long-term perspective for the firm would include community stakeholders writ large.

  22. Douglas Levene (@DouglasLevene)

    What the author seems to be focusing on is the business judgment rule. This rule says that courts will not second guess directors’ business judgment. It is based on the relative functional incompetence of courts to make business decisions. However, this does not mean that directors are free to do whatever they want. What it means is that although the directors have a fiduciary duty to the residual interest holders to maximize that interest, the courts will give directors a great deal of leeway in deciding how to do that.

    A good case to illustrate this is Ebay v. Newmark, Civ. Action # 3705-CC, slip op. at 57-58 (Del Ch. September 9, 2010), where the Chancellor said, “When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests–be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture–ultimately promote stockholder value.” In that case, the court struck down a poison pill that was intended to protect craiglists’ “culture” because, inter alia, the defendants failed to prove a sufficient connection between that culture “and the promotion of shareholder value.” Id. at 59.

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