How the “Maximize Shareholder Value” Myth Weakens Companies and Economic Systems

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Yves here. We’ve written from time to time that the notion that companies exist to maximize shareholder value was made up by Milton Friedman in 1970 in an intellectually incoherent New York Times op ed. It started to get traction in the 1980s as the leveraged buyout boom made people like Henry Kravis extremely rich and those who wanted in on the act were in need of intellectual air cover.

One minor quibble with this piece: Lynn Stout makes it sound as if the new “maximize shareholder value” has become a duty. If you read any guide for board members, you won’t see it listed among the things they have to worry about. It is more accurate to say that it has become so widely accepted from the standpoint of business practice that CEOs have succeeded in institutionalizing it. It’s considered to be good practice to have share-price linked pay schemes even the author of the theory that executives should be paid like entrepreneurs, Harvard Business School’s Michael Jensen, has repudiated his earlier work. Similarly, compliant compensation consultants and boards regularly find ways to justify paying CEOs for non-performance (making excuses for moving the goalposts) and overpaying for what performance there arguably was (when high CEO pay is negatively correlated with performance). In other words, the “maximize shareholder value” regime has served as an excuse for greatly increasing the level of executive pay relative to average worker compensation, often with destructive results.

An interview by David Sloan Wilson, SUNY Distinguished Professor of Biology and Anthropology at Binghamton University and Arne Næss Chair in Global Justice and the Environment at the University of Oslo. Twitter: @David_S_Wilson. Originally published at Evonomics

A bedrock assumption of economics is that firms become well adapted by competing against each other. If so, then consider a study that I reported upon earlier, which monitored the survival of 136 firms starting from the time they initiated their public offering on the US Stock Market. Five years later, the survivors—by a wide margin—were the firms that did best by their employees.

If only the fittest firms survive, then doing well by employees would have become the prevailing business practice a long time ago. That hasn’t happened, so something is wrong with the simple idea that best business practices evolve by between-firm selection. That “something” is multilevel selection, which is well known to evolutionary biologists and needs to become better known among economists and the business community.

Multilevel selection theory is based on the fact that competition can take place at all levels of a multi-tier hierarchy of units—not only among firms, but also among individuals and subunits within firms. The practices that evolve (culturally in addition to genetically) by lower-level selection are often cancerous for the welfare of the higher-level unit. By the same token, if selection did operate exclusively at the level of firms, then the outcome would often be cancerous for the multi-firm economy. When it comes to the cancerous effects of lower-level selection, there is no invisible hand to save the day.

The kind of firm selection imagined by economists, along with the invisible hand assumption that lower-level selection is robustly beneficial for the higher-level common good, would be called “naïve group selectionism” by evolutionary biologists. Its biological counterpart was roundly criticized during the 1960’s and has had a half century to mature. Modern multilevel selection theory is not naïve and has much to teach the economics profession and business community.

That is the topic of my interview with Lynn Stout, who knows a thing or two about firms. She is Distinguished Professor of Corporate and Business Law at the Cornell Law School and author of Cultivating Conscience: How Good Laws Make Good People and The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.

Lynn and I decided to conduct this interview by email after a pleasant get-together over drinks and a light meal at Ithaca’s Agave restaurant—highly recommended!

DSW: Hello, Lynn, and welcome to, which has already featured your work.

LS: Thank you for inviting me to have a conversation. I think the evolutionary approach offers a lot of insights into the workings of corporations.

DSW: Let me begin by making sure that I haven’t constructed a straw man. Am I correct that between-firm selection is a bedrock assumption of economics? I have in mind Milton Freeman’s classic 1953 essay in which he invokes between-firm selection to explain why people behave as if the assumptions of neoclassical economics are true (go here for more).

LS: It’s a pretty fair claim. Although a lot of people never make the assumption explicit, the bedrock of many debates in corporate governance today is the often unspoken-belief that corporations have to maximize profits and “shareholder value” in order to survive, and the companies that sometimes sacrifice these goals in order to take care of their employees, suppliers, customers or communities are at a disadvantage and will be selected out.

DSW: Right! From your own perspective, why are these beliefs a “myth” as you put it in the title of your most recent book?

LS: Corporations are complex systems that bring together intellectual capital, physical capital, the human capital of employees and executives, and financial capital from equity and debt investors. These different elements work together over time to produce a number of important social benefits, including not only dividends and share price appreciation for stockholders, but also interest payments to bondholders, salaries for employees and executives, useful goods and services for consumers, tax revenues for taxing governments, and technological innovations for future generations. The shareholding system (that is, the system within the corporation by which shareholders contribute financial capital on the rare occasions when companies issue stock) is only one of the important subsystems that corporations need to function. Unfortunately, the modern cult of “shareholder value” privileges the interests of the shareholding subsystem over the interests of the corporate entity as a whole. The result has been an obsessive focus on raising share price in many public companies that may be threatening their ability to survive. If you look back at the last quarter-century, with the rise shareholder value ideology –now hardwired into a number of federal securities regulations and tax code rules –you will also see declining numbers of public companies, dramatically reduced corporate life expectancy, and reduced long-term returns for shareholders themselves.

DSW: OK, that’s a cancerous social process if ever there was one! Why isn’t it easily diagnosed as life threatening for the body politic? The power of narrative to trump reality and elites benefitting at the expense of the common good are two reasons that spring to mind, but I am eager to hear your diagnosis.

LS: You’ve identified the combination of factors that has made shareholder value thinking so influential. Talking about corporations as if they are owned by shareholders is a very simple, reductionist story that makes life easy for professors and journalists who are either unaware of, or don’t want to go into, the essential but messy legal details of what corporate legal personality really means. And unfortunately, this reductionist narrative has proven extremely useful for short-term investors who use it as a basis for claiming managers should “unlock shareholder value.” They’ve even been able to push through federal rule changes, like tax code rules that pressure companies into tying executive pay to shareholder returns, that drive companies to focus even more on short term results for shareholders.

DSW: Biology offers the example of cancer, which eats multi-cellular organisms from within. In addition, even when multi-cellular organisms are cancer-free, they often interact with each other in ways that are highly dysfunctional at the level of single-species social groups and multi-species ecosystems. Special conditions are required for higher-level units to function as “super-organisms”. During our get-together, you told me about some business practices that are highly predatory and no more desirable for an economic ecosystem than the crown of thorns starfish destroying coral reef ecosystems. Could you elaborate on that here?

LS: There’s no better example of corporate predators than activist hedge funds. These are investment funds catering to wealthy individuals and institutions that typically target companies, take a modest stock position, then use the threat of an embarrassing proxy contest to pressure managers into “unlocking value” by selling assets, taking on leverage, or cutting accounting costs like payroll and R&D to make the company looked more profitable. These strategies have a good chance of raising the share price in the short term, which is all the activists care about as they’re planning to sell as soon as the price rises. Unfortunately, this kind of “financial engineering” often ends up harming companies in the long run, along with their employees, customers, and remaining investors. The predatory nature of activist funds is well captured in the slang business term for a group of hedge funds working together to target a company: a “wolf pack.”

If activists targeted only weaker companies, it could be argued that they play a useful role in the corporate ecosystem. Unfortunately, shareholder activism creates a destructive feedback loop. As activists earn profits from damaging companies, they become wealthier, allowing them to target more companies, become still wealthier, and so forth. Of course eventually they will run out of companies to target. We’ve already seen the population of U.S. public companies drop by 50%, as new corporations avoid activists by remaining privately held and declining to go public in the first place. But when corporations stay private, the wealth generated by corporate production remains concentrated in the hands of the very wealthy. Meanwhile, the ongoing destruction of U.S. public companies produces negative consequences for employees, customers, long-term investors, and the nation.

DSW: Wow. Companies staying private to avoid getting attacked by hedge fund wolf packs is so similar to biological examples of prey remaining in refuges to avoid getting attacked by predators, even though they would do much better leaving their refuges in the absence of the predators. I’m also reminded of the predatory nature of high frequency trading, as recounted by Michael Lewis in his book Flash Boys, which I interpret from a game theoretic perspective here. Here is how Lewis describes the emotionally numb view of one of the book’s characters, Don Bollerman:

Don wasn’t shocked or even all that disturbed by what had happened, or, if he was, he disguised his feelings. The facts of Wall Street life were inherently brutal, in his view. There was nothing he couldn’t imagine someone on Wall Street doing. He was fully aware that the high-frequency traders were preying on investors, and that the exchanges and brokers were being paid to help them to do it. He refused to feel morally outraged or self-righteous about any of it. “I would ask the question, ‘On the savannah, are the hyenas and the vultures the bad guys?’ “ he said.   “We have a boom in carcasses on the savannah.  So what? It’s not their fault. The opportunity is there.”  To Don’s way of thinking, you were never going to change human nature—though you might alter the environment in which it expressed itself.

The more I learn about theories of economics and business, the more I realize how far they lag behind theories of evolution, ecology, and behavior, which are my home disciplines. The idea that ecosystems achieve some sort of benign balance by themselves, which is best left undisturbed by human intervention, no longer has any basis in theory [go here for more]. Special conditions are required for multi-agent systems to function well as systems. Multi-level selection theory begins to spell out the conditions for both natural and human systems (e.g., here and here). From your own legal perspective, what is required for multi-agent corporate ecosystems to function well as systems?

LS. The first and absolutely necessary step is to recognize that the business sector is indeed a system. If we want it to work well, we need to treat it as such. That includes looking out for potential problems like decreasing diversity, lack of resilience, runaway feedback loops, and so forth. Ironically, one of the most dangerous feedback loops is the ability of wealthy individuals and institutions to buy the legislation and regulation they want through campaign contributions and lobbying. Left to its own devices, the business sector is pretty good at finding efficient and stable solutions–as long as the law doesn’t get in the way too much.

DSW: What is the role of the government in regulating corporate ecosystems? Is it possible for corporations to regulate themselves and are there any examples?

LS. Business corporations need governments to provide and enforce basic rules against theft, fraud, and obvious market failures like monopolies and pollution. Beyond that, government tinkering often does more harm than good, as our current campaign finance system allows powerful interests to hijack regulation and bend it in their favor. For example, if we’re worried about pollution and climate change, a simple carbon tax is a great solution compared to attempts to micromanage through investment tax credits, carbon markets, performance standards, and so forth. Similarly, back in the days when corporate law was mostly state law and mostly “enabling,” meaning business people could choose their own firm structures and objectives, US corporations were more resilient and profitable, and did a better job for their employees and other stakeholders, than today. Tinkering with the business sector raises many of the same problems as tinkering with an ecological system; you never know what the unintended consequences of your actions are going to be.

DSW: That’s the challenge of managing complex systems. Central planning won’t work. Lack of regulations won’t work. Something in between is required, which David Colander and Roland Kupers call “Activist Laissez-faire”. Thanks very much for your insights!

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  1. Steve H.

    – Left to its own devices, the business sector is pretty good at finding efficient and stable solutions–as long as the law doesn’t get in the way too much.

    “All mine” is stable.

  2. Enquiring Mind

    Shareholder value maximization sloganeering has been used by some companies I know to bully the troops. In the meantime, the CEO profited through incentives, while hiding that information from the rank and file. There were serious morality issues that were ignored by the management and board or were actively camouflaged. Conventional business practices become casualties in such cases, especially when there is such misdirection and outright lying going on. Those companies became victims of their own hubris, and the more fortunate employees were able to get hired elsewhere with more acceptable values before the axes fell.

  3. cnchal

    There’s no better example of corporate predators than activist hedge funds. . .

    Flesh eating disease would be a better analogy than cancer for hedge funds attacking corporations.

    Bill Clinton can be thanked for the twist of rules to allow hedge funds to grow exponentially. The seeds of this form of destruction were sown roughly 20 years ago when the maximum of 99 clients per hedge fund was changed to an unlimited number. Again we see the results when narcissist politicians surrounded by psychopaths do the deeds that benefit the psychopaths at the expense of the peasants.

    These different elements work together over time to produce a number of important social benefits, including not only dividends and share price appreciation for stockholders, but also interest payments to bondholders, salaries for employees and executives, useful goods and services for consumers, tax revenues for taxing governments, and technological innovations for future generations.

    Irony. The pension funds of government employees are used by hedge funds to destroy the companies that supposedly make a taxable profit. The result is skilled hedge fund managers making a million dollars per hour, while the corporate hulk left behind that was eaten alive, never pays a dollar of tax again.

    The employees of the destroyed corporations lose their pensions, yet are expected to top up the pensions of the public sector employees that invested alongside the hedge funds and didn’t make as much as expected. That fault lies not with the public sector employees. It’s the managers of the pension fund that align themselves with the flesh eating predators, and personally either gain from that alignment or are not harmed.

    The first and absolutely necessary step is to recognize that the business sector is indeed a system. If we want it to work well, we need to treat it as such. That includes looking out for potential problems like decreasing diversity, lack of resilience, runaway feedback loops, and so forth. Ironically, one of the most dangerous feedback loops is the ability of wealthy individuals and institutions to buy the legislation and regulation they want through campaign contributions and lobbying.

    The system is in control by the predators. How does a peasant survive, not be eaten and fight back?

    It’s a David and Goliath fight, and David has loaded his slingshot with a rock named Bernie Sanders. It’s a long shot and if it doesn’t hit Goliath square in the forehead, Goliath eats us all.

    1. Sound of the Suburbs

      “The system is in control by the predators. How does a peasant survive, not be eaten and fight back?”

      You just have to wait, the wealthy are so predatory and destructive they destroy the system they benefit so well from.

      Unfettered capitalism needs to be followed by a more redistributive capitalism before the whole thing collapses.

      After four decades of supply side economics its all supply and no demand.

      A New Deal looks imminent:

      1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase

      1929/2008 – Wall Street crash

      1930s/2010s – Global recession, currency wars, rising nationalism and extremism

      1. Sound of the Suburbs

        “The Marxian capitalist has infinite shrewdness and cunning on everything except matters pertaining to his own ultimate survival. On these, he is not subject to education. He continues wilfully and reliably down the path to his own destruction”

        They never learn.

        It is a flaw in the psychopath’s personality, they can never learn from their mistakes.

        The first step in learning from your mistakes is to take responsibility for them, and then work out where you went wrong.

        Psychopaths fall at the first hurdle and don’t take responsibility for anything.

  4. Pat

    Something that should have been corrected decades ago was this idea that corporations were only responsible to their shareholders. My dream amendment meant to drawn and quarter the atrocity that is Citizen’s United is one that states outright that corporations are not persons and hold an equal responsibility to its shareholders, its employees, its customers and its community. It cannot harm one to advance another. And it can only be referred to as an individual in actions taken by any of those entities in order to force it to live up to its responsibilities. And while the government and its representatives can ask for a corporation’s opinion or advice, corporate lobbying is illegal and punishable by a federal felony prison sentence for its top management. NO FINES.
    The CEOs will just have to depend on their individual outsized campaign donations for influence.

    And while I will the entertain the idea that the lobbying section MIGHT be taking it too far, I really do believe we should be getting rid of the idea that Corporations are constrained by markets and not laws and codify that no you don’t screw the workers, the customers or the places you operate in.

    1. LifelongLib

      IIRC “corporate personhood” started as a legal convenience to allow corporations to participate in lawsuits as single entities rather than having to name every single shareholder/manager/employee. This seems reasonable. But over the years the idea was gradually expanded into the absurdity we have now, where corporations appear to have more rights than actual humans do.

      1. Pat

        part of the reason I think it needs to be encoded in a manner where even bought and paid or ideological hacks cannot argue that they are persons, and any reference to them as individuals is limited to a convenience for humans AND not for their benefit.

  5. ke

    Planning is a myth. You cannot plan the weather. Out of a thousand people, one guesses the weather correctly 30 times ion a row, becomes the expert, and everyone bets accordingly. The experts get replaced, and pretty soon the majority bets on the expert with the best average. And on it goes, with different groups betting that they have the best expert, and competing accordingly, learning nothing. Pretty soon everyone is wearing raincoat on a sunny day and you are sent to jail for reprogramming because you wore a t-shirt, a threat to the raincoat factory, the State.

    The problem with theories is that none of them begin with reality. Agency doesn’t work. Never has. Except to line the pockets of growing agency. Economies are built from the bottom up and are destroyed from the top. It’s a process, with quite predictable outcomes, most would rather not face. America can’t win a war.

    Everything on the battlefield is a toy in a financial sandbox. To have a debt as money economy, a reserve currency, you need a military to enforce it. Debt is a weapon, which fails every time, because it breeds compliance. The more debt you use, the more you get, to buy toys, from those with access to bankruptcy law.

    Giving kids student loans for a failed education system, public and private, with no access to bankruptcy, and demanding that all attend, to be certified in stupid by an expert employed for the purpose, is no accident, nor is methylating their genes to begin the process.

    Human farming has been going on for thousands of years, and fails every time. You cannot replace parents because there is no book on parenting, for a reason. Write your own, and the empire disappears.

    The public, private and nonprofit corporation is a paper fiction, populated by automatons. Arguing about which group is following the best expert is a waste of time. There are as many ways to fix CO2 as there are people, and more, but it’s not in the interests of colluding agency hucksters to tell you so.

    The kids are pushing agency off the cliff, which is stacking pensions accordingly. Can you blame them?

  6. inode_buddha

    Thanks Yves for this. I needed the historical background wrt Friedman, and I needed the intellectual ammunition. Something has always felt “wrong” to me about the whole “maximizing shareholder value” line. It pretends that there is no agency, no choice but the despicable. It tries to deflect responsibility for ones actions. It has always been a prticularly infuriating line for me, but I had no idea where or how to attack it. So now, I’m learning…. Econ was never my field, I’ve always taken what people said as the truth. And I was only 7 when Nixon resigned. Now days I’m living in the hell produced by these policies, giving up on the concept of “retirement”, crapified everything, etc….

  7. Minnie Mouse

    The most endangered species are the top predators most dependent on the entire food chain below them. Anything that fails will be sure to take them down first. Maximizing profits by cutting corners will maximize the risk of going bust.

  8. Softie

    I am reading The Age of Acquiescence written by Steve Fraser this weekend.

    Let me quote what he says about the topic:

    Shareholder value as an ideology and faith, no matter its claim to axiomatic truth and longevity, was actually invented a mere generation ago to overthrow the ancien régime, itself increasingly dysfunctional. The faith’s underlying premise that shareholder value would be protected and enhanced by a studied ruthlessness again and again proved faulty. In so many leveraged buyouts, takeovers, mergers, and acquisitions, shareholder value declined over the long term, corporate performance fell, and the “discipline” of debt, which was supposed to make these firms pit-dog fit, ended up sinking otherwise entirely viable concerns. Nonetheless, we now pay obeisance to the belief that those who have essentially nothing to do with the running of these businesses—and in most instances have little or no intrinsic interest in what they make or do, and whose collective identity as a mass of individual owners changes almost daily—by right and tradition ought to control them.

    “Shareholder value” as the only value that ought to govern decision making in the boardroom is the orthodoxy of our time. To lend ballast to that claim, its advocates intimate its pedigree goes all the way back to the beginning of capitalist time. But that was not so in Adam Smith’s day or during the long nineteenth century that followed. Stock exchanges, once they became significant, were infrequently used to raise capital for long-term investment; rather they were a vehicle for cashing in and cashing out by individuals or were used in more or less ingenious ways by financial institutions trading for the short term. Reinvested earnings, commercial loans, and bond issues instead constituted the lion’s share of capital resources for the modern corporation. This practice continued well into the twentieth century. Between 1950 and 1973 nonfinancial corporations funded 93 percent of capital expenditures out of internal resources. During this period, 70 percent of corporate profits on average were reinvested in the company as opposed to 30 percent in 1929.

  9. diptherio

    I have in mind Milton Freeman’s classic 1953 essay in which he invokes between-firm selection to explain why people behave as if the assumptions of neoclassical economics are true

    Who’s this Milton Freeman guy? Sounds like a real windbag ;-)

  10. Pwelder

    That’s an important post – and as luck would have it the subject matter is squarely in Yves’ wheelhouse. I hope it gets a lot more coverage on NC nd elsewhere.

    I have one observation, and two questions.

    1) For the “Shareholder Value” story to have worked so well as a rationalization for various shenanigans, there had to be some large kernels of truth to it. These need to be identified and remembered, or we could stumble into a situation where some things that were valuable – if only as checks on managerial/bureaucratic human nature – are thrown out along with the garbage.

    2) In my business school days – more decades ago than I care to remember – there was a first-year course that tried to impart some idea of the social context in which business operated. (“Planning and the Business Environment”, IIRC) Does anybody know if this issue has risen to a level where the pros and cons of the Shareholder Value story are evaluated in courses like this?

    3) Similarly, does anybody know if the subject has had any coverage by the CFA Institute?

  11. Jim

    The interviewer in the above article, David Sloan Wilson, states that “The more I learn about theories of economics and business, the more I learn about how far they lag behind theories of evolution…”

    Strangely enough one theorist of capitalism who was heavily into evolutionary thinking was Marx. He often emphasized how a new mode of production naturally grows out of an old one.

    In Capital Volume III Marx saw the corporation as representing “the
    abolition of capital as private property within the framework of capitalist production itself…. which destroys private industry as it expands…”

    He apparently believed that the corporate enterprise is a necessary transitional stage to a new form of production in the transition from capitalism to socialism.

    He saw the “capitalist stock companies”, as much as the co-operative factories of workers themselves as a necessary transition stage from capitalism to socialism.

    This part of Marx’s perspective is not often discussed since pro-capitalist forces do not like to admit their complicity in the move to socialist modes of production through an evolutionary developmental process.

    More pro-socialist sentiment also seem uncomfortable with some of these evolutionary insights of Marx since they don’t want to think that anything good could come out of a corporate-capitalist society.

    1. ke

      Not sure what happened to this..

      Long before “evil” corporations, parents were using their children as slaves, selling their children, and employing other people’s children as slaves. The State Corporation simply legitimizes the operation to make it more efficient, farming humans who are farming humans.

      There’s going to be cavepeople where ever you go, and you are going to have your hands full raising your own. It’s quality vs numbers. Scaling up is the easy part, which you save until needed.

      Spending more debt than the rest, of the world combined on military and social compliance doesn’t mean you have an effective military. The electronics are crap, the motors they control are crap and the sensors are crap, because we sell crap, as one might suspect.

      The Chicago/California bail out should be interesting.

      1. Jim

        Assuming for a moment the legitimacy of the evolutionary perspective of Marx, the idea that “parents were using their children as slaves long before evil corporations,” implies that Marx appeared to have quite powerful and accurate insights into the historical development of capitalism.

        First, he argued for the existence of a type of feudal capitalism, then the largely proprietary capitalism of the type the U.S. experienced between 1820 and 1880, to be followed by a corporate capitalism which began to take off around 1890 with the creation of a more administered and ultimately less competitive business environment.

        By the 1930s the large corporation was the dominant form of business organization and in conjunction with the establishment of the Federal Reserve became the basic structural framework of the economy in a continuing evolution( according to Marxist theory) which is still being played out.

        1. ke

          Marx was a bright guy, as was Tesla. Funny.

          Evolution without quantum advance doesn’t quite work out though. Natural resource liquidation runs its course.

          The only difference between the capitalists and socialists is the guilt complex. Is there anything worse than a “Christian” opening the door to hell for you and pushing you in, helping.

  12. James McRitchie

    Thanks for the great interview with Lynn Stout, one of my favorites.

    From my chapter of The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, to be released next week:

    Scientists have known for decades that engaging employees in decision making generates more wealth. For example, back in the 1970s a panel of experts reviewed the extensive findings of 57 field experiments in job satisfaction and productivity for the National Science Foundation and concluded:

    Human involvement at the work place in all facets of the work is a prerequisite for the enhancement of quality life as well as performance and satisfaction. . . . The organizational policy, therefore, should work towards enhancing such aspects of work which encourage people’s ownership of the work place as well as the work itself, collaborative efforts among coworkers, and decision-making processes based on participate models.

    Other scholars have long reached the same conclusion:

    It is paradoxical that the standard justification for autocratic practice in industry is its alleged efficiency, since the empirical research results do not support that conclusion. In fact, increased rank-and-file responsibility, increased participation in decision making and increased individual autonomy are associated with greater personal involvement and productive results.

    Why, against the findings of so many studies, do organizations continue to allow workers so little control over their jobs? From what I studied as a Fellow with the National Institute of Mental Health, many decision-making structures are designed around status needs related to dominance and control over others, not to maximize the creation of wealth or to meet other societal needs.

    In order to gain higher status, individuals seek to dominate more and more people, leading to a widespread dynamic over time, which shapes the organization so as to move the locus of control upward. In order to generate more wealth and to meet other societal needs, we should take advantage of all the brains in our organizations. We can do so by pushing decision-making down to the lowest practical level. At the same time, we need to infuse our financial decisions with all our values to ensure we are not externalizing costs and creating an unsustainable company or world.

    1. Jim


      Is it conceivable that capitalism might eventually evolve in the direction you suggest “engaging employees in more and more decision-making?”

      Such an evolution, according to the more classical Marx, would not take place primarily because of the creation of a social movement or party but because of more indigenous changes in the process of production?

  13. Ray Phenicie

    Several random thoughts occur after reading the article.
    1. The systems analysis approach is the best to look at why, to name one notable example, wages are so abysmal in the United States. Some corporate interests -Silicon Valley- (setting aside for the moment the wage fixing among the larger players) took care of their employees in terms of working conditions, salaries, benefits and usually, a willingness to let employees have some say in the day to day running of the business. But the very issue of wage fixing leads to a discussion of the freedom to choose among several employers within the same field, for example highly skilled programmers. I disagree with the author’s penchant for minimal regulation; in a healthy economy perhaps wage earners would have opportunities to move around within a particular industry. But in an economy that’s constantly sagging and where employers rule on the wage issue the government needs to step in to pick up the bottom end of the market with a job guarantee. For example, the government could encourage employment by funding things like classroom assistants, library assistants, with very minimal skill sets say going to do things like pick up trash. And so say, a programmer who was looking to move in a career direction would not have to fear totally losing a job if they decided to suddenly up and leave an otherwise good position. So if employers knew that their employees could leave at a moment’s notice, the HR department might be a bit more cautious in taking stock of their employees and not be so callous and so quick to fire people. But again focusing just on wages, to take a page from our analogy with ecology and if wages are to the economy what nutrients are to an ecosystem we can see the focusing only on quote nutrients unquote, is not sufficient for us to move forward on a real revolution in changing our business environment. Again moving over to the analogy with ecology we need to take a look at other factors needed for growth and we see that conditions like temperature and humidity soil pH, environmental hazards like storms volcanoes; all of these have their analogy in the economic world and I will leave it to the reader to decide what those might be.
    So to make my point abundantly clear what I am saying it was: while we see the necessity of having a business environment where taking care of one’s employees is of the utmost consideration, that alone is not sufficient to make the business environment more viable flexible and responsive to the needs of the larger community.

  14. John Wright

    Here is a link that shows the Hewlett Packard corporate objectives around 1973.


    On page 32 of this 1973 Measure Magazine (in-house publication of Hewlett-Packard for employees) one can find the corporate objectives.

    The HP corporate objectives (see page 32 for more details on them).

    1, Profit (objective:to generate the highest level of profit consistent with our other objectives)
    2. Customers
    3. Fields of Interest
    4. Growth
    5. Our People
    6. Management
    7. Citizenship

    I worked for HP for more than 20 years. During most of these years Hewlett and Packard were alive and interested in their business (and they had a massive say in how the company was run as they had more than 30% of the common stock for much of this time).

    Shareholder value was certainly not a corporate objective as listed above but profits were.

    HP was largely self financed with much employee ownership of stock, so employees and executives both had reasons for the company to do well.

    It was communicated to the employees that HP had enough business risk so it avoided financial risk by borrowing little.

    It was a different time as the electronics industry was growing in many directions and HP capitalized on it.

    The stories about Bill and Dave are definitely from another era. Some years ago a co-worker remembered shaking Packard’s hand when he toured the plant, another remembered seeing Hewlett welding a broken fireplace grate on a Saturday, another remembered Packard coming to the machine shop to see a new expensive milling machine that had arrived. I remembered an employee telling of seeing Packard filling up his car at the local gas station for his drive back to Palo Alto (probably in the late 1980’s when he was already very wealthy).

    Hewlett Packard did not follow the quick to IPO stock model. They incorporated the company in 1939 and did not IPO until 1957.

    I no longer work for HP.

    One can suggest that Hewlett’s and Packard’s view of how a corporation should be run, for the benefit of many constituents, was strongly influenced by their Great Depression experience.

    And they had so much stock they could run the company the way they wanted to.

    This not at all similar to today’s shareholder value driven CEO’s.who might suggest that Hewett and Packard could have been even wealthier had they followed the “maximize shareholder value” model.

  15. ke

    Here we are an entire cycle later, the middle class remains in deep denial as if America does not have the highest infrastructure costs and poorest results, the .1% could possibly force the majority to do anything, and it is inconceivable that a generation could repudiate the debt slavery actuarial ponzi.

    America doesn’t make anything that anyone else wants to buy, short of military debt extortion. Labor is not on the Titanic, and is not climbing on board anytime soon. Labor has no interest in being part of the 99%.

  16. Griffith Jones

    Thanks as always for this nugget.

    Yves’ quibble is that “Lynn Stout makes it sound as if the new “maximize shareholder value” has become a duty.”

    Granted, but I also take issue with the idea put forth above that a planned economy can’t work in principal.

    Today the world has the technological means for aggregating demand and reducing the waste inherent in so-called ‘free markets’.

    I would rather imagine a world where advertising cedes the domination of the attention of global consciousness to artistic expression, where human needs take precedence over artificially stimulated desires and where labor (in all its forms) rules over capital.

  17. Chauncey Gardiner

    Subsequent developments regarding an issue Dave Dayen reported on in an article here in March about the acquisition of Syngenta by ChemChina plugs into this “Maximizing Shareholder Value” meme. Now it’s Bayer undertaking to buy Monsanto for $62 billion cash, which in turn follows a reported merger between Dow and DuPont.

    Through a global oligopoly over GMO seeds and Ag chemicals (pesticides and herbicides), these business combinations and their legal rights over related patents and pricing power would further consolidate the already tremendous influence these huge transnational corporations have over farmers and the global food supply.

    Of course, the euphoric short-term rush to be provided from huge transaction fees for the big global investment banks and the related debt financing will lubricate these deals. All of which shows the so called “trade agreements” are utterly unnecessary.

    But are there any meaningful benefits to humanity and the environment?…

    I think not.

  18. ckimball

    DSW: What is the role of the government in regulating corporate ecosystems? Is it possible for corporations to regulate themselves and are there any examples?
    I find the term corporate ecosystems disturbing, kind of like corporate
    person hood. Seems like Business has adopted a biological model
    attempting to describe the interconnection of all life forms and their organic processes to an intellectually defined corporate model. It
    seems a corporate model might be compared to an organic ecosystem
    to learn but to define itself in the same realm is many things but not
    accurate. The connection to an organic model may give it or it may seek more authority than it deserves.

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