Are U.S companies legally obligated to maximize profits for shareholders? (2012)(skeptics.stackexchange.com)
skeptics.stackexchange.com
Are U.S companies legally obligated to maximize profits for shareholders? (2012)
https://skeptics.stackexchange.com/questions/8146/are-u-s-companies-legally-obligated-to-maximize-profits-for-shareholders
203 comments
A bit off topic, but William Dalrymple's book "The Anarchy" does an excellent job tracking the development of the East India Company from "the king gives you a right to establish trade with India" to the "the purpose of [all of India] is to... increase the wealth of the [EIC shareholders]."
> I want to know more about how that shift occurred.
I’ve been stuck in that rabbit hole for atleast 2 years now. At the macro level it seems as if it was all planned but upon deeper reading I came to a conclusion that it was a sequence of events which while individually would have made sense collectively lead to the current mess.
To get a whirl wind tour and as a starting point I highly recommend Adam Tooze’s book “Crashed”. In it he chronicles the 2008 crisis beginning with Nixon’s abolishment of gold standard. The book is full of excellent references.
I’ve been stuck in that rabbit hole for atleast 2 years now. At the macro level it seems as if it was all planned but upon deeper reading I came to a conclusion that it was a sequence of events which while individually would have made sense collectively lead to the current mess.
To get a whirl wind tour and as a starting point I highly recommend Adam Tooze’s book “Crashed”. In it he chronicles the 2008 crisis beginning with Nixon’s abolishment of gold standard. The book is full of excellent references.
I'm glad you came out on the other side, and have the cognitive ability to perceive independent parts in a large system this way.
I would add one other thing, some of those steps have opportunists in them.
Once you realize that, you realize you can be an opportunist too. You can play the game at the same level, by pushing chess pieces at a small level.
I would add one other thing, some of those steps have opportunists in them.
Once you realize that, you realize you can be an opportunist too. You can play the game at the same level, by pushing chess pieces at a small level.
> You can play the game at the same level, by pushing chess pieces at a small level.
You can’t lobby to abolish the gold standard or influence federal appointees
You can’t lobby to abolish the gold standard or influence federal appointees
> influence federal appointees
you can. you can get your people in agencies and courts when the time looks favorable, and they will transcend the Senate committee composition and the President's administration.
> You can’t lobby to abolish the gold standard
odd example since that's gone for 50-90 years already, but again you can.
==
think about it this way. periodically there's a conspiracy documentary about people pulling the strings of the elected President. what they neglect to mention is that every possible permutation of potentially electable Presidents have opportunists already waiting. You don't have to be a partisan. You don't have to actually be a partisan. Loads of people are doing things beneficial to them.
you can. you can get your people in agencies and courts when the time looks favorable, and they will transcend the Senate committee composition and the President's administration.
> You can’t lobby to abolish the gold standard
odd example since that's gone for 50-90 years already, but again you can.
==
think about it this way. periodically there's a conspiracy documentary about people pulling the strings of the elected President. what they neglect to mention is that every possible permutation of potentially electable Presidents have opportunists already waiting. You don't have to be a partisan. You don't have to actually be a partisan. Loads of people are doing things beneficial to them.
> the new dogma/mandate of BlackRock-style DEI
I don’t think DEI is new. The original affirmative action legal cases in the 60s was in employment, particularly in breaking up the homogeneous of all-white labor unions and other all-white labor forces. Remember that the Jim Crow laws and racial segregation in the public sphere was still occurring in the 50s and early 60s, and affirmative action policies occurred in the workplace as a response to try and actually enforce desegregation in the corporate sphere.
I don’t think DEI is new. The original affirmative action legal cases in the 60s was in employment, particularly in breaking up the homogeneous of all-white labor unions and other all-white labor forces. Remember that the Jim Crow laws and racial segregation in the public sphere was still occurring in the 50s and early 60s, and affirmative action policies occurred in the workplace as a response to try and actually enforce desegregation in the corporate sphere.
Of course, but the civil rights movement was a great victory and segregation was made illegal, at least at the surface level.
I just don't think it's progress to go from "it's good to burn down the forest to extract a dollar" to "it's good to burn down the forest to extract a dollar, as long as 50% of the torches are held by women."
I just don't think it's progress to go from "it's good to burn down the forest to extract a dollar" to "it's good to burn down the forest to extract a dollar, as long as 50% of the torches are held by women."
I never made a claim on the ethics.
The idea of investment managers directing capital based on their own corporate purity tests is definitely much newer than the 1960s
I don’t think it is. Government had enforced diversity metrics in order to prevent hiring all-white union laborers for their contracts pretty early on in the desegregation process. The private sphere followed suit to avoid the label of segregationism.
This can also (and, frankly, less weasel-wordishly) be framed as "directing capital based on the desires of the stakeholders involved." High-dividend ETFs have "purity tests", they just involve things you don't feel like being pejorative about.
And, as 'Apocryphon notes, this is much older than you think besides.
And, as 'Apocryphon notes, this is much older than you think besides.
I don’t think they’re doing it for an ideological purity test, they’re doing it because:
1. They believe there is investor demand for funds that take environmental and social impact into account
2. They believe that companies with better environmental, governance, and social Impact ratings will have higher or more stable returns over time
You can disagree, but I think there are good arguments to be made for both of those points.
1. They believe there is investor demand for funds that take environmental and social impact into account
2. They believe that companies with better environmental, governance, and social Impact ratings will have higher or more stable returns over time
You can disagree, but I think there are good arguments to be made for both of those points.
I would modify #2
Generally its not as profitable to go by DEI guidelines, but it does have an anticompetitive effect because smaller orgs simply cannot afford to do it.
It's similar to how regulations effect businesses. If there are enough regulations the only ones that can afford to stay compliant are the ones with teams of lawyers. Which is why megacorps lobby for more regulations. It prevents competition from sprouting up.
Generally its not as profitable to go by DEI guidelines, but it does have an anticompetitive effect because smaller orgs simply cannot afford to do it.
It's similar to how regulations effect businesses. If there are enough regulations the only ones that can afford to stay compliant are the ones with teams of lawyers. Which is why megacorps lobby for more regulations. It prevents competition from sprouting up.
I don’t know if this is true — we’re largely talking public companies here, which should have resources to meet compliance and governance goals. If they can’t, then they are probably riskier investments.
But even if I accept it as true, it doesn’t contradict point 2, which is that investors think they’ll see better or more stable returns
But even if I accept it as true, it doesn’t contradict point 2, which is that investors think they’ll see better or more stable returns
Yes, I do agree with your point (1)... there is a class of non-STEM college grads that has solved the chicken-and-egg problem by essentially blanketing every industry at once, demanding "[xxxxxx] justice" on all sorts of topics, which sort of forces everyone's hand simultaneously. That's why it's been highly effective.
This is a ridiculous statement. There are lots of people who will avoid investing in companies for ethical reasons. You might be a religious investor who chooses not to invest in “immoral companies”.
I also doubt the people you have in mind have enough financial capital to really force everyone’s hand _unless_ their arguments are actually persuasive
I also doubt the people you have in mind have enough financial capital to really force everyone’s hand _unless_ their arguments are actually persuasive
Why is it though? In non-obfuscated language, the whole idea is "the job of someone hired to do something is to do the thing". If I own a room full of groceries, the job of the people I hire to run it /should be/ to run it in whatever legal way I want it to be run. If I want to maximize profits and the workers give the food away to the poor, or if I want to give the food away to the poor and the workers charge them money, I'm going to fire the workers (or in extreme cases, sue them for damages).
Shareholders are simply the owners of the corporation. The difficulty arises when we try to figure out what the shareholders want given the diffuse ownership (especially if you trace funds and pension plans to their ultimate owners/beneficiaries), but "maximize returns" is a reasonable assumption in absence of other expressed preferences.
Moreover, I'm pretty sure if you tried to get the preferences from an average shareholder you would find out they support all the good things and are against all the bad things, as long as it's free. It would end up like the recent poll they had in Western Oregon: "Do you think we should keep Eastern Oregon as part of Oregon?" "Yes!" "Eastern Oregon is net tax subsidized, how much in taxes are you personally prepared to pay to keep Eastern Oregon?" "$0!")
Shareholders are simply the owners of the corporation. The difficulty arises when we try to figure out what the shareholders want given the diffuse ownership (especially if you trace funds and pension plans to their ultimate owners/beneficiaries), but "maximize returns" is a reasonable assumption in absence of other expressed preferences.
Moreover, I'm pretty sure if you tried to get the preferences from an average shareholder you would find out they support all the good things and are against all the bad things, as long as it's free. It would end up like the recent poll they had in Western Oregon: "Do you think we should keep Eastern Oregon as part of Oregon?" "Yes!" "Eastern Oregon is net tax subsidized, how much in taxes are you personally prepared to pay to keep Eastern Oregon?" "$0!")
What you're describing is more applicable to an ordinary partnership, where the partners are personally liable for any debts or legal judgments against the partnership. Corporations and LLPs allow shareholders and partners to escape those liabilities, and it's reasonable to expect some duty to act in the public interest in return.
> Corporations and LLPs allow shareholders and partners to escape those liabilities, and it's reasonable to expect some duty to act in the public interest in return.
The entire concept of limited liability was created with the public interest in mind. Limiting personal liability encourages business creation, which encourages growth, which is in the interest of the public.
> It's reasonable to expect some duty to act in the public interest in return.
What is it that you're wanting to make these companies do, specifically?
The entire concept of limited liability was created with the public interest in mind. Limiting personal liability encourages business creation, which encourages growth, which is in the interest of the public.
> It's reasonable to expect some duty to act in the public interest in return.
What is it that you're wanting to make these companies do, specifically?
The question was whether a corporation is legally obligated to maximize profit. I was pointing out that, as you also note, the actual purpose of the limited liability of a corporation is to promote the public interest. Economic growth is one aspect of that interest, certainly, but it's not the only consideration. So corporations that give up short term profits to improve the environment or the well-being of their employees or the community are not shirking their legal obligation, they are living up to it.
Pick your poison.
I love how people rail against shareholder value.
But then, they fail to forget that…
Shareholders are also pension funds, people with 401k’s and rank and file employees.
The actual problem is wealth inequality and the fact that a select few burden the majority with most of the risk while they reap most of the rewards.
In one way or another employees are always shareholders even when they’re not holding any certificates.
I love how people rail against shareholder value.
But then, they fail to forget that…
Shareholders are also pension funds, people with 401k’s and rank and file employees.
The actual problem is wealth inequality and the fact that a select few burden the majority with most of the risk while they reap most of the rewards.
In one way or another employees are always shareholders even when they’re not holding any certificates.
> Shareholders are also pension funds,
We don’t forget that. It is simply a reality that we can’t avoid. All the profit is siphoned into the stock market, if you opt out of it (if you are even allowed to; in many European states, these funds are mandatory), you’ll loose your savings to inflation.
Could we have a better system? yes. Does it make sense to add this caveat every time we complain that shareholders are exploiting workers for their own profits? No, that would be a waste of nuance.
We don’t forget that. It is simply a reality that we can’t avoid. All the profit is siphoned into the stock market, if you opt out of it (if you are even allowed to; in many European states, these funds are mandatory), you’ll loose your savings to inflation.
Could we have a better system? yes. Does it make sense to add this caveat every time we complain that shareholders are exploiting workers for their own profits? No, that would be a waste of nuance.
Yup. And even the headline question of this pernicious concept leaves massive ambiguities.
Is the goal to maximize profits this quarter, or shareholder value (share price) this quarter, or over the course of a decade, or a century, or a millennium ?
Merely changing the answer over those four options would entail massive changes in management goals and choices.
The entire pernicious concept merely enables exploitative behavior — exploiting employees, the people in the surrounding community/society, and the environment, externalizing costs on everyone else while internalizing profits.
If we are going to treat corporations as effectively persons, it is far past time to expect them to behave as good citizens.
(and if they do not behave as good citizens, then treat them as bad citizens, i.e., jail or execute them)
Is the goal to maximize profits this quarter, or shareholder value (share price) this quarter, or over the course of a decade, or a century, or a millennium ?
Merely changing the answer over those four options would entail massive changes in management goals and choices.
The entire pernicious concept merely enables exploitative behavior — exploiting employees, the people in the surrounding community/society, and the environment, externalizing costs on everyone else while internalizing profits.
If we are going to treat corporations as effectively persons, it is far past time to expect them to behave as good citizens.
(and if they do not behave as good citizens, then treat them as bad citizens, i.e., jail or execute them)
> Is the goal to maximize profits this quarter, or shareholder value (share price) this quarter, or over the course of a decade, or a century, or a millennium? Merely changing the answer over those four options would entail massive changes in management goals and choices.
This is the absolutely crucial core question that gets skipped over so, so often.
This is the absolutely crucial core question that gets skipped over so, so often.
This is a question that is answered in company board meetings when shareholders actually tell directors what they want. This is not a philosophical question to be pondered on in a vacuum.
Agreed there isn't a single answer to be reached in a vacuum, and obviously this is the mechanism by which majority shareholder intention may be communicated. The statement stands.
I am both an employee and a small-time investor in the stock market.
I actually prefer to see companies as entities such as their only goal is maximizing profits, all else be damned. They will exploit every worker and will externalize every negativity in their profit-driven mandate. And typically short term profits will trump long term anything.
It's the role of governments, as representatives of society, to rein in companies so that they don't act in ways that damage the society where they are inserted in. Cue in labor and union protections, environment regulations, etc and so forth.
And yes, companies that break regulations should be treated as criminals, including termination.
I actually prefer to see companies as entities such as their only goal is maximizing profits, all else be damned. They will exploit every worker and will externalize every negativity in their profit-driven mandate. And typically short term profits will trump long term anything.
It's the role of governments, as representatives of society, to rein in companies so that they don't act in ways that damage the society where they are inserted in. Cue in labor and union protections, environment regulations, etc and so forth.
And yes, companies that break regulations should be treated as criminals, including termination.
> I actually prefer to see companies as entities such as their only goal is maximizing profits, all else be damned. They will exploit every worker and will externalize every negativity in their profit-driven mandate. And typically short term profits will trump long term anything.
They clearly don't do this though. There are less profitable and more profitable industries and companies don't move out of the less profitable ones. If they were out there exploiting anyone and everyone, they'd all be selling crack instead of furniture. Or at least mandating the employees be on it for productivity.
They clearly don't do this though. There are less profitable and more profitable industries and companies don't move out of the less profitable ones. If they were out there exploiting anyone and everyone, they'd all be selling crack instead of furniture. Or at least mandating the employees be on it for productivity.
> There are less profitable and more profitable industries and companies don’t move out of the less profitable ones.
Entering a different market is expensive and takes a lot of time. It’s also not guaranteed you’ll succeed.
> they’d all be selling crack instead of furniture. Or at least mandating the employees be on it for productivity.
Selling crack is against the law and afaik so is requiring employees to use PEDs (see the parent’s idea of governments deciding what’s out of bounds). The tactics Purdue used to push OxyContin are a good example.
Entering a different market is expensive and takes a lot of time. It’s also not guaranteed you’ll succeed.
> they’d all be selling crack instead of furniture. Or at least mandating the employees be on it for productivity.
Selling crack is against the law and afaik so is requiring employees to use PEDs (see the parent’s idea of governments deciding what’s out of bounds). The tactics Purdue used to push OxyContin are a good example.
> Entering a different market is expensive and takes a lot of time. It’s also not guaranteed you’ll succeed.
That's a strategy risk…
> Selling crack is against the law and afaik so is requiring employees to use PEDs (see the parent’s idea of governments deciding what’s out of bounds).
and that's a legal risk…
…but acceptance of risk is how profits are made and they know it. So basically this is just saying they're single-minded in pursuit of profits except for when they aren't. It doesn't seem to have predictive power.
I think a better explanation includes things like how, since most American companies are owned by the same retirement fund managers like Vanguard, their owners aren't necessarily interested in them competing maximally hard.
(and yes, Purdue is an example of _actually_ doing this, so are tobacco companies.)
That's a strategy risk…
> Selling crack is against the law and afaik so is requiring employees to use PEDs (see the parent’s idea of governments deciding what’s out of bounds).
and that's a legal risk…
…but acceptance of risk is how profits are made and they know it. So basically this is just saying they're single-minded in pursuit of profits except for when they aren't. It doesn't seem to have predictive power.
I think a better explanation includes things like how, since most American companies are owned by the same retirement fund managers like Vanguard, their owners aren't necessarily interested in them competing maximally hard.
(and yes, Purdue is an example of _actually_ doing this, so are tobacco companies.)
> They clearly don't do this though.
Forgive me for perhaps being blind, but I fail to see it with the same clarity as you do.
Typically, what stops companies from ruthlessly exploiting workers, selling products that damage society, polluting the environment, et cetera and so forth is only government regulation, not the goddwill of executives and chairmen.
Forgive me for perhaps being blind, but I fail to see it with the same clarity as you do.
Typically, what stops companies from ruthlessly exploiting workers, selling products that damage society, polluting the environment, et cetera and so forth is only government regulation, not the goddwill of executives and chairmen.
>>what stops companies from ruthlessly exploiting workers, selling products that damage society, polluting the environment, et cetera ...?
When the companies engage in the ordinary big-business practice of regulatory capture, absolutely nothing.
It is just treated as a game to be hacked. And hack it, they do.
Because according to your standards, companies don't need to treat everyone fairly (as a good citizen), but the govt must treat them fairly.
That's how earlier this week we saw headlines that Tesla employees in Buffalo NY were organizing a union drive. Then the very next day, we see headlines that Tesla has fired 10 workers, the ones organizing it.
It is illegal as hell, but they did it anyway. Why? Because Tesla knows that it'll take years for all the hearings to work their way through the courts, and the result will be a fine, which they can appeal, and delay further. Meanwhile, they figure the end cost will be less than having to deal with giving workers a fair deal. So, despite all the "excess govt regulation", the workers get exploited and screwed.
It is also how Norfolk rail donated to both Trump and the Ohio gov and had regulations eased, e.g., requiring fewer workers on trains and not needing to update their technology with "extra" brakes. And now we have an environmental disaster as a result. And those costs will be 'socialized' to the taxpayers and victims in the town, while the company keeps most of it's profits (it will not pay even a small fraction of the costs and it will be years from now).
So yeah, the govt structurally CAN NOT be as nimble as the companies, so the companies exploit that weakness. Great for them. Sucks for society.
I'm not saying they're all bad or evil, but this over-simplistic "shareholder value only" concept /structure is not good for a sustainable society or even for sustainable corporations.
When the companies engage in the ordinary big-business practice of regulatory capture, absolutely nothing.
It is just treated as a game to be hacked. And hack it, they do.
Because according to your standards, companies don't need to treat everyone fairly (as a good citizen), but the govt must treat them fairly.
That's how earlier this week we saw headlines that Tesla employees in Buffalo NY were organizing a union drive. Then the very next day, we see headlines that Tesla has fired 10 workers, the ones organizing it.
It is illegal as hell, but they did it anyway. Why? Because Tesla knows that it'll take years for all the hearings to work their way through the courts, and the result will be a fine, which they can appeal, and delay further. Meanwhile, they figure the end cost will be less than having to deal with giving workers a fair deal. So, despite all the "excess govt regulation", the workers get exploited and screwed.
It is also how Norfolk rail donated to both Trump and the Ohio gov and had regulations eased, e.g., requiring fewer workers on trains and not needing to update their technology with "extra" brakes. And now we have an environmental disaster as a result. And those costs will be 'socialized' to the taxpayers and victims in the town, while the company keeps most of it's profits (it will not pay even a small fraction of the costs and it will be years from now).
So yeah, the govt structurally CAN NOT be as nimble as the companies, so the companies exploit that weakness. Great for them. Sucks for society.
I'm not saying they're all bad or evil, but this over-simplistic "shareholder value only" concept /structure is not good for a sustainable society or even for sustainable corporations.
You described quite well how companies, in their pursuit of profits at all costs, corrupt the systems that should rein them in so that they can freely exploit workers and externalize negativity.
The answer for that is more regulation, stronger and more independent institutions that can rein those companies in. Not wishing thay companies magically become nicer.
The answer for that is more regulation, stronger and more independent institutions that can rein those companies in. Not wishing thay companies magically become nicer.
I'm not wishing for them to "magically become nicer".
I fully understand that that will not happen by itself.
What I'm advocating is changing the STRUCTURE in which they operate so that "becoming nicer" is prompted by the system. The current system fully expects only the primary goal of maximizing profit/value for the shareholders/owners, and minimal compliance with anything else.
This is despite the fact that EVERY corporation enjoys massive benefits of operating in a country that provides everything from transportation infrastructure, a reliable legal system, an educated workforce, to military protection of global shipping lanes.
It would help to embedding into the law the concept of corporate responsibility, by providing a cause of action for irresponsible corporate actions. Expecting the corporation to take care of the workers, and the environment. E.g., In Germany, it is required that workers have seats on the boards and workers have much greater rights.
The point is that the law is now, as you say, just [corps are expected to take care of only their shareholders] and [corps are subject to some regulation].
This system has been tried for nearly 250 years, and is obviously lacking.
I don't think iron-fisted regulation will provide a solution. That's already been tried, everyone got annoyed at the overhead, and it was backed off (see Reagan administration), and the corp destruction has ramped up ever since. It literally just becomes a higher priority to corps to do regulatory capture then.
We need to make the system harder to capture, spin a wider web. And that can be done by broadening the social and legal compact with corporations ('tho they'll fight like hell against it).
I fully understand that that will not happen by itself.
What I'm advocating is changing the STRUCTURE in which they operate so that "becoming nicer" is prompted by the system. The current system fully expects only the primary goal of maximizing profit/value for the shareholders/owners, and minimal compliance with anything else.
This is despite the fact that EVERY corporation enjoys massive benefits of operating in a country that provides everything from transportation infrastructure, a reliable legal system, an educated workforce, to military protection of global shipping lanes.
It would help to embedding into the law the concept of corporate responsibility, by providing a cause of action for irresponsible corporate actions. Expecting the corporation to take care of the workers, and the environment. E.g., In Germany, it is required that workers have seats on the boards and workers have much greater rights.
The point is that the law is now, as you say, just [corps are expected to take care of only their shareholders] and [corps are subject to some regulation].
This system has been tried for nearly 250 years, and is obviously lacking.
I don't think iron-fisted regulation will provide a solution. That's already been tried, everyone got annoyed at the overhead, and it was backed off (see Reagan administration), and the corp destruction has ramped up ever since. It literally just becomes a higher priority to corps to do regulatory capture then.
We need to make the system harder to capture, spin a wider web. And that can be done by broadening the social and legal compact with corporations ('tho they'll fight like hell against it).
> What I'm advocating is changing the STRUCTURE in which they operate so that "becoming nicer" is prompted by the system. The current system fully expects only the primary goal of maximizing profit/value for the shareholders/owners, and minimal compliance with anything else.
Those are interested ideas. But it begs the question: How to enforce compliance without regulation?
Those are interested ideas. But it begs the question: How to enforce compliance without regulation?
It is not to replace regulation, it is to add other mechanisms. I wouldn't back off regulation one bit.
For example, corporations are strictly creatures of law; they exist IF and Only If, and in the form that the law allows, at the pleasure of the government.
So, rewrite the enabling laws to state specifically and explicitly that corporations have affirmative responsibilities not only to the shareholders, but also to their workers, the community, the nation, and the environment, etc.
That alone immediately gives cover to any executive or board taking action that benefits those entities and perhaps not so much the shareholders. So they have a defense against shareholder suits that seek to force action or compensation away from corporate responsibility. Plus, there would also be a cause of action from the other parties for failure to take care of their interests. Obviously, this could go too far in either direction, so it must be carefully written, but this is the general idea.
There are many other ways, but that's the idea, don't rely solely on regulation.
For example, corporations are strictly creatures of law; they exist IF and Only If, and in the form that the law allows, at the pleasure of the government.
So, rewrite the enabling laws to state specifically and explicitly that corporations have affirmative responsibilities not only to the shareholders, but also to their workers, the community, the nation, and the environment, etc.
That alone immediately gives cover to any executive or board taking action that benefits those entities and perhaps not so much the shareholders. So they have a defense against shareholder suits that seek to force action or compensation away from corporate responsibility. Plus, there would also be a cause of action from the other parties for failure to take care of their interests. Obviously, this could go too far in either direction, so it must be carefully written, but this is the general idea.
There are many other ways, but that's the idea, don't rely solely on regulation.
Yeah I mean I guess we can set up an iron-fisted Dept. of Transportation and staff it to do battle with the railroads, shippers, airlines, trucking companies, etc., or the DoT could just own and operate these things directly. Even the most pro-capital ideologue has to admit there doesn't seem to be much point in Norfolk Southern owning and operating the tracks through East Palestine, since there is no competition except via other, inherently pricier, forms of transport (highway or maybe lake freighter). Yes, competition can lower costs, and therefore you may want to provision some goods via regulated markets, but it doesn't make sense for everything. Why not do like we do on highways, with public tracks but private rolling stock? We can require inspections before they switch out of their private yards onto the peoples' tracks and make sure their chemical deathtrains have reasonably working brakes, etc. This isn't radical thinking -- it's literally how it already works for trucks and highways.
> Because Tesla knows that it'll take years for all the hearings to work their way through the courts, and the result will be a fine, which they can appeal, and delay further.
I do not believe this is how NLRB enforcement works.
Though if the US had sectoral bargaining like other countries it just wouldn't be an issue in the first place.
I do not believe this is how NLRB enforcement works.
Though if the US had sectoral bargaining like other countries it just wouldn't be an issue in the first place.
It's exactly how NLRB enforcement works. Company retalliation is immediate; the consequences tend to be small and long to arrive. The company gets years worth of intimidation out of the action, followed by a slap on the wrist much later.
Almost no reasonable regulation will be effective if this is the standard of behavior. To punish a cheater when cheating is part of the game, you need incredibly strong rules and almost perfect enforcement. The subjects of the regulation will do whatever they can to "work the refs", exploit loopholes, or just get the regulations changed outright. They will ignore everything where the penalty doesn't outweigh the profit.
We have seen all of these happening in modern times.
We have seen all of these happening in modern times.
> Almost no reasonable regulation will be effective if this is the standard of behavior
That is the standard of behavior.
Regulation is what stops companies selling you contaminated food, working conditions similar to slavery, factories polluting the air and water with dangerous chemicals, so on and so forth
> you need incredibly strong rules and almost perfect enforcement.
And that's what citizens should demand of their governments
That is the standard of behavior.
Regulation is what stops companies selling you contaminated food, working conditions similar to slavery, factories polluting the air and water with dangerous chemicals, so on and so forth
> you need incredibly strong rules and almost perfect enforcement.
And that's what citizens should demand of their governments
Continuing on your final point, comparing the consequences businesses should face for breaking regulations with the consequences that criminals should receive, how would you feel about applying the analogy on the other side?
Specifically, would you actually prefer to see people as individuals whose only goal is maximizing their personal interests, all else be damned? Should they exploit every interpersonal relationship and externalise every negativity in their selfish-driven mandate? Should short-term personal wants trump long term anything?
If yes, I don't like the society that would result, but I respect the consistency in the idea. And if not, why should individuals be subject to more stringent moral rules than companies?
Specifically, would you actually prefer to see people as individuals whose only goal is maximizing their personal interests, all else be damned? Should they exploit every interpersonal relationship and externalise every negativity in their selfish-driven mandate? Should short-term personal wants trump long term anything?
If yes, I don't like the society that would result, but I respect the consistency in the idea. And if not, why should individuals be subject to more stringent moral rules than companies?
> Specifically, would you actually prefer to see people as individuals whose only goal is maximizing their personal interests, all else be damned? Should they exploit every interpersonal relationship and externalise every negativity in their selfish-driven mandate? Should short-term personal wants trump long term anything?
People are already pretty selfish, and without any regulation and oversight they will definitely act in ways that are detrimental to society. That's why we have laws and law enforcement.
The only difference from corporations is that people do not only pursue money. They may have different goals (sex, pleasure, power, influence). That makes people notoriously difficult to parse, and dealing with them is extremely frustrating.
Corporations are easy, they are the incarnation of greed. For them money is all that matters.
People are already pretty selfish, and without any regulation and oversight they will definitely act in ways that are detrimental to society. That's why we have laws and law enforcement.
The only difference from corporations is that people do not only pursue money. They may have different goals (sex, pleasure, power, influence). That makes people notoriously difficult to parse, and dealing with them is extremely frustrating.
Corporations are easy, they are the incarnation of greed. For them money is all that matters.
What you appear to be saying is that corporations are an existential threat to everyone. If so, they should be abolished.
Not really.
But they are entities designed to pursue profits as their primary motivation. With proper regulation, when the pursuit of profits align with the needs of society, they can be great to have around.
Problems arise when regulation is insufficient, when regulators are complacent or corrupt, or when governments look after the desires of corporations instead of the benefit of the people.
When that happens, then yes, they become a threat to society.
But they are entities designed to pursue profits as their primary motivation. With proper regulation, when the pursuit of profits align with the needs of society, they can be great to have around.
Problems arise when regulation is insufficient, when regulators are complacent or corrupt, or when governments look after the desires of corporations instead of the benefit of the people.
When that happens, then yes, they become a threat to society.
Companies have boards in which shareholders tell directors and the execs what they consider their interests are. They can say that it's max profits now, or they can say that they want steady over the long term.
My inexpert assessment is that this shift was precipitated by the creation of these tycoons in the industrial revolution. Prior to that, big corporations like the India Tea Company were formally/directly associated with the State.
Getting into my more controversial political opinions, I believe now these corporations and their executives also control the government almost exclusively but they at least pretend they’re separate from the State.
Getting into my more controversial political opinions, I believe now these corporations and their executives also control the government almost exclusively but they at least pretend they’re separate from the State.
I assume you mean the East India Company? And from what I understand it was somewhat different than directly controlled by the state. Getting the "Queen's permission" was more of a business license, and they actively formed a lobby within in the government to lobby for a monopoly which was roughly 100 years after they were formed as a private venture.
> East India Company?
Yep
Yep
>One of the most insidious ideas of our time
This isn't obvious to me. The idea is to pursue profits above all else, but also that giving people what they want will result in maximal profits. Is giving people what they want insidious?
This isn't obvious to me. The idea is to pursue profits above all else, but also that giving people what they want will result in maximal profits. Is giving people what they want insidious?
I think the concerns about profit maximisation include externalities. For example, if somebody not party to a transaction is harmed by unsafe behaviour, that might not inhibit that behaviour from maximising profit for those who are party to the transaction.
This is pretty much what heterodox economics is all about. Veblen hits on this with the theory of the leisure class (I think? I my heterodox knowledge isn’t as good as it once was). Heterodox economics is probably the least known category of economics, but arguably one of the most important. That importance is because it helps us think about our motivations and reasons not just quantitative results (I do love quantitative results, tho).
Most folks don’t even know money wasn’t really used until the like 1500s. The wealthy bartered and used coins as a sign of wealth, using them (coins) was typically faux-pas. And even then, the church hated money because it stripped them and the monarchy of power…
Most folks don’t even know money wasn’t really used until the like 1500s. The wealthy bartered and used coins as a sign of wealth, using them (coins) was typically faux-pas. And even then, the church hated money because it stripped them and the monarchy of power…
> Most folks don’t even know money wasn’t really used until the like 1500s
Do you mean in Europe? Pretty sure money has been used quite a bit in many other places.
Do you mean in Europe? Pretty sure money has been used quite a bit in many other places.
> Do you mean in Europe? Pretty sure money has been used quite a bit in many other places.
I mean pretty much everywhere. Money wasn't used the same way it is today, and it wasn't until the 1500s that really emerged as a result of the Dutch being prolific traders. Coins existed but money wasn't spent, or used, like it is today... Barter was the primary way for people, both rich and poor, to acquire goods.
I mean pretty much everywhere. Money wasn't used the same way it is today, and it wasn't until the 1500s that really emerged as a result of the Dutch being prolific traders. Coins existed but money wasn't spent, or used, like it is today... Barter was the primary way for people, both rich and poor, to acquire goods.
yeah me too, its wide field... I'm currently working through this series https://press.princeton.edu/series/the-princeton-economic-hi...
Sometimes I get sidetracked by specific sources and explore tanget stuff, but most of this series is pretty approachable
the shareholder class is everyone. we all benefit from the wealth created. it's odd to constantly see people posting on the internet, using computers, from their warm house ... etc. not noticing this.
I shared your curiosity on this exact subject in the past. There is an interesting historiography entitled “The Transition from Feudalism to Capitalism,” originally published in the 1950s, which contains a collections of debates on this subject.
It is no frills and quite scholarly, but that is often the case for hyper focused, niche subjects.
It is no frills and quite scholarly, but that is often the case for hyper focused, niche subjects.
Not sure I would describe a multi decade history exploring the transition from feudalism to capitalism as "hyper focused", or niche for that matter.
Your feedback is received. Granted, I do disagree. This is just one specific area of focus in the broader field of Marxist historiography. So it is niche.
It is as niche as studying a specific subject area in the broader field of Egyptology, which again I don’t think would be a stretch to consider niche.
Perhaps a takeaway we can both agree on is niche may not be the best word for describing what I’m talking about. Perhaps subfield of an academic discipline is.
It is as niche as studying a specific subject area in the broader field of Egyptology, which again I don’t think would be a stretch to consider niche.
Perhaps a takeaway we can both agree on is niche may not be the best word for describing what I’m talking about. Perhaps subfield of an academic discipline is.
Since we weren't alive for the king's tolls we may romanticize it as a counterpoint to our corporate-centric organization structures, but while you may believe it to be "insidious" and maybe it is, it's the only reason we have a middle class.
High production, high consumption models are so many people are able to have discretionary income in the modern era. And this is true for every modern economy whether it be democratic, socialist, communist etc. Maximizing productive capacity has a lot of social and environmental consequences and while we are free to hate on the corporations that make it possible, we must also admit that our way of life entirely depends on it. We are of course free to dream of other ways of life, but looking back in history there have been no alternatives that have offered our current quality of life to such a large collection of people.
High production, high consumption models are so many people are able to have discretionary income in the modern era. And this is true for every modern economy whether it be democratic, socialist, communist etc. Maximizing productive capacity has a lot of social and environmental consequences and while we are free to hate on the corporations that make it possible, we must also admit that our way of life entirely depends on it. We are of course free to dream of other ways of life, but looking back in history there have been no alternatives that have offered our current quality of life to such a large collection of people.
> ...while you may believe it to be "insidious" and maybe it is, it's the only reason we have a middle class.
What if the existence of a middle class is transitory? The billionare preppers certainly think our current social order is on borrowed time[1], not that I agree with their outlook, but I take that attitude as evidence that today's capital class does not particularly care for the continued existence of a middle class, unlike Henry Ford.
Once off sales are passé now, and recurring revenue is in. I suspect the middle class gets in the way of profit maximization because of the class' propensity to saving and ability to cross-shop since they have free time.
Selling Patagonia vests for leisure activities may be profitable, but it will lose out to PE squeezing out the middle class from buying homes and making them perpetual renters and unable to afford leisure activity
1. https://www.theguardian.com/news/2022/sep/04/super-rich-prep...
What if the existence of a middle class is transitory? The billionare preppers certainly think our current social order is on borrowed time[1], not that I agree with their outlook, but I take that attitude as evidence that today's capital class does not particularly care for the continued existence of a middle class, unlike Henry Ford.
Once off sales are passé now, and recurring revenue is in. I suspect the middle class gets in the way of profit maximization because of the class' propensity to saving and ability to cross-shop since they have free time.
Selling Patagonia vests for leisure activities may be profitable, but it will lose out to PE squeezing out the middle class from buying homes and making them perpetual renters and unable to afford leisure activity
1. https://www.theguardian.com/news/2022/sep/04/super-rich-prep...
At the same time, this is no reason to stop trying to make it even better, when looking at its inevitable drawbacks.
"the purpose of all human life is to build financial structures to increase the wealth of the shareholder class."
I have never met a single person at any level of any organization or otherwise who has expressed this sentiment. This characterization is a strawman.
Usually the idea that shareholder wealth maximization is central comes with a whole bunch of other economic ideas. Like that long-term wealth is what matters, not wealth tomorrow. And that corporations aren’t the center of all life or meaning for everyone involved, just a way to generate stuff. And that in order to generate more wealth you need to constantly provide more goods for more people at lower cost.
These distorted strawman characterizations of capitalists are just outrage porn, they don’t help move the world forward at all.
I have never met a single person at any level of any organization or otherwise who has expressed this sentiment. This characterization is a strawman.
Usually the idea that shareholder wealth maximization is central comes with a whole bunch of other economic ideas. Like that long-term wealth is what matters, not wealth tomorrow. And that corporations aren’t the center of all life or meaning for everyone involved, just a way to generate stuff. And that in order to generate more wealth you need to constantly provide more goods for more people at lower cost.
These distorted strawman characterizations of capitalists are just outrage porn, they don’t help move the world forward at all.
I've heard it my entire working life, from coworkers at every step of the chain. Engineer wants to build something they think will be good & useful & help the company, and someone backhands them with "how will this make us/the company money?", sometimes followed up with "we're here to make money".
It may not be the exact same statement, but it's very close in spirit. This should be beside the point; we should do things that are good because we can, not just because they make us money, but I usually tend to see there being a ton of potential for the engineer's idea to help make money.
It may not be the exact same statement, but it's very close in spirit. This should be beside the point; we should do things that are good because we can, not just because they make us money, but I usually tend to see there being a ton of potential for the engineer's idea to help make money.
I think we have such different understandings on how economics work we couldn’t have a intelligent conversation about this. Maybe that’s why this topic generates so much heat in some and confusion in others.
I dont think you've made your case very clearly for anyone. And you'be accused a lot of people of being difficult & problematic. Without having tried to make yourself understood.
I like a bunch of the gist of what you are saying, but I feel like most capitalism is bad capitalism, that the short-sightedness's prevalence is almost always outrageous & deserves the hate it attracts.
Organizations have extremely short reward loops. People come and go & dont try to do the right thing for next year, much less the next 5 years. Markets & investors punish poor quarterly reports. Maybe there's an idealized version of capital where folks can play it smart, but it doesnt seem to be happening on this planet.
I like a bunch of the gist of what you are saying, but I feel like most capitalism is bad capitalism, that the short-sightedness's prevalence is almost always outrageous & deserves the hate it attracts.
Organizations have extremely short reward loops. People come and go & dont try to do the right thing for next year, much less the next 5 years. Markets & investors punish poor quarterly reports. Maybe there's an idealized version of capital where folks can play it smart, but it doesnt seem to be happening on this planet.
> we should do things that are good because we can
If I hire you to fix my car I’m not paying you if instead you fix the neighbors car
If I hire you to fix my car I’m not paying you if instead you fix the neighbors car
ah yes, the beautiful zero-sum view of the world, where no one does anything positive ever unless the blood price is paid. thank you for your shitty shit view.
looking at it the other way, a repair shop could just, like, add some washer fluid for free. or clean some wipers to help the life. good repair shops do, because they understand some small benevolent acts cost next to nothing. not everything needs to be a brutal & cold calculated exchange, priced at every point. good is allowed. sometimes it costs intensely little.
i've heard this condescending bullshit used to browbeat & bully countless ideas that would make everyones lives vastly easier within an org. i dont think a mutual benefit ought be required to do a little good; sometimes the price of doing good is just tiny. but the organization/managerial class thinks their contribution is eliminating small nicenesses, without really coming to understand how much it hurts everyone to eliminate niceities. without understanding that often the price is near zero. orgs have a vastly overinflated sense that they, by preventing people from doing good, are helping the org. it causes immense internal dissonance, is unbelievably time wasting & harmful to have the org stepping in to low level shit- basically free activities- & intervening, and it rarely does good.
looking at it the other way, a repair shop could just, like, add some washer fluid for free. or clean some wipers to help the life. good repair shops do, because they understand some small benevolent acts cost next to nothing. not everything needs to be a brutal & cold calculated exchange, priced at every point. good is allowed. sometimes it costs intensely little.
i've heard this condescending bullshit used to browbeat & bully countless ideas that would make everyones lives vastly easier within an org. i dont think a mutual benefit ought be required to do a little good; sometimes the price of doing good is just tiny. but the organization/managerial class thinks their contribution is eliminating small nicenesses, without really coming to understand how much it hurts everyone to eliminate niceities. without understanding that often the price is near zero. orgs have a vastly overinflated sense that they, by preventing people from doing good, are helping the org. it causes immense internal dissonance, is unbelievably time wasting & harmful to have the org stepping in to low level shit- basically free activities- & intervening, and it rarely does good.
> ah yes, the beautiful zero-sum view of the world, where no one does anything positive ever unless the blood price is paid
I didn’t say that. We put rules on corporations to protect shareholders. Nothing prevents shareholders from taking profits and giving them away.
But we don’t want the execs deciding to give away the shareholders moneys for them.
This is also where taxes come in. While others are maximizing profits we take a cut and distribute it to hopefully add some more good to the world
> i dont think a mutual benefit ought be required to do a little good
My personal cynical belief is that there is always a mutual benefit, it could be of different kind but everyone gets something in return. We value goods/actions differently and don’t place $ on every action, but every action has a cost.
I didn’t say that. We put rules on corporations to protect shareholders. Nothing prevents shareholders from taking profits and giving them away.
But we don’t want the execs deciding to give away the shareholders moneys for them.
This is also where taxes come in. While others are maximizing profits we take a cut and distribute it to hopefully add some more good to the world
> i dont think a mutual benefit ought be required to do a little good
My personal cynical belief is that there is always a mutual benefit, it could be of different kind but everyone gets something in return. We value goods/actions differently and don’t place $ on every action, but every action has a cost.
I've never heard of it with the phrase
> shareholder class
at the end of it. But make no mistake, every discussion I've had as been "how will this make us money, and will that impact the stock price" -- which has an implication.
Cuz retail investors don't count for much w/r/t stock ownership.
Plus Milton Friedman's "companies exist only to generate profits for shareholders" has been a mantra since I went to Uni in the 80s.
> shareholder class
at the end of it. But make no mistake, every discussion I've had as been "how will this make us money, and will that impact the stock price" -- which has an implication.
Cuz retail investors don't count for much w/r/t stock ownership.
Plus Milton Friedman's "companies exist only to generate profits for shareholders" has been a mantra since I went to Uni in the 80s.
> Plus Milton Friedman's "companies exist only to generate profits for shareholders" has been a mantra since I went to Uni in the 80s.
Would you invest your 401k/retirement in companies that don’t generate profits for you ?
Would you invest your 401k/retirement in companies that don’t generate profits for you ?
I think that was presented as an ideology rather than anyone’s personal beliefs. Paraphrasing Zizek, to follow an ideology you don’t have to believe it’s true; it’s enough to act as if it is.
Why? This leads to optimal results assuming high quality laws that put a price on externalities and make sure markets are competitive.
These assumptions are approximately correct, so maximizing shareholder value is approximately optimal. It maximizes prosperity.
It's better to create more value than less value all things being equal. If you put it this way, it's obvious.
These assumptions are approximately correct, so maximizing shareholder value is approximately optimal. It maximizes prosperity.
It's better to create more value than less value all things being equal. If you put it this way, it's obvious.
It doesn't account for externalities. It also doesn't distribute "value" equitably.
It's more profitable to dump waste in a lake than to clean it up. It's more profitable to hire children for 10 cents a day than adults for a living wage. It's more profitable to keep using ingredients even after they've started turning bad. None of these deliver value to society.
It's more profitable to dump waste in a lake than to clean it up. It's more profitable to hire children for 10 cents a day than adults for a living wage. It's more profitable to keep using ingredients even after they've started turning bad. None of these deliver value to society.
Some say the answer all starts with $5 days and Dodge vs Ford.
https://corpgov.law.harvard.edu/2021/12/01/dodge-v-ford-what...
Much more in-depth read:
https://scholarship.law.vanderbilt.edu/cgi/viewcontent.cgi?a...
If you'd like to read a book on each side of the coin: "The Shareholder Value Myth" - Lynn Stout and Stephen Bainbridge just published a rebuttal book "The Profit Motive"
I've read Lynn Stouts book, it's good, I've yet to start Stephen Bainbridge but I've been told it's a good read.
https://corpgov.law.harvard.edu/2021/12/01/dodge-v-ford-what...
Much more in-depth read:
https://scholarship.law.vanderbilt.edu/cgi/viewcontent.cgi?a...
If you'd like to read a book on each side of the coin: "The Shareholder Value Myth" - Lynn Stout and Stephen Bainbridge just published a rebuttal book "The Profit Motive"
I've read Lynn Stouts book, it's good, I've yet to start Stephen Bainbridge but I've been told it's a good read.
Breach of fiduciary duty is a real thing, can get you sued, and can cost an executive or board member their position. Fiduciary duty is the legal responsibility to act solely in the best interests of another party - shareholders in this case. So if shareholders want profits to be maximized, and that is their definition of your duty and their definition of success, then if you act counter to these interests, you may be in breach. However in 2023 many organizations take an ESG approach to strategy and governance which often encompasses taking into account environmental impact, social impact and other factors that acknowledge that a business isn’t sustainable without the environment and society within which it operates.
To take the recent Ohio train derailment as an example, it appears that Norfolk Southern’s execs may have made decisions that were good for business but catastrophic for the environment and society. In the 1980s one may speculate that not acting purely in the interests of profitability may have gotten them sued. In the modern era they may be sued from an ESG perspective for making decisions that put the sustainability of their business at risk by risking the sustainability of the environment and the society within which it operates.
Not legal advice as I am not a lawyer.
To take the recent Ohio train derailment as an example, it appears that Norfolk Southern’s execs may have made decisions that were good for business but catastrophic for the environment and society. In the 1980s one may speculate that not acting purely in the interests of profitability may have gotten them sued. In the modern era they may be sued from an ESG perspective for making decisions that put the sustainability of their business at risk by risking the sustainability of the environment and the society within which it operates.
Not legal advice as I am not a lawyer.
The linked answers actively counteract this. Fiduciary duty is to the corporation, not the shareholders. The shareholders have certain limited rights but you don't have any duty to maximize their returns.
That’s a meaningless distinction. Failure to meet fiduciary obligations in a way that causes provable damages to shareholders gives shareholders grounds to sue the fiduciary.
"Nor does the law require, as many believe, that executives and directors owe a special fiduciary duty to shareholders. The fiduciary duty, in fact, is owed simply to the corporation, which is owned by no one, just as you and I are owned by no one — we are all “persons” in the eyes of the law. Shareholders, however, have a contractual claim to the “residual value” of the corporation once all its other obligations have been satisfied — and even then directors are given wide latitude to make whatever use of that residual value they choose, as long they’re not stealing it for themselves."
"the corporation, which is owned by no one"
Conflating the legal fiction of the personhood of a corporation with the fact that it cannot be owned, or worse, has no owners, is not something I'd expect to hear from a WaPo journalist.
(Upon further research, the author was neither an attorney or an economist, but did win the Pulitzer, and has since passed on: https://en.wikipedia.org/wiki/Steven_Pearlstein )
However, I still take issue with the statement that a corporation is not "owned" by the shareholders. As a matter of law, a corporation is owned by the shareholders.
Conflating the legal fiction of the personhood of a corporation with the fact that it cannot be owned, or worse, has no owners, is not something I'd expect to hear from a WaPo journalist.
(Upon further research, the author was neither an attorney or an economist, but did win the Pulitzer, and has since passed on: https://en.wikipedia.org/wiki/Steven_Pearlstein )
However, I still take issue with the statement that a corporation is not "owned" by the shareholders. As a matter of law, a corporation is owned by the shareholders.
> However, I still take issue with the statement that a corporation is not "owned" by the shareholders. As a matter of law, a corporation is owned by the shareholders.
As a matter of law a corporation is not:
> Simply and clearly, the corporation owns its own assets. In the simplest terms, a private company became a public company when the original owners gave up ownership. In turn, they received a stock certificate outlining certain rights to profits and other privileges. What they got, again, was a stock certificate not a certificate of ownership. The word “ownership” does not appear in that document. Additionally, while the shareholders are entitled to a portion of profits, as shareholders, they are no longer exposed to liabilities of the companies in which they hold shares.
* https://www.forbes.com/sites/petergeorgescu/2021/07/21/the-s...
> This paper demonstrates that shareholder ownership, a sacred cow of business, is a myth. According to our legal system, shareholders do not own the Modern Corporation itself, nor do they own the corporate assets or profits. […]
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1464148
See also: Paddy Ireland (1999), 'Company Law and the Myth of Shareholder Ownership', Modern Law Review, 62, pp. 32-57.
As a matter of law a corporation is not:
> Simply and clearly, the corporation owns its own assets. In the simplest terms, a private company became a public company when the original owners gave up ownership. In turn, they received a stock certificate outlining certain rights to profits and other privileges. What they got, again, was a stock certificate not a certificate of ownership. The word “ownership” does not appear in that document. Additionally, while the shareholders are entitled to a portion of profits, as shareholders, they are no longer exposed to liabilities of the companies in which they hold shares.
* https://www.forbes.com/sites/petergeorgescu/2021/07/21/the-s...
> This paper demonstrates that shareholder ownership, a sacred cow of business, is a myth. According to our legal system, shareholders do not own the Modern Corporation itself, nor do they own the corporate assets or profits. […]
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1464148
See also: Paddy Ireland (1999), 'Company Law and the Myth of Shareholder Ownership', Modern Law Review, 62, pp. 32-57.
The 13th Amendment begs to disagree.
/s
/s
No - but Wall Streeters (and a lot of similar creeps trying to justify various nasty stuff) would love it if everyone believed that companies were.
Really get the https://en.wikipedia.org/wiki/Superior_orders vibes from some of them.
The system forced me to be a monster by command of the process. So i enthusiastically embraced every monstrosity that i had to commit for that and gave up all moral standalone responsibility.
The system forced me to be a monster by command of the process. So i enthusiastically embraced every monstrosity that i had to commit for that and gave up all moral standalone responsibility.
> and gave up all moral standalone responsibility.
While also pocketing some absolutely obscene bonuses. But I felt really bad about all that.
While also pocketing some absolutely obscene bonuses. But I felt really bad about all that.
> But I felt really bad about all that.
... for about 12 seconds. Then I got the email notification for the extra millions in my bank account, and I stopped feeling bad.
... for about 12 seconds. Then I got the email notification for the extra millions in my bank account, and I stopped feeling bad.
[deleted]
Is that why they release statements saying it's not true?
https://www.businessroundtable.org/business-roundtable-redef...
https://www.businessroundtable.org/business-roundtable-redef...
It cuts both ways for Wall Street since activist investors use it to spoil what other financiers believe to be better plans.
If Wall Streeters own a majority of shares then it would be true.
atlgator(1)
I don't think the question is well formed. What is meant by "maximize profits for shareholders?" That doesn't even make sense. Shareholders don't take profits. There's no definition for "maximizing" any sort of gain as the ceiling isn't known.
A better question would be "are corporate executives accountable to shareholders for stock value?" 1000% they are accountable to the shareholders and if the executives do not act in their best interests, there could be repercussions. This may even include legal liability, depending on the situation.
A better question would be "are corporate executives accountable to shareholders for stock value?" 1000% they are accountable to the shareholders and if the executives do not act in their best interests, there could be repercussions. This may even include legal liability, depending on the situation.
What is the best interest of the shareholders though? Is it “now” (this quarter) or is it “the future” (say 5 years’ time).
Or is it a several variables problem in which there is no “optimum”?
Or is it a several variables problem in which there is no “optimum”?
I think this is more easily answered in the negative. What would happen if an executive acted in a way that NEGATIVELY impacted shareholder value? For example, they decided to not issue dividends and gave everyone above a certain level a huge bonus instead.
Probably right, that is something I had not thought about.
I'm going to randomly say that executive's objective is effectively maximizing executives' compensation. It should be the shareholders' objective to put the bonus schema to align maximization of executive compensation to maximization of shareholder wealth.
> A better question would be "are corporate executives accountable to shareholders for stock value?"
This has the same issues, though. Over what timeframe? How do you prove a certain action helped/hurt share value independent of other variables? How do you account for intangibles?
Wall Street has encouraged a very short-term view of the question, but that's not legally required. Some companies have pushed back on this; Apple has a few times said "no, we're not doing that, because short-term gains would hurt long-term ones".
This has the same issues, though. Over what timeframe? How do you prove a certain action helped/hurt share value independent of other variables? How do you account for intangibles?
Wall Street has encouraged a very short-term view of the question, but that's not legally required. Some companies have pushed back on this; Apple has a few times said "no, we're not doing that, because short-term gains would hurt long-term ones".
Ford v. Dodge (cited above by another commenter).
Ford was seeing massive profits and struggling to keep up with orders and retain staff. Henry Ford decided to end special dividends in order to allocate these profits to the expansion of the company. The Dodge Brothers, who were shareholders at the time, sued and won claiming damages from them not getting special dividends when Ford was seeing record profits. Ford's defense was that this decision was what was right for the company and his workers.
This case is viewed as one of the seminal examples of workers vs shareholders. While there is considerable debate over the topic, I'm not convinced by the detractors. If the executives of a company deliberately sacrificed shareholder wealth for the benefit of the workers, the shareholders would almost certainly sue and I have no doubt they would win.
Ford was seeing massive profits and struggling to keep up with orders and retain staff. Henry Ford decided to end special dividends in order to allocate these profits to the expansion of the company. The Dodge Brothers, who were shareholders at the time, sued and won claiming damages from them not getting special dividends when Ford was seeing record profits. Ford's defense was that this decision was what was right for the company and his workers.
This case is viewed as one of the seminal examples of workers vs shareholders. While there is considerable debate over the topic, I'm not convinced by the detractors. If the executives of a company deliberately sacrificed shareholder wealth for the benefit of the workers, the shareholders would almost certainly sue and I have no doubt they would win.
Ford v. Dodge had antitrust complexities to it, and there's been substantial jurisprudence since then.
Burwell v. Hobby Lobby Stores, Inc., https://caselaw.findlaw.com/us-supreme-court/13-354.html
> While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
Burwell v. Hobby Lobby Stores, Inc., https://caselaw.findlaw.com/us-supreme-court/13-354.html
> While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
I feel like this is nitpicking. There is nothing codified in law, because it's not required to be.
The fundamental question should be "if the executives of a company acted in the best interests of employees in such a way that it negatively impacted shareholder value, would this be grounds for a civil suit?" I think so. The shareholders are ultimately the owners of the company. Now, would this ever happen? Probably not. The first thing that would happen is that the board would remove the executives. So basically, this would take both the executives and the board acting against the interests of the shareholders. Given that the board is almost always made up of the majority shareholders, it would take a really extreme case for something like this to happen.
Having said that, there are plenty of examples of shareholders taking action against the board when the board acts against their best interests.
The fundamental question should be "if the executives of a company acted in the best interests of employees in such a way that it negatively impacted shareholder value, would this be grounds for a civil suit?" I think so. The shareholders are ultimately the owners of the company. Now, would this ever happen? Probably not. The first thing that would happen is that the board would remove the executives. So basically, this would take both the executives and the board acting against the interests of the shareholders. Given that the board is almost always made up of the majority shareholders, it would take a really extreme case for something like this to happen.
Having said that, there are plenty of examples of shareholders taking action against the board when the board acts against their best interests.
> The fundamental question should be "if the executives of a company acted in the best interests of employees in such a way that it negatively impacted shareholder value, would this be grounds for a civil suit?"
Sure; the point is that "did this negatively impact shareholder value" is a more complicated question than the "short term profit at all costs" folks would have you believe.
For example: what's the impact on shareholder value of a reputation as an ethical company who pays their workers above-market salaries? How do you balance that versus "it ate into our profits by 10% this year"?
Sure; the point is that "did this negatively impact shareholder value" is a more complicated question than the "short term profit at all costs" folks would have you believe.
For example: what's the impact on shareholder value of a reputation as an ethical company who pays their workers above-market salaries? How do you balance that versus "it ate into our profits by 10% this year"?
Maximize here is not "to find the largest value", but "to increase or make as great as possible". The question formation seems fine to me.
What are "best interests"? That gets back to the heart of the question here.
What are "best interests"? That gets back to the heart of the question here.
As stated above, I think this is best answered in the negative similar to how other agencies are held to certain standards according to the law (e.g. lawyers or real estate agents). What would happen if an executive team decided to specifically act against the interests of shareholders in the interests of the company itself? For example, suddenly stopping dividends and instead issuing huge bonuses to the employees?
> Shareholders don't take profits
This is some Orwellian level doublespeak. For all intents and purposes the only reason to buy shares is to rake in profits. There are some huge levels of misdirection that happens which ultimately lead to workers not getting the profits they produce, and this profits going to shareholders that don’t contribute anything.
This is some Orwellian level doublespeak. For all intents and purposes the only reason to buy shares is to rake in profits. There are some huge levels of misdirection that happens which ultimately lead to workers not getting the profits they produce, and this profits going to shareholders that don’t contribute anything.
Profits influence share price, but outside of dividends and buybacks, shareholders do not take profits from the company. My point was that the question isn't well formed, because it would not make sense for shareholders to sue over poor profits. Shareholders are not directly harmed by profits/losses.
Instead, shareholders would need to (and have successfully) sue(d) over executive actions which negatively and negligently impacted shareholder value (stock price).
Instead, shareholders would need to (and have successfully) sue(d) over executive actions which negatively and negligently impacted shareholder value (stock price).
But they still take profits, just through indirect means. They’re not harmed, but they sure feel entitled to profits. When the stock raises in value, and shareholders make their money from it, they are taking profits (what else could you call it). That profit was created by somebody that worked for it but didn’t get it.
> ...for stock value?" 1000% they are accountable...
No, more like 40%. Look at (say) the huge swings in P/E ratios for the US stock market over the past ~century. Even Tim Cook at Apple has no control over whether large-cap tech stocks are being valued at 6X vs. 100X.
No, more like 40%. Look at (say) the huge swings in P/E ratios for the US stock market over the past ~century. Even Tim Cook at Apple has no control over whether large-cap tech stocks are being valued at 6X vs. 100X.
Company leaders are legally obligated to act in the best interests of the company and the shareholders. That is related to profit maximization, but it's not the same thing.
Right. I take it as meaning, "don't abuse your position as CEO to enrich yourself to the detriment of the company."
The cool thing about the business judgment rule is, you can define 'best interests' almost any way you want.
Not that different from 'effective altruism', really. Maybe running a Ponzi is moral if you are taking the money from people who are not effective altruists, but you are saving the planet or something?
Or Kant's categorical imperative, act in a way that you would want to make universal law. Then in order to act morally, you have to solve for all downstream impacts of the action over all time, if everyone acts that way.
Seems computationally intractable, possible multiple local equilibria, problems with which discount rates to use and whatnot.
Hence the popularity of simple ethical systems, just do what God says on the tablets and be done with it.
That's the cool thing about shaky theoretical foundations and fuzzy data, you can project anything you want onto them and act with a great deal of moral certainty about everything.
Not that different from 'effective altruism', really. Maybe running a Ponzi is moral if you are taking the money from people who are not effective altruists, but you are saving the planet or something?
Or Kant's categorical imperative, act in a way that you would want to make universal law. Then in order to act morally, you have to solve for all downstream impacts of the action over all time, if everyone acts that way.
Seems computationally intractable, possible multiple local equilibria, problems with which discount rates to use and whatnot.
Hence the popularity of simple ethical systems, just do what God says on the tablets and be done with it.
That's the cool thing about shaky theoretical foundations and fuzzy data, you can project anything you want onto them and act with a great deal of moral certainty about everything.
In practice company leaders can do pretty much whatever they like. The "best interest" test doesn't hold up in court, except in cases of shameless looting of a company by insiders.
Take a leveraged buyout for instance. The company takes on a perhaps fatal amount of debt, the employees stand to lose their jobs, the shareholders might benefit if the LBO works out, but they lose if the company goes bankrupt. Who wins? The vultures who organized the LBO, because their downside is limited and their upside is highly leveraged.
Company suffers. Shareholders suffer. Some insiders benefit. And it's still legal.
Another example. Executives award themselves generous option packages. Then they announce a massive buyback program, which drives the stock price up (by arithmetic). The executives' options go to the moon. Big companies like Facebook have incinerated hundreds of billions in shareholder value this way. But it's legal, shareholder interests be damned.
Take a leveraged buyout for instance. The company takes on a perhaps fatal amount of debt, the employees stand to lose their jobs, the shareholders might benefit if the LBO works out, but they lose if the company goes bankrupt. Who wins? The vultures who organized the LBO, because their downside is limited and their upside is highly leveraged.
Company suffers. Shareholders suffer. Some insiders benefit. And it's still legal.
Another example. Executives award themselves generous option packages. Then they announce a massive buyback program, which drives the stock price up (by arithmetic). The executives' options go to the moon. Big companies like Facebook have incinerated hundreds of billions in shareholder value this way. But it's legal, shareholder interests be damned.
> Big companies like Facebook have incinerated hundreds of billions with buybacks at absurd valuations at the expense of shareholders. But it's legal, shareholder interests be damned.
Facebook returned profit to shareholders via buybacks.
If you invest in a company, you expect to make a return. There are two ways to do this: dividends or selling your equity.
Dividends drain cash from the company to repay investors. Stock buybacks drain cash from the company to repay investors.
Both are in the interest of shareholders! What is the other option? Make profit forever and never return anything to shareholders? Then we’re not talking about an investment. It’s crypto-ponzi all over again.
Facebook returned profit to shareholders via buybacks.
If you invest in a company, you expect to make a return. There are two ways to do this: dividends or selling your equity.
Dividends drain cash from the company to repay investors. Stock buybacks drain cash from the company to repay investors.
Both are in the interest of shareholders! What is the other option? Make profit forever and never return anything to shareholders? Then we’re not talking about an investment. It’s crypto-ponzi all over again.
Share buybacks when a company is overvalued are bad for shareholders. Share buybacks when a company is undervalued are good for shareholders. When you buy shares the price matters! This is still true when a company buys its own shares!
During the 2021 mania the share buybacks accelerated, even though executives could easily have waited a year or two and sat on their money as the zero interest rate era was coming to an end.
You don't want to do buybacks at $300 a share when your company is going to trade at $100 in a year. Because the shares you bought will then be $200 underwater. A buyback is a stock transfer between a party that believes the stock to be overvalued to the company. And in this case of facebook the seller was right and facebook was wrong.
During the 2021 mania the share buybacks accelerated, even though executives could easily have waited a year or two and sat on their money as the zero interest rate era was coming to an end.
You don't want to do buybacks at $300 a share when your company is going to trade at $100 in a year. Because the shares you bought will then be $200 underwater. A buyback is a stock transfer between a party that believes the stock to be overvalued to the company. And in this case of facebook the seller was right and facebook was wrong.
And on top of that, you don't want buybacks to happen at the expense of other operations. For instance, railway companies bought back a shitload of stock and then cut funding to inspections and other safety measures.
What is the other option?
You can sell your stocks to someone else. The company doesn't have to be the one to buy it.
Also, remember, investments do come with risk.
You can sell your stocks to someone else. The company doesn't have to be the one to buy it.
Also, remember, investments do come with risk.
> You can sell your stocks to someone else. The company doesn't have to be the one to buy it.
But that defeats the purpose. The company buys back stock not to hold it, but to dissolve it and drive up the value of remaining shares mathematically.
But that defeats the purpose. The company buys back stock not to hold it, but to dissolve it and drive up the value of remaining shares mathematically.
Large public companies have diverse, non monolithic shareholders who very rarely have similar goals beyond making money. It is exceedingly rare for the majority of shareholders to agree on anything other than maximizing either short term, or long term discounted profits. Sure, it's possible to have other goals, but that almost never happens in practice.
This is also false, but less obviously so. The most clear counter example is officers are allowed to negotiate increased compensation even if it hurts the company. Which illustrates the separation between acting as an individual and an officer.
The actual legal obligations are fairly narrow such as protecting minority shareholders. But, that rule is only in effect for the most egregious situations as there isn’t a strict ranking between objectives. Reducing pollution more than legally mandated is a tradeoff between profits, reputation, and shareholder wellbeing. It’s simply not obvious what the correct tradeoff would be and things get even more fuzzy when you include risks.
The actual legal obligations are fairly narrow such as protecting minority shareholders. But, that rule is only in effect for the most egregious situations as there isn’t a strict ranking between objectives. Reducing pollution more than legally mandated is a tradeoff between profits, reputation, and shareholder wellbeing. It’s simply not obvious what the correct tradeoff would be and things get even more fuzzy when you include risks.
That's not an example of why this is false, it's an example of a conflict of interests.
The CEO, for example, needs to push for a compensation package that shareholders see as fair. If not, they can file a derivative lawsuit as a remedy.
The CEO, for example, needs to push for a compensation package that shareholders see as fair. If not, they can file a derivative lawsuit as a remedy.
Yes shareholders can sue, but they such sue the board not the CEO.
In well run public company the CEO’s don’t set their own compensation package they negotiate with a board who does. In that negotiation the CEO has zero legal obligations with respect to the company they are in effect an independent entity at the time. Of course this is assuming an independent board, conflicts of interest can still happen.
In well run public company the CEO’s don’t set their own compensation package they negotiate with a board who does. In that negotiation the CEO has zero legal obligations with respect to the company they are in effect an independent entity at the time. Of course this is assuming an independent board, conflicts of interest can still happen.
The problem with that is just that the best interest of the shareholders is making as much money as possible in the short term, while the best interest of the company is being able to survive long term, which it won't be if all profits are siphoned off by the shareholders rather than being invested in stuff like R&D...
Shareholders may be interested in other things beside making money. For example, a shareholder in Hain Celestial might be interested in ensuring that healthy organic food is available in as many retail locations as possible. Or a Fox Corp. investor might feel their best interests are in countering the dominance of leftist dogma in the media.
Aren't most shareholders long-term investors?
I personally want as much return as possible over a 20-30 year time span, I don't care about next quarter.
As a shareholder myself, I'm much more interested in long term money.
Not only that - the CEO has broad authority to decide what the best interests of the company and shareholders are, within reason.
Shareholders can't sue the CEO of Whole Foods for failing to stock profitable Coca-Cola products. If the CEO says that's the right decision for their brand, reputation and market positioning - that's precisely the sort of professional judgement the CEO was hired to make.
Shareholders can't sue the CEO of Whole Foods for failing to stock profitable Coca-Cola products. If the CEO says that's the right decision for their brand, reputation and market positioning - that's precisely the sort of professional judgement the CEO was hired to make.
I'd like to be able to read the actual law on this. Happen to have a reference to the section of US Code where this is spelled out?
Of course, if all you do is profit maximise you will be fine. But if you divert from that you get to spend years and millions of dollars in court proving you were not wrong...
>One of the most insidious ideas of our time
Completely agree. I took a lot of business class in university about 20 years ago. undergrad in econ, accounting, M.S. in finance, cpa etc.
I'm kind of sickened now when I look back at that way things were taught in the sense that.. a companies sole purpose to maximize profits is like this "thing" that is under the table inherently factual. Sure it's said out loud, but never in any context of really "why" and just what profound effects it has on everyone when you make that vital assumption.
Everything was presented in such an academic way that.. it makes sense in that context but there is so much more to the world. Economics everyone is taught of a supply & demand curve like it's some law of nature. It's literally based on greed! (which, ok yes you can easily say IS our nature.. but should it be?). If I'm able only able to produce 100 loafs of bread a day and there is demand for 200 a day.. economics say I should keep raising my prices until there is demand for exactly 100. That's called price gouging and ALWAYS hurts the people who can't afford it. See: any concert/sporting event these days. They push every single penny they can out of people and price the shit out of people who actually need a break the most.
Anyway I'm just ranting here. But my point is the pure academics and the needs of the society are at great odds. I'm guessing things are a little better now, maybe? Kids probably question some of these "givens", at least enough to get others wondering. I mean shit not to mention kids these days must be feeling it ever WAY more with the simple costs of school, healthcare, rent, food etc.
Completely agree. I took a lot of business class in university about 20 years ago. undergrad in econ, accounting, M.S. in finance, cpa etc.
I'm kind of sickened now when I look back at that way things were taught in the sense that.. a companies sole purpose to maximize profits is like this "thing" that is under the table inherently factual. Sure it's said out loud, but never in any context of really "why" and just what profound effects it has on everyone when you make that vital assumption.
Everything was presented in such an academic way that.. it makes sense in that context but there is so much more to the world. Economics everyone is taught of a supply & demand curve like it's some law of nature. It's literally based on greed! (which, ok yes you can easily say IS our nature.. but should it be?). If I'm able only able to produce 100 loafs of bread a day and there is demand for 200 a day.. economics say I should keep raising my prices until there is demand for exactly 100. That's called price gouging and ALWAYS hurts the people who can't afford it. See: any concert/sporting event these days. They push every single penny they can out of people and price the shit out of people who actually need a break the most.
Anyway I'm just ranting here. But my point is the pure academics and the needs of the society are at great odds. I'm guessing things are a little better now, maybe? Kids probably question some of these "givens", at least enough to get others wondering. I mean shit not to mention kids these days must be feeling it ever WAY more with the simple costs of school, healthcare, rent, food etc.
> Economics everyone is taught of a supply & demand curve like it's some law of nature. It's literally based on greed! (which, ok yes you can easily say IS our nature.. but should it be?)
That's the distinction of descriptivism vs prescriptivism.
Both types of theories are important, but miscommunication about which one a theory is representing is a source of many unnecessary arguments.
Agreed on the rest... Mainstream economic theory does not include externalities (including environmental) into the the price... Most likely because society still sucks at enforcing externalities into prices.
More concretely: systematically gouging people who can't afford it is likely to create social issues, while at the same time generating profit for someone else in the exploitative chain. In an ideal world, that profit would be reduced to directly pay for social issues it causes. Of course, that's easier said than done in practice. There's no free lunch, so the bill goes to society to pay for somehow, either through increased taxes or lower standard of living for all of us.
An example: say someone needs to go into debt to get basic education for their kids. The parent works more, spends less time with the kids. Kids are less likely to live up to their potential, and more likely to be involved later in life with criminality, drug use, homelessness. Meanwhile, a small group of people higher up in the chain that systematically gouges thousands like this family, enjoy a nice year end bonus, not for working extra hard or being particularly clever, but just because they've inserted themselves in this exploitative mechanism. Meanwhile, we all pay a little more tax to pay for remedial social programs and policing, to deal with those that were already vulnerable and further nudged into bad outcomes.
That's the distinction of descriptivism vs prescriptivism.
Both types of theories are important, but miscommunication about which one a theory is representing is a source of many unnecessary arguments.
Agreed on the rest... Mainstream economic theory does not include externalities (including environmental) into the the price... Most likely because society still sucks at enforcing externalities into prices.
More concretely: systematically gouging people who can't afford it is likely to create social issues, while at the same time generating profit for someone else in the exploitative chain. In an ideal world, that profit would be reduced to directly pay for social issues it causes. Of course, that's easier said than done in practice. There's no free lunch, so the bill goes to society to pay for somehow, either through increased taxes or lower standard of living for all of us.
An example: say someone needs to go into debt to get basic education for their kids. The parent works more, spends less time with the kids. Kids are less likely to live up to their potential, and more likely to be involved later in life with criminality, drug use, homelessness. Meanwhile, a small group of people higher up in the chain that systematically gouges thousands like this family, enjoy a nice year end bonus, not for working extra hard or being particularly clever, but just because they've inserted themselves in this exploitative mechanism. Meanwhile, we all pay a little more tax to pay for remedial social programs and policing, to deal with those that were already vulnerable and further nudged into bad outcomes.
Early in my career, I worked for a company that had one of its five core values as "Maximize shareholder value" and these would get displayed all around the company (as if they were supposed to inspire us). I thought (1) 'I can't believe anyone is actually inspired by that' and (2) 'Well, at least they're honest about it'.
Were you a shareholder at the time?
As only one of 5 principles, that's not necessarily bad (depending on what the other 4 are).
The simple answer is no.
What companies are enjoined from doing is purposefully working against the interests of the corporate good (and by extension shareholders). What that “good” is, is very fuzzy. But roughly speaking it means you can’t take gross actions that will clearly significantly harm the company, and that you know it will cause harm.
A good example would be Twitter. If it was still public, I think a case could be made the Musk took a number of gross actions that directly and materially harmed the company.
What companies are enjoined from doing is purposefully working against the interests of the corporate good (and by extension shareholders). What that “good” is, is very fuzzy. But roughly speaking it means you can’t take gross actions that will clearly significantly harm the company, and that you know it will cause harm.
A good example would be Twitter. If it was still public, I think a case could be made the Musk took a number of gross actions that directly and materially harmed the company.
Seeing as how Twitter use has skyrocketed since Musk freed the bird, I'd say that would be a very hard case to prove. Especially considering all the worldview changing revelations that have been allowed to come to light on the platform since.
> the corporate good (and by extension shareholders)
The top answer (after the second edit) makes a very good and explicit distinction between the corporation and the shareholders. The shareholders do not, in fact, own the company, they have just entered into a contract with it that grants them certain rights.
This means you can do things that are good for the company that are not necessarily good for the shareholders (and vise versa).
The top answer (after the second edit) makes a very good and explicit distinction between the corporation and the shareholders. The shareholders do not, in fact, own the company, they have just entered into a contract with it that grants them certain rights.
This means you can do things that are good for the company that are not necessarily good for the shareholders (and vise versa).
The Delaware courts interpret the Business Judgment Rule[1] very liberally. That's because there is risk in business, and corporations take risks and lose all the time, and that's just capitalism. The court is not there to determine what risks are good business and which are bad business.
The big thing you aren't allowed to do that happens with some regularity is breach the duty of loyalty by engaging in self-dealing transactions, trade using inside information, or taking opportunities that are presented to the corporation for your other businesses.
[1] https://en.wikipedia.org/wiki/Business_judgment_rule
The big thing you aren't allowed to do that happens with some regularity is breach the duty of loyalty by engaging in self-dealing transactions, trade using inside information, or taking opportunities that are presented to the corporation for your other businesses.
[1] https://en.wikipedia.org/wiki/Business_judgment_rule
Much has been said about the need for dog-eat-dog law of the jungle in the business world to ensure darwinian evolution of the economy to deliver maximum results for the society and to secure an everlasting prosperity.
I have no problem with that. The benefits of capitalism seem well articulated and history supports many of the assertions.
On the other hand, I think the fragile, precious, and short-lived people of said society need to exist in a different environment insulated from the brutal realities of daily survival that exists in a world of business by robust social safety nets and welfare, allowing them achieve their potential without being ridden by anxieties of merciless pressures of daily survival.
But one may also observe that the current state of things in US at least - is sometimes the mirror image of the desired state - the largest businesses have often secured themselves robust socially-funded safety nets, while people are more and more stripped of any social protections, see the erosion of welfare programs of the past, while being criticized for not robustly enough fighting for survival according to the laws of the jungle.
I have no problem with that. The benefits of capitalism seem well articulated and history supports many of the assertions.
On the other hand, I think the fragile, precious, and short-lived people of said society need to exist in a different environment insulated from the brutal realities of daily survival that exists in a world of business by robust social safety nets and welfare, allowing them achieve their potential without being ridden by anxieties of merciless pressures of daily survival.
But one may also observe that the current state of things in US at least - is sometimes the mirror image of the desired state - the largest businesses have often secured themselves robust socially-funded safety nets, while people are more and more stripped of any social protections, see the erosion of welfare programs of the past, while being criticized for not robustly enough fighting for survival according to the laws of the jungle.
> The benefits of capitalism seem well articulated and history supports many of the assertions
This is if you ignore all the mass hunger or the homelessness that many people experience globally, or the mass exclusion from treatment which could be administrated but isn’t because people can’t afford it (take the recent misdistribution of covid vaccines which caused millions of unnecessary deaths).
And also if you ignore the climate disaster, which was caused by oil companies simply maximizing their profits, at the cost of all else, including our climate, engaging in a mass disinformation campaign to downplay the effect of carbon emissions, despite their own science telling them otherwise.
If you only focus on the upper and middle class of the richest nations, sure, this system does seem to work nicely. I’m sure you could say the same about communism if you only focus on Soviet upper party members.
This is if you ignore all the mass hunger or the homelessness that many people experience globally, or the mass exclusion from treatment which could be administrated but isn’t because people can’t afford it (take the recent misdistribution of covid vaccines which caused millions of unnecessary deaths).
And also if you ignore the climate disaster, which was caused by oil companies simply maximizing their profits, at the cost of all else, including our climate, engaging in a mass disinformation campaign to downplay the effect of carbon emissions, despite their own science telling them otherwise.
If you only focus on the upper and middle class of the richest nations, sure, this system does seem to work nicely. I’m sure you could say the same about communism if you only focus on Soviet upper party members.
So, what is the right answer? Even if it's not illegal, if investors are short term profit driven and can pop in and out of investments at will, does that really matter?
The agents are put in place by the owners/board. As long as there's no reason to prioritize long term stability and growth duty over short term profits, what will change?
And the opposite -- owners NOT being in charge of agents -- sounds even scarier.
Do any markets lock-in investors for a period of time, with benefits to encourage that? Isn't this how 401ks and IRAs work, even if that's not their intent (maybe it is I don't know)
It seems like if you could create a % of owners that had longer investment horizons, there would be a faction that would push agents to care more about long term stability and growth of a company than wringing as much money out of it in the next 3-6 months as we can.
I think you can see this trend outside of markets as well -- You take a trusted, established thing, and gut it for short term profit while eroding the trust. PVH has been doing this for a long time with brands like Tommy Hilfiger, Calvin Klein, etc, where they have 'discount stores' that actually sell completely different product lines than the flagship stores and what their 'influencers' wear. The 'discount' line is of the lowest quality possible.[1]
I suspect LVMH will end up doing the same thing with the real luxe brands soon -- Look out for those $90 LV handbags...[2]
[1]: https://www.pvh.com/brands [2]: https://www.lvmh.com/houses/
The agents are put in place by the owners/board. As long as there's no reason to prioritize long term stability and growth duty over short term profits, what will change?
And the opposite -- owners NOT being in charge of agents -- sounds even scarier.
Do any markets lock-in investors for a period of time, with benefits to encourage that? Isn't this how 401ks and IRAs work, even if that's not their intent (maybe it is I don't know)
It seems like if you could create a % of owners that had longer investment horizons, there would be a faction that would push agents to care more about long term stability and growth of a company than wringing as much money out of it in the next 3-6 months as we can.
I think you can see this trend outside of markets as well -- You take a trusted, established thing, and gut it for short term profit while eroding the trust. PVH has been doing this for a long time with brands like Tommy Hilfiger, Calvin Klein, etc, where they have 'discount stores' that actually sell completely different product lines than the flagship stores and what their 'influencers' wear. The 'discount' line is of the lowest quality possible.[1]
I suspect LVMH will end up doing the same thing with the real luxe brands soon -- Look out for those $90 LV handbags...[2]
[1]: https://www.pvh.com/brands [2]: https://www.lvmh.com/houses/
The answer is no, and it depends. Different shareholders have different preferences. Dynamic cap tables make this a difficult problem, but not an intractable one.
Matt Levine has a pretty funny observation that stems from this with his now famous one-liner, "Everything is Securities Fraud".
https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
US companies aren't legally obligated to maximize profits.
Managers are at risk of losing their jobs if shareholders decide to vote them out via a proxy battle due to poor profitability, so there are incentives to max profits, but there's no legal statutes that demand profit maximization. If there was, it'd be impossible to prove since all activity is subject to risk.
Managers are at risk of losing their jobs if shareholders decide to vote them out via a proxy battle due to poor profitability, so there are incentives to max profits, but there's no legal statutes that demand profit maximization. If there was, it'd be impossible to prove since all activity is subject to risk.
Executives are legally required to run the company in a way they believe is in the shareholders best interests. That doesn't necessarily mean maximize profits, as shareholders could have different values, but 9 times out of 10 it does.
They actually don't. If there's any regulatory statute you wish to cite free to share it.
Shareholder primacy was a 20th century marketing campaign to get investors more comfortable with investing their money. There's actually very little legal protections for investors in this regard. If there even was, it'd be impossible to prove "maximization" since all activity is subject to risk.
Shareholder primacy was a 20th century marketing campaign to get investors more comfortable with investing their money. There's actually very little legal protections for investors in this regard. If there even was, it'd be impossible to prove "maximization" since all activity is subject to risk.
https://www.mhtlegal.com/blog/2021/september/ceo-must-uphold...
CEO and board has a fiduciary duty to act in the company's best interest, which means the shareholders best interests.
CEO and board has a fiduciary duty to act in the company's best interest, which means the shareholders best interests.
If this blog post helps you sleep at night knowing your investments have the solid protection of "fiduciary duties", then so be it. Laws tend to be specific to foster enforcement. Notice the lack of congressional hearings for companies failing to "maximize profits". Lying and stealing are of course still illegal.
Just because a law isn't enforced doesn't mean it doesn't exist. Top executives at companies have a legal obligation to carry out shareholder wishes to the best of their ability. It really is that simple.
There's no legal requirement for profit maximization, it's that simple. That's why it's not enforceable, it doesn't exist.
Maximize profits over what time horizon?
Whatever shareholders decide. Sometimes that’s this quarter, others it’s the full discounted long term profits.
I wish consumers and citizens more generally would appreciate the implications of corporate responsibility to shareholders. This means everything else is secondary: the welfare of workers, the environment, and society at large. Capitalism is great at generating wealth for owners, but can be devastating for these so-called "external" parties.
Here is a summary of Lynn Stout's arguments about the "Shareholder Value Myth". https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v...
When I think about corporations trying to maximize profits at the expense of all others, I think of ancient Rome. Rome did maximize profits at the expense of everything else, even enslaving citizens for failing to pay their taxes which was one of the causes of the second servile war. https://en.wikipedia.org/wiki/Second_Servile_War
The idea that corporations should deify shareholders at the expense of society means that shareholders are effectively declaring class warfare against everyone else.
When I think about corporations trying to maximize profits at the expense of all others, I think of ancient Rome. Rome did maximize profits at the expense of everything else, even enslaving citizens for failing to pay their taxes which was one of the causes of the second servile war. https://en.wikipedia.org/wiki/Second_Servile_War
The idea that corporations should deify shareholders at the expense of society means that shareholders are effectively declaring class warfare against everyone else.
Money Stuff’s Matt Levine has written extensively about this and the general consensus is “if the judge says it is.”
Shareholders are always bringing lawsuits against the companies they have holdings in for this pretense, but it’s more often the case the companies just walk a tightrope act of appeasing shareholders, employees and customers alike.
Shareholders are always bringing lawsuits against the companies they have holdings in for this pretense, but it’s more often the case the companies just walk a tightrope act of appeasing shareholders, employees and customers alike.
That top answer on stackexchange is a pretty thorough explanation. Another perspective to consider is that strategic initiatives almost always incur a cost in the short term. You take a small loss in the short term with the idea that you will come out better in the long term. So the idea about maximizing profits for shareholders is meaningless without a time frame. If I'm a short term investor, I probably want the company to layoff some employees so that it improves the bottomline immediately, allowing me to exit. If I'm a long term investor, I probably wouldn't be so thrilled because it's a sign that the company has messed up. And so while there is no, and cannot be, this legal obligation, the reality is that major shareholders exert influence on the direction of the company depending the time frame they are looking to exit.
What a weird premise. The purpose of an organization is whatever that organization decides that it is. Shareholders can choose to invest in that vision, or not. If the majority of the owners are dissatisfied with that purpose, they can change it, by electing a new board. There are plenty of businesses where shareholder value is explicitly not the primary value. See for example: cooperatives, b-corps, non-profit corporations, etc. But you don't need a "special" organizational structure just to decide that profits aren't your primary value.
That said, I've definitely been at organizations where they defaulted to the vision of shareholder profit, but every single time it's been because they've lacked any other compelling vision.
That said, I've definitely been at organizations where they defaulted to the vision of shareholder profit, but every single time it's been because they've lacked any other compelling vision.
Business profits yes, because executives exert direct control over revenues and expenses.
Share prices no, because it depends on the future expectations of others who buy and sell shares every day.
Imagine you are part-owner of, say, a local landscaping business, and you're a passive investor, i.e., not part of its management. The managers of this business would be working for the owners, including you, and the managers' mandate would be to maximize business profits over time, a portion of which you would get as income in the form of annual dividends or distributions.
When you buy a share in an exchange-listed company like, say, Apple, you're a part-owner of Apple. Our legal framework (encompassing everything from federal and state laws to company bylaws) stipulates that the board of directors works for and represents the interests of shareholders like you, and that the company's executives work to maximize profits for the shareholders over time. Shareholders, including you, vote to elect the members of the board, who have a fiduciary obligation to act in the best interests of shareholders, including you.
However, when most people think about "maximizing profits" they think about it as maximizing share prices. In practice, executives of exchange-listed companies are "held accountable" (by the board) for share prices, generally under the assumption that present share prices are correlated with future profits.
Share prices no, because it depends on the future expectations of others who buy and sell shares every day.
Imagine you are part-owner of, say, a local landscaping business, and you're a passive investor, i.e., not part of its management. The managers of this business would be working for the owners, including you, and the managers' mandate would be to maximize business profits over time, a portion of which you would get as income in the form of annual dividends or distributions.
When you buy a share in an exchange-listed company like, say, Apple, you're a part-owner of Apple. Our legal framework (encompassing everything from federal and state laws to company bylaws) stipulates that the board of directors works for and represents the interests of shareholders like you, and that the company's executives work to maximize profits for the shareholders over time. Shareholders, including you, vote to elect the members of the board, who have a fiduciary obligation to act in the best interests of shareholders, including you.
However, when most people think about "maximizing profits" they think about it as maximizing share prices. In practice, executives of exchange-listed companies are "held accountable" (by the board) for share prices, generally under the assumption that present share prices are correlated with future profits.
Nope.
Feel free to cite whatever regulatory statute that legally demands profit maximization. Also when you buy a share of Apple you are not a part owner of the company. You are granted rights to board votes and cash flows in the form of dividends and that's pretty much it. Shareholder primacy is a 20th century marketing campaign to make people more comfortable with investing their money--as a shareholder you're entitled to very little and do not have legal rights to demand profitability.
Feel free to cite whatever regulatory statute that legally demands profit maximization. Also when you buy a share of Apple you are not a part owner of the company. You are granted rights to board votes and cash flows in the form of dividends and that's pretty much it. Shareholder primacy is a 20th century marketing campaign to make people more comfortable with investing their money--as a shareholder you're entitled to very little and do not have legal rights to demand profitability.
> You are granted rights to board votes and cash flows in the form of dividends
Yes, exactly: Shareholders elect the board. Here's a question for you: What are the legal obligations to shareholders of those board members elected by the shareholders?
(Hint: board members have a fiduciary obligation to act in the best interest of shareholders.)
Yes, exactly: Shareholders elect the board. Here's a question for you: What are the legal obligations to shareholders of those board members elected by the shareholders?
(Hint: board members have a fiduciary obligation to act in the best interest of shareholders.)
Not very much. Just issue filings and have meetings to retain the company's corporate status.
They may have unique contractual obligations that may result in a lawsuit should they not be fulfilled but those aren't necessarily "legal obligations" since it's subject to scrutiny (contracts aren't laws).
edit: and in terms of "fiduciary obligation", maximizing profitability isn't one of them.
They may have unique contractual obligations that may result in a lawsuit should they not be fulfilled but those aren't necessarily "legal obligations" since it's subject to scrutiny (contracts aren't laws).
edit: and in terms of "fiduciary obligation", maximizing profitability isn't one of them.
> Also when you buy a share of Apple you are not a part owner of the company.
This is totally wrong.
> as a shareholder you're entitled to very little and do not have legal rights to demand profitability.
Only if you are an isolated minority shareholder. If shareholders group together form a quorum (+ 50% of total ownership), they can demand anything from their company - including replacing the entire board and taking operational control of the company.
This is totally wrong.
> as a shareholder you're entitled to very little and do not have legal rights to demand profitability.
Only if you are an isolated minority shareholder. If shareholders group together form a quorum (+ 50% of total ownership), they can demand anything from their company - including replacing the entire board and taking operational control of the company.
Yeah the statement is definitely false. But I think there is a private vs public company nuance.
Matt Levine of Bloomberg looks at this in an interesting way for public cos. - "everything is securities fraud", where "everything" is any action that impacts stock price. It seems that there is a lot of evidence that in the US, regulators penalises, not the making/not making of profit, but the movement in stock price. If you make $10bn in profit but kill 100 people and the stock price goes to 0, well thats bad mkay.
On the other hand, with private companies, its pretty weird because here they are less regulated over stock price and profit matters far more (unless you are en route to IPO). This results in a tonne of companies that do bad stuff like gouge drug prices etc.
One you introduce this nuance, you get things like the "Texas two step", which J&J made popular, again, recently. The idea of a corporate veil has been long established; a "limited" company is a pool of risk and reward that is isolated and non transferable in the most part. So public companies go through a lot of chicanery to get the best of both worlds - high risk profit max in subsidiaries, and corporate governance to share price max, everywhere else.
On the other hand, with private companies, its pretty weird because here they are less regulated over stock price and profit matters far more (unless you are en route to IPO). This results in a tonne of companies that do bad stuff like gouge drug prices etc.
One you introduce this nuance, you get things like the "Texas two step", which J&J made popular, again, recently. The idea of a corporate veil has been long established; a "limited" company is a pool of risk and reward that is isolated and non transferable in the most part. So public companies go through a lot of chicanery to get the best of both worlds - high risk profit max in subsidiaries, and corporate governance to share price max, everywhere else.
I do not quite get the theoretical basis of the idea that shareholder value should be maximized. I mean, in order to maximize shareholder value, you need to pay a going rate to other factors of production anyway. If you pay too little wages, you do not maximize shareholder value etc. But if we maximized for say taxes or paid salaries in the long term, we would obviously need to pay going rate for capital, otherwise we would not maximize the taxes/salaries in the long term. So, what it is and why that makes maximizing shareholder value over other stakeholders? Before you answer, do remeber that if you do not pay going rate for capital, you are not maximizing anything else, either.
Okay, I have one theory. There kind of exists a measure for long term shareholder value, i.e. stock price. That would make it superior to other stakeholders because you can judge management on a relatively objective measure. Would make, if it did not have so abysmally bad signal to noise ratio that I find it hard to believe anyone seriously thinks that is the reason why shareholder value is superiour.
Okay, I have one theory. There kind of exists a measure for long term shareholder value, i.e. stock price. That would make it superior to other stakeholders because you can judge management on a relatively objective measure. Would make, if it did not have so abysmally bad signal to noise ratio that I find it hard to believe anyone seriously thinks that is the reason why shareholder value is superiour.
In many jurisdictions directors have a 'fiduciary duty' to protect shareholders' interests from harm.
While this does not imply maximizing profits per se, it has to be closely related in general . And of course if shareholders are unhappy they will fire the directors.
It seems that in Delaware directors have a closely-related duty: a duty of loyalty, which means "to look to the interests of the company and its other owners and not to their personal interests". [1]
Of course, companies have boards in which shareholders actually tell directors what they consider is in their best interests. So I'd think that as long as directors act accordingly they are doing their job and duty.
[1] https://en.wikipedia.org/wiki/Fiduciary
While this does not imply maximizing profits per se, it has to be closely related in general . And of course if shareholders are unhappy they will fire the directors.
It seems that in Delaware directors have a closely-related duty: a duty of loyalty, which means "to look to the interests of the company and its other owners and not to their personal interests". [1]
Of course, companies have boards in which shareholders actually tell directors what they consider is in their best interests. So I'd think that as long as directors act accordingly they are doing their job and duty.
[1] https://en.wikipedia.org/wiki/Fiduciary
The contrary law in the U.S. builds on A.P. Smith v. Barlow (NJ 1953)[1] and is framed today as "corporate social responsibility."[2] The issue is, and always has been, drawing a line between the personal interests of directors and legitimate business interests.
[1] https://en.m.wikipedia.org/wiki/AP_Smith_Manufacturing_Co._v...
[2] https://en.m.wikipedia.org/wiki/Corporate_social_responsibil...
[1] https://en.m.wikipedia.org/wiki/AP_Smith_Manufacturing_Co._v...
[2] https://en.m.wikipedia.org/wiki/Corporate_social_responsibil...
I think it's more of a social norm than a legal right since it would be on shareholders to pursue a lawsuit to prove that the board of directors at a company are sabotaging the business from being successful. Even then, it would be dependent on the given strategies to achieve profit both short and long term. It's not to say that corporate boards have zero incentives to maximum shareholder value since many times the boards are shareholders (whether minority or majority owners), but that if this a problem then it can't be truly solved by papering over it or mythologizing it.
The question itself seems to be focused on disproving the idea, by distorting the quote and requiring a negative answer based on technicalities.
Corporations may not be legally obligated to maximize profits for shareholders, but they still are forced to do it for reasons explained well by the second most voted answer[1].
That means that in practice "legally obligated" and "obligated" cause the same result.
.1: https://skeptics.stackexchange.com/a/8253/67409
Corporations may not be legally obligated to maximize profits for shareholders, but they still are forced to do it for reasons explained well by the second most voted answer[1].
That means that in practice "legally obligated" and "obligated" cause the same result.
.1: https://skeptics.stackexchange.com/a/8253/67409
The only way to enforce such law would be to have an oracle that tells you which actions would maximize profits. Obviously such oracle doesn't exist, and even if it did, it would not come from legal system.
What legal system can do fairly well, however, is to punish actions that are intentionally harmful to the company. E.g. as a CEO you can't just give yourself a salary equal to company revenue. You can't sign a contract with unfavorable terms with a company that you "happen" to own.
What legal system can do fairly well, however, is to punish actions that are intentionally harmful to the company. E.g. as a CEO you can't just give yourself a salary equal to company revenue. You can't sign a contract with unfavorable terms with a company that you "happen" to own.
This was always nonsense.
So is "You're the product, not the consumer".
Doesn't stop people from believing in it with their whole heart and mocking anyone that dare suggest different.
So is "You're the product, not the consumer".
Doesn't stop people from believing in it with their whole heart and mocking anyone that dare suggest different.
[deleted]
That first answer is fantastic. In fact, the very act of holding to any ideology so tighly just becomes self-defeating after some point.
INAL. Regardless of the legality it’s clear that US firms have been squarely optimizing for the shareholder returns for atleast 50 years now. It’s lead to execs aiming for short term goals. For instance, I’ve read it multiple places that financialization accounts for 30% of all US firms’ profits. Which is just money moving through stuff like HFT, FX trading etc.
Sorry to be a little off topic: the book “The Infinite Game” has a good discussion on why corporate leaders should not take a short term view of maintaining stock price. Anyway, I really enjoyed the book. (The infinite game - stay in the game, whatever you are doing, for your lifetime, or for corporations for multiple generations).
My biggest issue with this mentality is when a company makes obscene money, but the stock drops because it was slightly less obscene than expected. It’s just unrealistic and makes me feel like the entire stock market is a casino more than an actual investment opportunity.
[deleted]
Someone commented on a subthread with this link recently (I apologize, but HN search is not surfacing the comment so that I can provide credit; if that was you, please reply here for attribution!), posted to create a distinct thread for discussion on the topic.
There was a point where stockholder compensation structures went from dividends to the increasing value of the security itself, and thats when the stock market and the economy itself started to go awry.
Japanese companies only seem to return profits to shareholders when they feel like it... maybe this will change when interest rates aren't zero.
Is not maximizing profits a rather weak constraint?
Maximizing at which point? How do you treat a failed attempt to maximize profit in the future? And so on
Maximizing at which point? How do you treat a failed attempt to maximize profit in the future? And so on
Well, profits should be maximized in the infinite time horizon. Which means no one can complain that profits are low during their lifetime.
From a previous thread[1] where this came up:
----
Is maximizing shareholder value really law now ? Just trying to understand if CEOs are legally responsible to return maximum share of profits to shareholders.
Well... that's a slightly complicated question. It's definitely not quite as simple as "companies must maximize profit to the exclusion of all other concerns". But while directors and executives are given wide latitude to run the company according to their judgment, they don't have carte blanche to do "whatever they want" either.
More to the point, while a company as a whole can do more than simply "maximize profit to the exclusion of all else", the caveat seems to be that they can do so if the owners (eg the shareholders) agree.
From the SCOTUS decision in the Hobby Lobby case:
While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
The question I see then, is how much influence a single shareholder can truly yield based on this principle. That is, of course, assuming they don't single-handedly hold a controlling share of the company to the point that they can simply replace the board with whoever they want and enforce any arbitrary edict. Given a publicly traded company, it seems clear that some shareholders are going to want the "maximize my stock value at any expense" while others are going to go for more of a "do the humanitarian thing and treat (employees|the environment|whatever) well" or such-like.
See:
https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co...
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3943559
https://corpgov.law.harvard.edu/2021/12/01/dodge-v-ford-what...
https://caselaw.findlaw.com/us-supreme-court/13-354.html
https://web.archive.org/web/20130603013056/https://www.brook...
https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
https://en.wikipedia.org/wiki/Shareholder_primacy
[1]: https://news.ycombinator.com/item?id=34513015
----
Is maximizing shareholder value really law now ? Just trying to understand if CEOs are legally responsible to return maximum share of profits to shareholders.
Well... that's a slightly complicated question. It's definitely not quite as simple as "companies must maximize profit to the exclusion of all other concerns". But while directors and executives are given wide latitude to run the company according to their judgment, they don't have carte blanche to do "whatever they want" either.
More to the point, while a company as a whole can do more than simply "maximize profit to the exclusion of all else", the caveat seems to be that they can do so if the owners (eg the shareholders) agree.
From the SCOTUS decision in the Hobby Lobby case:
While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
The question I see then, is how much influence a single shareholder can truly yield based on this principle. That is, of course, assuming they don't single-handedly hold a controlling share of the company to the point that they can simply replace the board with whoever they want and enforce any arbitrary edict. Given a publicly traded company, it seems clear that some shareholders are going to want the "maximize my stock value at any expense" while others are going to go for more of a "do the humanitarian thing and treat (employees|the environment|whatever) well" or such-like.
See:
https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co...
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3943559
https://corpgov.law.harvard.edu/2021/12/01/dodge-v-ford-what...
https://caselaw.findlaw.com/us-supreme-court/13-354.html
https://web.archive.org/web/20130603013056/https://www.brook...
https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
https://en.wikipedia.org/wiki/Shareholder_primacy
[1]: https://news.ycombinator.com/item?id=34513015
I suppose this could also become highly personal, say if a super-charismatic shareholder can convince the rest to do something despite being in the minority.
I think the wide latitude for judgement thing also has more impact that people realize.
An executive needs to have a reason to believe their actions we’re maximizing, but that’s all they really need.
So, if an executive can article a plausible case that, in their judgment the PR benefit from operating above the environment standards would bring more long term value than the cash expenditure to do so, they’re probably pretty well insulated from a shareholder lawsuit over it. They can obviously be fired by the board/shareholders over such decisions at any time, but they would probably not lose a shareholder brought lawsuit.
You really need to be able to convincingly argue that you genuinely believed the course of action you took was in the interest of the shareholders. As long as that’s true (an email in discovery that says “this isn’t in the interest of the shareholders, but I think it’s important for the planet” would be awful for the executive, but internal communications or reports demonstrating the long term benefits of the strategy would help a lot).
An executive needs to have a reason to believe their actions we’re maximizing, but that’s all they really need.
So, if an executive can article a plausible case that, in their judgment the PR benefit from operating above the environment standards would bring more long term value than the cash expenditure to do so, they’re probably pretty well insulated from a shareholder lawsuit over it. They can obviously be fired by the board/shareholders over such decisions at any time, but they would probably not lose a shareholder brought lawsuit.
You really need to be able to convincingly argue that you genuinely believed the course of action you took was in the interest of the shareholders. As long as that’s true (an email in discovery that says “this isn’t in the interest of the shareholders, but I think it’s important for the planet” would be awful for the executive, but internal communications or reports demonstrating the long term benefits of the strategy would help a lot).
The accepted answer really illustrates that a popular, eloquent answer can still be so very, very wrong on many levels.
Think about it this way: Why put money in a stock that's not going anywhere when there are so many other options
Shocking that this needs to be pointed out, but because the company is supposed to _actually do something_. Ideally, that thing is good, and there are benefits to being able to exert some influence on how decisions about that thing are made.
That's very different than a legal obligation.
Why put money in a stock that's not going anywhere
The most obvious one would be "because you believe in the company's mission and want to support that mission." It's just a variation on the reason why people donate to charities, sign up for Kickstarters, buy products from a certain company just to help that company, etc, etc. Not everybody is a profit-maximizing machine in terms of how they live their lives.
The most obvious one would be "because you believe in the company's mission and want to support that mission." It's just a variation on the reason why people donate to charities, sign up for Kickstarters, buy products from a certain company just to help that company, etc, etc. Not everybody is a profit-maximizing machine in terms of how they live their lives.
When you buy a stock on the open market, the company doesn't get any of the money, it goes to whoever was the last person to own that stock. There is no built-in incentive for a company to seek to increase it's stock price except that current owners want to be able to sell higher than they bought.
Once a company has gone public for the first time, it can't get any more fundraising from shareholders without issuing more fresh stock which would make existing shareholders very angry because it dilutes the value of those existing shares.
Setting corporate policy with the goal of increasing the stock price doesn't encourage new investment, and it doesn't help the company at all, it just makes existing shareholders happy. But since the governing structure of basically every company says that shareholders are the exclusive decision makers, that's what happens, regardless of whether it's good for the company, customers, employees, or the market.
Once a company has gone public for the first time, it can't get any more fundraising from shareholders without issuing more fresh stock which would make existing shareholders very angry because it dilutes the value of those existing shares.
Setting corporate policy with the goal of increasing the stock price doesn't encourage new investment, and it doesn't help the company at all, it just makes existing shareholders happy. But since the governing structure of basically every company says that shareholders are the exclusive decision makers, that's what happens, regardless of whether it's good for the company, customers, employees, or the market.
> When you buy a stock on the open market, the company doesn't get any of the money, it goes to whoever was the last person to own that stock.
The company was partially able to get that money in the IPO because the IPO buyers expected you'd buy it from them.
> Once a company has gone public for the first time, it can't get any more fundraising from shareholders without issuing more fresh stock which would make existing shareholders very angry because it dilutes the value of those existing shares.
Doesn't seem true in practice since FAANGs issue shares to pay employees' RSUs all the time, and meme stocks like Hertz and AMC have done at the market raises that make their investors even happier.
The company was partially able to get that money in the IPO because the IPO buyers expected you'd buy it from them.
> Once a company has gone public for the first time, it can't get any more fundraising from shareholders without issuing more fresh stock which would make existing shareholders very angry because it dilutes the value of those existing shares.
Doesn't seem true in practice since FAANGs issue shares to pay employees' RSUs all the time, and meme stocks like Hertz and AMC have done at the market raises that make their investors even happier.
That can’t be true. Truly, who ever owns the company decide what the goal of the company is.
[deleted]
I wish the history of corporatocracy was taught more in schools, it seems like there was this massive, sudden leap between "the king gives you the right to build a bridge and collect tolls on it" and "the purpose of all human life is to build financial structures to increase the wealth of the shareholder class." I want to know more about how that shift occurred.