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Tag: Ownership

  • BOOK: The “myth” of shareholder primacy stands at the brink of intellectual failure, Stout writes

    BOOK: The “myth” of shareholder primacy stands at the brink of intellectual failure, Stout writes

    Book author Lynn Stout produced The Shareholder Myth in 2012 to challenge the advancement of “shareholder value” as the exclusive guiding principle of corporations.

    Lynn Stout's book
    Lynn Stout’s book

    Stout, a Cornell Law School professor, debunks the “shareholder myth” by showing how the principle of profit maximization sets corporations on an unsustainable trajectory — detracting from the well being of customers, employees, local communities, and even shareholders themselves. Stout writes that those obsessed with shareholder primacy possess “one fatal flaw” which is “the notion that corporate law requires directors, executives, and employees to maximize shareholder wealth simply isn’t true.”

    She adds: “There is no solid legal support for the claim that directors and executives in U.S. public corporations have an enforceable legal duty to maximize shareholder wealth.”

     Stout also turns to the empirical record in order to further invalidate the efficacy of the profit-maximizing firm. Stout urges caution in the face of shareholder-supporting proposals by warning of the “remarkable lack of a reliable empirical connection between shareholder-oriented governance practices and better corporate performance at the level of the individual corporation.”

    Stout was among participants in a 2013 think-tank session at the Drucker Institute.

    Instead of leading to stronger corporate performance, shareholder primacy forces managers into a “myopic” point of view where long term performance is sacrificed in the name of short term shareholder returns. For example, Stout notes the choice to cut research and development costs that fund longer-term growth as common targets of dividend-hungry investors. The result, as Stout writes, is a divergence of interests between shareholders. Investors seeking long-term returns favor corporate decisions that help prepare the company for the long road ahead rather than short-term shareholders who favor immediate and substantial returns from the company. Stout uses the analogy of fishing with dynamite to express the harmful long-term effects of divergent interests among shareholders.

    “Conventional shareholder primacy,” according to Stout, “stands on the brink of intellectual failure.” In order to survive, Stout anticipates that “it must evolve into a new, more complex, and more subtle understanding of what shareholders really want from corporations.” By pushing the boundaries of investor consciousness and challenging the restrictively narrow profit-maximizing principle of corporations, Stout’s book represents a powerful critique of shareholder primacy worthy of considerable and sustained attention.

    Stout’s book is available on Amazon here

  • GWO gathering builds knowledge, support for “fourth sector” businesses combining profit, social benefits; sector seen as growing at twice rate of profit-only entities

    GWO gathering builds knowledge, support for “fourth sector” businesses combining profit, social benefits; sector seen as growing at twice rate of profit-only entities

    CONFERENCE NOTES: 
    PART ONE / PART TWO / PART THREE / BACKGROUND

    WASHINGTON, D.C. — Some 200 scholars, public officials, researchers, funders and practitioners — supported by the Federal Reserve Board, George Washington University and others – kicked off an initiative to help prove that capitalists are doing well by doing good – in what they call the “fourth-sector” economy.

    “Mapping the Fourth Sector,” was a one-day, invitation-only brainstorming session (open to media) held Jan. 15, 2015 at the university’s Trachtenberg School of Public Policy organized by a group called the Fourth Sector Network. Other supporters of the gathering included the B Team and the Urban Institute.

    “There’s growing recognition of the fourth sector’s potential for delivering solutions to a broad array of social, environmental, and economic challenges,” said retired GWU President Stephen Trachtenberg.   “These include job creation and sustainable economic development to climate change, health care, education, social services, energy and more.”

    The morning featured on-the-record panel presentations with speakers including Don Graves, Deputy Assistant to the President; Kathy Calvin, President and CEO of the UN Foundation; Robert Forrester, Chairman & CEO of Newman’s Own Inc.; Mark Prater, Chief Tax Counsel for the Senate Finance Committee; among others.”

    “Fourth sector” is a term used by some experts to described companies chartered to make a profit at the same time they are pledged to serve one or more social purposes. They are distinct from the three other economic sectors — government, non-profit, and purely profit-making businesses. Organizers want to make sure legal forms and support systems for such organizations are thriving. Well-known examples including Newmans Own Inc.

    “These organizations are creating jobs and their growth rate is almost twice as fast as pure-profit  businesses in the first,” Heerad Sabeti, a Fourth Sector Network co-founder and himself a Raleigh, N.C., entrepreneur, said a few days before the event. “How many are there? That is one thing the mapping initiative is going to tell us — it could be 10% or 20% of GDP already. And they are working to solve social and environmental problems in the process.”

    “As the lines between public, private and nonprofit sectors blur, a fourth sector is emerging that strives to contribute to economic growth while solving social and environmental problems. said Elizabeth T. Boris, a director at the Urban Institute, which was preparing the data map.   “It has the potential for generating immense economic, social and environmental benefits. The mapping project is designed to bring them broader public recognition and engagement.”

    Companies organized in the forth sector are often called “for-benefit” corporations – or “B corps.” They are typically driven to achieve environmental, community, justice or equity goals. They include sustainable businesses, social enterprises, municipal enterprises, community development corporations, social businesses and other models.

    “These efforts are hampered by lack of adequate data and analysis,” says Sabeti.   “Research will help policymakers understand the barriers they face and what would promote their growth and impact.”

    In May 2013, Sabeti’s team staged a gathering at the Harvard Business School called “Growing the Impact Economy.” One outcome was a grant to the Urban Institute to create a systematic method – a “taxonomy” — for categorizing and listing “Fourth Sector” entities. At Thursday’s event, participants will get a preview of the mapping project, which will become public later this year.

    Following morning session of updates from the speakers, “Mapping the Fourth Sector” participants spent the afternoon in roundtable breakouts, seeking answers to at least four key questions:

    • What distinguishes the Fourth Sector from the private, public and nonprofit sectors? What differentiates various types of for-benefit organizations from each other?
    • How does the Fourth Sector contribute to job and enterprise creation, economic development?
    • What obstacles do for-benefit organizations face and what enabling policies and infrastructure are needed to address them, both regionally and nationally?
    • What can fill the gaps in data and understanding required by public agencies, practitioners, researchers, investors, economic developers and other stakeholders?

    — 30 –

    CONFERENCE NOTES: 
    PART ONE / PART TWO / PART THREE / BACKGROUND

    MEDIA CONTACTS:
    Laura Greenback, Urban Institute, (202) 261-5709, lgreenback@urban.org
    Heerad Sabeti, Fourth Sector Network, 919-426-7722, h.sabeti@forbenefit.net

    EVENT CONVENORS:

    The B Team
    The B Team is a not-for-profit initiative formed by a global group of leaders to create a future where the purpose of business is to be a driving force for social, environmental and economic benefit.

    Federal Reserve Board of Governors
    The Federal Reserve, the central bank of the United States, is a federal system composed of a central governmental agency—the Board of Governors—and 12 regional Federal Reserve Banks. Besides conducting research, analysis, and policymaking related to domestic and international financial and economic matters, the Board plays a major role in the supervision and regulation of U.S. financial institutions and activities, has broad oversight responsibility for the nation’s payments system and the operations and activities of the Federal Reserve Banks, and plays an important role in promoting consumer protection, fair lending, and community development.

    The Urban Institute
    The nonprofit Urban Institute is dedicated to elevating the debate on social and economic policy. For nearly five decades, Urban scholars have conducted research and delivered evidence-based solutions that improve lives, strengthen communities, and increase the effectiveness of public policy. Their objective research helps expand opportunities for all, reduce hardship among the most vulnerable, and strengthen the fiscal health of government across a rapidly urbanizing world.

    Trachtenberg School of Public Policy and Public Administration
    The Trachtenberg School in GWU’s Columbian College of Arts and Sciences is a focal point for public affairs education, research and public service at the George Washington University. Building on a rich tradition of education for public service and on its location in the nation’s capital, just a few blocks west of the White House, the George Washington University offers a superior education for students wishing to pursue public affairs-oriented academic programs.

    RELATED LINKS:

    Story about 2013 conference at Harvard University:
    http://www.csrwire.com/press_releases/35643-Boosting-the-Fourth-sector-Economy-is-Goal-of-200-delegate-Summit-at-Harvard

    Chart: For-Benefit Enterprises and the Fourth Sector:
    http://www.fourthsector.net/learn
    http://www.fourthsector.net/assets/1/fourth-sector_large.jpg

    Read profiles of Fourth Sector businesses:
    http://gamechangers500.com/

    “The Emerging Fourth Sector” (2009 study by The Aspen Institute):
    https://www.aspeninstitute.org/sites/default/files/content/docs/pubs/4th%20sector%20paper%20-%20exec%20summary%20FINAL.pdf

    Report of a 2008 meeting on Fourth Sector legal forms:
    http://www.perlmanandperlman.com/publications/articles/2008/FourthSector.pdf

    IMAGE: Fourth Sector LOGO o
    http://www.ggem-microfinancesl.org/communities/6/004/010/200/376/images/4572993329_pre.jpg

  • BOSTON GLOBE: Is ‘shareholder value’ bad for business?

    What is the purpose and structure of the modern corporation, and what are the consequences when management takes a short-term approach to meeting corporate goals?

    . In a recent article, Boston Globe reporter Leon Neyfakh captured the debate surrounding the “future of the American corporation—what its purpose is, how it should be run, and whom it should be engineered to benefit.” The article describes how shareholder-guided corporations often fail to adequately serve other stakeholders such as employees, customers, the environment, and local community. Nayfakh also notes the failures of shareholder supremacy and the harms inflicted on others, even shareholders themselves. He writes: “Countless others made short-sighted decisions intended to goose earnings, keep investors happy, and enrich themselves—all without regard for the long-term health of their companies.” Shareholders, according to Neyfakh, have also been harmed by the status quo and are increasingly advocating for greater representation on boards of directors.

    There are other strong voices in the debate about the structure and purpose of corporations such as Harvard Law School professor Lucian Bebhuk. He argues that there are significant barriers to greater shareholder activism that stem from the near-absolute power of the board and CEO. Bebchuk favors empowering shareholders to make “rules of the game” decisions about the structure of the corporate ballot set by by-laws. Bebchuk explains that these decisions are unlikely to occur because boards and CEOs accrue private benefits from having control over the corporate ballot such as job security, higher pay, and other perks. This problem of board capture also manifests itself in the exorbitant pay of many CEOs which some have referred to as the “smoking gun” of managerial opportunism and other corporate governance failures.

    While the stakeholder model may appear to be a better alternative to the shareholder primacy model, there are unique challenges to detecting and eliminating managerial opportunism under a stakeholder model. If CEO performance is currently quantified in share price and compared to peers, what performance metrics would complement the creation of shareholder value? How would these different metrics be balanced? The inclusion of alternative metrics creates room for CEOs to justify even more egregious pay packages. For example, if a CEO serves the local community and workers well but delivers weak financial results, how much should the CEO be paid? Even under the shareholder model, CEOs are able to justify vast compensation packages to boards and shareholders. During economic downturns, CEOs are paid for performance in spite of various headwinds and obstacles. Insider opportunism is clearly prevalent in the shareholder model and might even be more insidious and frequent in the stakeholder model.

    These challenging questions suggest that the stakeholder model might be more vulnerable to insider opportunism than the shareholder model. As Jonathan Macy and Geoffery Miller warn “constituency statutes do not benefit the interests or groups that they ostensibly are intended to benefit. Rather, such statutes benefit a well-organized, highly influential special-interest group, namely the top managers of large, publicly held corporations who wish to terminate the market for corporate control.”

    Together, these issues represent an essential point of focus for corporations, politicians, and citizens alike. Accordingly, the Rules Change team will provide coverage on issues of corporate governance as they continue to unfold.