Are U.S companies legally obligated to maximize profits for shareholders? (2012)
skeptics.stackexchange.com
skeptics.stackexchange.com
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.
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)
This is the absolutely crucial core question that gets skipped over so, so often.
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.
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.
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.
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.)
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.
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.
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.
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 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).
Those are interested ideas. But it begs the question: How to enforce compliance without 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.
We have seen all of these happening in modern times.
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
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?
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.
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.
It is no frills and quite scholarly, but that is often the case for hyper focused, niche subjects.
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.
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.
And, as 'Apocryphon notes, this is much older than you think besides.
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 also doubt the people you have in mind have enough financial capital to really force everyone’s hand _unless_ their arguments are actually persuasive
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.
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
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’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 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’t lobby to abolish the gold standard or 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.
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.
Yep
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…
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 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.
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 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.
If I hire you to fix my car I’m not paying you if instead you fix the neighbors car
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.
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.
> 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.
Would you invest your 401k/retirement in companies that don’t generate profits for you ?
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'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.
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.
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...
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 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.
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.
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!")
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?
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.
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.
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.
/s
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 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.
While also pocketing some absolutely obscene bonuses. 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.
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.
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 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.
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.
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.
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"?
Or is it a several variables problem in which there is no “optimum”?
What are "best interests"? That gets back to the heart of the question here.
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.
Instead, shareholders would need to (and have successfully) sue(d) over executive actions which negatively and negligently impacted shareholder value (stock price).
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.
https://www.businessroundtable.org/business-roundtable-redef...
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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/
https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
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.
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.
CEO and board has a fiduciary duty to act in the company's best interest, which means the shareholders best interests.
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.
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 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.
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.
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.
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.)
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.
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.
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.
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.
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.m.wikipedia.org/wiki/AP_Smith_Manufacturing_Co._v...
[2] https://en.m.wikipedia.org/wiki/Corporate_social_responsibil...
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.
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.
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.
Maximizing at which point? How do you treat a failed attempt to maximize profit in the future? And so on
----
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.
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 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.
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.
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.