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BK Magazine BK Business
Posted by Jeevan Sivasubramaniam, Managing Director, Editorial, Berrett-Koehler Publishers Inc.
As author and professor Lynn Stout has pointed out numerous times, shareholder primacy -- of always focusing on maximizing shareholder returns -- remains one of the most detrimental and dangerous myths operating in business markets today. But just in case anyone tries to dismiss her argument as "liberal leftie talk," she outlines below five ways in which shareholder primacy actually hurts shareholders themselves:
1. Shareholder Primacy Erodes Long-Term Returns. Shareholder primacy leads corporate managers to focus obsessively on raising the next quarter's earnings. Often the most reliable way to do this is to defer maintenance, cut safety corners, or reduce customer support -- short-term strategies that harm long-term business performance.
2. Shareholder Primacy Stifles Innovation. Because so much focus is put on today's stock price, potentially innovative and revolutionary research and products are neglected as requiring too long-term an investment. Instead of creating groundbreaking products or services, companies settle for less ambitious projects that produce modest but reliable profits without challenging the industry -- meaning only modest returns for shareholders.
3. Shareholder Primacy Undermines Employee Effort and Loyalty. In the relentless drive to raise today's share price, companies reduce their workforces, outsource good jobs, and relentlessly drive the employees who remain into exhaustion. Employee dedication and loyalty suffers -- and eventually, so does the business.
4. Shareholder Primacy Hurts Investors' Other Assets and Interests. In the quest for more and more profit, companies take on leverage that hurts bond values, pursue anti-competitive strategies that raise consumer prices, and create mortgage bubbles that hurt real estate values. The price of some stocks in the investors' portfolios may go up, but the value of their other interests and assets go down.
5. Shareholder Primacy Makes Corporations Act Like Psychopaths, and Makes Shareholders Look Like Psychopaths. When managers feel they have to focus only on profits without regard to ethics or the welfare of others, they cause corporation to act like conscienceless psychopaths: maiming employees, polluting the environment, breaking the law. This works against the interests of the many shareholders who want their firms to earn profits honestly and ethically.