Column: The gun control issue is destroying the myth that ‘shareholder value’ is a corporation’s only goal
Milton Friedman should be spinning in his grave just about now. In 1970, the conservative economist turned his withering glare on business leaders who asserted that “business has a ‘social conscience’” and the responsibility for “providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.”
These business leaders, Friedman declared, were “preaching pure and unadulterated socialism” and were nothing less than “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”
Yet in recent days, numerous public companies including Walmart and Delta Airlines have taken stands against gun sales, raised the minimum age for gun purchases, or put daylight between them and the National Rifle Assn. by canceling member discounts and other cooperative marketing deals.
The systems in place are not effective to protect our kids and our citizens. We believe it’s time to do something about it.
— Dick’s CEO Edward Stack
The most outspoken may be Dick’s Sporting Goods, a public company, which said on Feb. 28, in the wake of the Parkland, Fla., massacre, that it would stop selling assault-style rifles or high-capacity magazines and not sell firearms to anyone under 21 years of age. The company also called on lawmakers to ban assault weapons and high-capacity magazines, raise the minimum age for firearms purchases to 21, and require universal background checks of buyers.
“The systems in place are not effective to protect our kids and our citizens,” Dick’s Chief Executive Edward Stack said in the announcement. “We believe it’s time to do something about it.”
“Gun control” is today’s reform “catchword,” to use Friedman’s term, and some of these steps may well cut into those companies’ sales and profits.
So are we witnessing an outbreak of pure and unadulterated socialism among corporate CEOs? Or are we seeing a long-overdue reevaluation of the myth that a corporation exists for one reason only — to maximize its shareholders’ wealth?
It’s certainly true that gun control is an issue that the public wants to see progress on. And it doesn’t seem to be going away in the wake of the Parkland shootings. Masses of students, teachers and supporters are being called on to participate in a National School Walkout for 17 minutes Wednesday at 10 a.m. — one minute for every death in the Feb. 14 mass shooting at Marjory Stoneman Douglas High School.
The shareholder value myth sprang in large part from the mind of Friedman, who articulated the case in an op-ed the New York Times published in September 1970. Its title was “The Social Responsibility of Business is to Increase its Profits.”
Yet as Cornell law professor Lynn Stout showed in her 2012 book “The Shareholder Value Myth,” Friedman’s notion was unsupported by corporate law, corporate economics or empirical results.
The legal case establishing shareholder value as the be-all and end-all of corporate management was Dodge vs. Ford, a Michigan Supreme Court case in 1919 that was chiefly about the duty that Henry Ford owed to the Dodge brothers, who were minority shareholders in his auto company. Ford Motor was then privately held — it did not go public until 1956 — so the case didn’t even involve public shareholders.
In the course of ruling for the Dodges, however, the Michigan court happened to assert that “a business corporation is organized and carried on primarily for the profit of the shareholders.” Stout labels this remark “dicta,” referring to a casual observation in a court ruling that is largely irrelevant to the issue at hand. Over the years it has been frequently cited by business commentators, but almost never by other judges as precedent, Stout observes.
Over the years, the shareholder value idea got wrapped up with the concept of the shareholders as the “owners” of a public company. That’s also a myth. Shareholders don’t have many of the rights we normally associate with ownership of anything. They don’t get discounts on company products, unless these are specifically granted by the company board (which seems to happen less and less). They can’t appoint a CEO (that’s the board’s job, too).
They have a limited and conditional right to a portion of the company’s profits, but only if the board grants that by declaring a dividend — and nothing in the law requires a board to declare a dividend. If a company is liquidated in bankruptcy, the shareholders are entitled to whatever’s left after all other stakeholders, including tax collectors, vendors and bondholders, are paid off. That’s all, and sometimes it’s nothing.
Nor is there any evidence that a single-minded focus on shareholder value makes a company stronger or more successful in the long term. Corporate success is the product of many factors, including factory floor efficiency, good and innovative products, a happy and skilled workforce, and positive popular esteem. Focus on those factors, and the shareholders may be among the beneficiaries. Focus on the shareholders — who will include CEOs with big option grants — and the other stakeholders may become unhappy and unproductive, the company will stagger, and the shareholders, in the end, will suffer.
One reason the shareholder value myth has been so alluring since Friedman’s essay is that it offers a simple proxy for corporate success: the share price. Prices used to be published once a day; today, they’re streamed all day long in real time on your television, computer or smartphone screen. How is IBM doing? Well, the stock’s up today (or not, as the case may be), so what do you think!
But the share price can be a deceptive proxy, since it’s based not merely on performance but expectations of performance. And both the evidence of performance and expectations can turn on a dime — witness the sudden revaluations of companies such as Enron, after fraud in the corporate suite was unearthed, or America’s banks, after their gluttonous appetite for toxic assets almost destroyed the global financial system in 2008.
Who are the shareholders, anyway? The price of a stock can reflect the judgments of millions of investors at a snapshot in time, but some (usually most) will be long-term investors holding shares through mutual or pension funds, and others are short-term traders hoping to capture a decimal or two and then bail out. Their “values,” as Stout writes, are certain to be very different.
The truth is that a public corporation is a public licensee, granted certain legal and economic advantages for the benefit of the public, not of a narrow and ill-defined shareholder group. Its duty is to apply its public benefits for the good of all its stakeholders. These include its suppliers, its customers, its communities and its employees.
A public company has the power to make life miserable for any or all these stakeholders, and those with a laser-like focus on shareholder wealth tend to squeeze all the others mercilessly. In the long run, everyone suffers except perhaps the CEO who has managed to cash out his shareholder benefits and salted the money away for retirement.
The recent actions of companies placing restrictions on gun sales and backing away from the NRA fit much better with the responsibilities of public corporations than a policy that would allow unrestricted gun sales, even to the fullest extent of the law, because they would bring revenue and profit to those companies. These companies understand their duties to the community at large. Professor Friedman, maybe your time is past.
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