Tuesday , September 17 2019

Shareholder primacy means shareholders are paid last

The Business Roundtable touched off a storm of commentary with its abandonment of the “shareholder primacy” view that the goal of a for-profit business corporation should be to maximize shareholder value. Most people celebrating this move seem to think it means stakeholders such as employees, customers, suppliers and communities will do better if corporate boards and managers treat their interests as equal to those of shareholders. But this betrays a basic confusion.
Shareholder primacy is usually traced to a 1970 New York Times magazine article by Milton Friedman titled “The Social Responsibility of Business is to Increase its Profits” where he was arguing against the views of business managers. It was labour leaders who objected to the social responsibility of management “far more consistently and courageously than have business leaders.”
Friedman’s main example was exhortations from the government for businesses to avoid wage increases in order to slow inflation.
Business leaders were fully on board for this campaign; it was labour that successfully fought it. Labour leaders wanted level-playing-field negotiations with profit-maximising managers, not for paternalistic managers to determine the best interests of workers. In the extreme, it was a literal road to serfdom in which workers exchanged loyalty to bosses for noblesse oblige caretaking.
How well stakeholders are treated depends on their power, not on the process for making decisions. In Friedman’s model, managers working as agents for shareholders hold bilateral negotiations with each stakeholder -workers, customers, suppliers, communities and creditors — and whatever money they have left at the end goes to shareholders. “Shareholder primacy” actually means shareholders get paid last.
The “stakeholder” alternative is for managers to simultaneously negotiate with all groups on a consensus plan that respects everyone’s interests. Managers are disinterested arbiters rather than agents for shareholders. There’s no reason to assume workers or any other group would do better under this system.
Existing stakeholder groups are likely to do much worse because (a) lots of new stakeholders will come out of the woodwork once corporate assets are to be shared “equitably” rather than bid for in tough negotiations, (b) running a company via multilateral negotiation will lead to perverse outcomes and stagnation, and (c) managers will write their own report cards, like politicians, rather than being disciplined by market prices and performance will suffer.
The way to get better outcomes for workers, customers, suppliers or communities is to pass laws giving them more power rather than changing the rules by which they negotiate. More power has predictable effects. Moreover, the laws apply to all enterprises, not just large for-profit corporations with highly developed senses of social responsibility, and are
enforceable.

—Bloomberg

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