Rethink Shareholder Primacy: Shape a Sustainable Future for Corporations
As a corporate board member, I’ve always grappled with the who’s interested I served. Milton Friedman and the Chicago School of Economics likes to suggest that companies are owned by shareholders and therefore corporate directors must focus on maximizing shareholder interests. This leaves employees, debt-holders, society, and environment out of consideration. As I educate myself, I’m convinced that the “Shareholder Primacy” model is simply wrong.
In her book, The Shareholder Value Myth, Lynn Stout points out that the courts almost never decide for shareholders interests alone. In fact, the only case resulting in the interests of shareholders was Dodge v. Ford where Ford tried to skip dividends of minority shareholders (i.e. to the Dodge brothers because they needed money to fund their new car company.) The courts ruled against Ford which in 1913, set the stage for shareholder primacy mentality.
As corporate leaders, we have a responsibility to steer our organizations toward long-term success and positive societal impact. However, the prevailing doctrine of shareholder primacy, which prioritizes short-term gains for shareholders above all else, has its flaws. In this article, we will explore the problems associated with shareholder primacy and why adopting a more holistic approach to corporate governance is crucial for sustainable growth and stakeholder satisfaction.
Shareholder primacy is focused on immediate financial returns, resulting in short-sighted decision-making. Executives focused only on pleasing shareholders in the short term (stock price tomorrow) may neglect the interests of other critical stakeholders, such as employees, customers, and the broader community. This narrow perspective can lead to detrimental outcomes, such as cost-cutting measures today that not only hurt the other stakeholders, but possibly the company in the long run. Thus, shareholder primacy can lead to severe cuts resulting in a high stock price in the short term but much lower company value in the long. Carl Icon is famous for buying stock, forcing the board into short term value choices (thus driving stock price up), then selling the stock (often forcing stock price back down).
Shareholder primacy will perpetuate social and environmental problems. When profit is the primary goal, companies will be incentivized to disregard the consequences of their actions on society and the environment. This approach can lead to many negative outcomes for society and the environment such as: exploitative labor practices, environmental degradation, and a lack of corporate social responsibility. Recognizing the social and environmental impacts of business decisions is essential for building a positive corporate image, enhancing brand reputation, and attracting socially conscious consumers and investors. By embracing a broader perspective that integrates sustainability practices and ethical considerations, corporations can align their interests with the greater good and contribute to a more equitable and environmentally conscious world.
While shareholder primacy emphasizes short-term gains, it often fails to consider the long-term value creation potential of businesses. Focusing solely on quarterly financial results can discourage investments in research and development, employee development, and sustainable practices. By shifting the focus to long-term value creation, organizations can make strategic decisions that foster innovation, improve productivity, and create enduring competitive advantages. Moreover, prioritizing the well-being of employees, fostering diversity and inclusion, and contributing positively to the communities in which companies operate can enhance brand reputation and attract top talent, leading to long-term success.
Shareholder primacy, with its exclusive focus on maximizing shareholder value, is an outdated and unsustainable approach to corporate governance. By embracing a stakeholder-centric perspective, companies can mitigate short-termism, address social and environmental challenges, and create long-term value for all stakeholders. It is our duty as forward-thinking corporate leaders to reimagine the purpose of our organizations, aligning them with broader societal goals and ensuring their sustained success in an ever-evolving world. Together, let us shape a future where businesses thrive by balancing profit with purpose.
Paul Bergman runs a business strategy and cybersecurity consulting company in San Diego. He writes on cybersecurity and board management for both corporate and nonprofit boards.
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