Came across an article by Bruce Bartlett.

Abstract: Historically, corporations were expected to serve some public purpose as justification for the benefits and privileges they receive from the state. But since the 1970s, the view has become widespread that corporations exist solely to maximize profits and for no other purpose. While the shareholder-first doctrine was supposed to solve the agency problem, in fact it has gotten worse as corporate executives enrich themselves at the expense of shareholders. Moreover, the obsession with current share prices as the only measure of corporate success may be destroying long-term value as companies cut back on investment to raise short-term profits. Tax policies designed to raise after-tax profits have done nothing to reverse these trends.

Interesting point to note (emphasis mine):

For many years, corporate status was only granted to businesses deemed to be in the public interest, such as companies that built turnpikes and canals. But as time has gone by, the idea that corporations exist at the pleasure of the state and in the public interest has been forgotten.

It seems that many of us are forgetting the very fact that businesses were bounded by social responsibility, and were allowed to exist to serve some public purpose. They exist to maximise stakeholder value, not shareholder value. That changed around 1970s when University of Chicago economist Milton Friedman suggested that corporates should be maximising shareholder value.

It worth noting that Friedman and other economists at the time were trying to solve a problem of

[aligning] management’s objectives with the interests of shareholders in a way that could be measured by share prices and rates of return.

This was generally achieved by compensating managers proportionally to the profits they generate. As the stock prices are used as a measure of performance, this made

management very short-term focused, often causing it to put the corporation’s long-term interest at risk,

and led to manipulation of stock prices through share buybacks.

More recently, proponents of shareholder value started to revert their stance. Jack Welch, CEO of General Electric between 1981 and 2001 said:

Shareholder value is a result, not a strategy….Your main constituencies are your employees, your customers and your products.

Managers argue that share repurchases help shareholders lowering their tax burden since capital gains arose from the rise in share prices are taxed at lower rates than income from dividends.

But there are problems. One is that managers can control the timing of share buybacks, which they use to pump up stock prices around the time their stock options are vested.

Since many managers are incentivised through issue of stock options, this creates conflict of interest. Also,

shareholders don’t benefit as much as it might appear because shares are constantly being diluted by stock options granted to corporate executives

On top of that,

there is growing evidence that share buybacks come at the expense of long-term profitability and the economy as a whole, because they lead managers to reduce or postpone investment spending for new projects, research and development, advertising and maintenance in order to meet near-term earnings targets.

Pursuit of short-term profits come at the expense of its corporate responsibility to its workers:

Note the decade where the two lines diverge.

The upshot

Shareholder primacy was supposed to align the interests of corporate owners and managers, improve efficiency and economic growth. It has done none of those things. All it has done is enrich corporate executives, while impoverishing workers and the communities in which corporations operate.

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