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I've heard it said corporations have no responsibility but to maximize shareholder value. That their employees, customers, and communities matter only to the degree they are in shareholders best interest or as mandated by law. The environment matters only to degree being a good steward of it is in shareholders best interest or as mandated by regulation.

This always bothered me. What company could exist or thrive without its employees, customers, communities, or a clean environment?  Then why are other stakeholders disposable? Talk about forgetting where you came from!

One day I was listening to an interview with Ralph Gomory.  When talking about shareholder primacy, Mr. Gomory said (3:18):

That [shareholder primacy] has become so embedded that most people think it was always that way but it wasn't.
That intrigued me. It wasn't always this way? Did another generation of business leaders think differently?  As I researched this question, I found Ralph Gomory was right. There was a time in America's economic history when the "Stakeholder" model was widely accepted. In the "Stakeholder" model, corporations have a responsibility to all stakeholders including employees, customers, communities, and our environment. I learned a generation ago, the shareholder primacy view would have been considered fringe.

I also read Cornell Law Professor Lynn Stout's  book The Shareholder Value Myth. I found her work very thought provoking. Most arguments against shareholder primacy admit it benefits investors, but at everyone else's expense. Lynn Stout shows how shareholder primacy doesn't even benefit shareholders. I learned there is no legal requirement for companies to maximize shareholder wealth. In fact, Lynn Stout's work was cited by Supreme Court Justice John Paul Stevens in his dissent in Citizens United.

In the Introduction, Lynn Stout concurs with Ralph Gomory it wasn't always this way:

Fifty years ago, if you had asked the directors or CEO of a large public company what the corporations purpose was, you might have been told it had many purposes....Today you are likely to be told the company has but one purpose, to maximize shareholder wealth.
But how did we go from the "Stakeholder" model, to Shareholder primacy?  And how do we get corporations to behave more in the public interest again?  

Yes, following the New Deal era the debate began to move back as a generation who doesn't remember the past is condemned to repeat the mistakes of the past.

In 1970, economist Milton Friedman published an article The Social Responsibility of Business is to Increase its Profits taking on the "Stakeholder" model. In his article, Milton Friedman refers to business people who accepted some social responsibility as:

In fact they are–or would be if they or anyone else took them seriously–preach­ing pure and unadulterated socialism. Businessmen who talk this way are unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades
In 1976, Michael Jensen and William Meckling published a paper in the Journal of Financial Economics Managerial Behavior, Agency Costs, and Ownership Structure. The paper argued the separation of ownership from control in public companies caused them to sometimes make decisions that weren't in shareholders best interest. The result was "agency costs" that decreased the total value of the company. The paper also claimed a principal-agent relationship where shareholders hired executives as agents to run the company on their behalf.

What is an agency cost?  My own understanding is these are costs that arise because managers are separate from shareholders. If expenses don't come out of your personal pocket, you don't watch them as closely. This could be anything from managerial fraud to paying employees an above market wage because the board of directors believes in fair wages. Basically, it is costs that arise from a company pursuing priorities other than maximizing shareholder value.

In 1990, Michael Jensen added more fuel with his paper "It's Not How Much You Pay, But How" talking about how underpaid CEO's were and making the case for more pay for performance packages.

In the 1930's, Berle and Means were aware managers were separate from shareholders and this would result in agency costs. But what Jensen and Meckling felt was a problem Berle and Means considered necessary for the corporate system to survive. Lynn Stout talks about this in her 2013 article  On The Rise of Shareholder Primacy, Signs Of Its Fall.  In her paper, she quotes from Berle and Means 1932 book The Modern Corporation and Private Property.

It is conceivable- indeed it seems almost essential if the corporate system is to survive-that the "control" of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity.
Forbes once referred to Berle and Means book as "the economic Bible of the Roosevelt Admin" - here.  Adolph Berle was part of FDR's brain trust.

But it was 1976, not 1932 and we had raised a generation of business leaders who had no memory of the Great Depression and no awareness that more of a shared prosperity was necessary if Capitalism was to survive. Economist Richard Wolff talks about this at around the 30 minute mark in his PBS interview with Bill Moyers. President Roosevelt went to the corporations and the wealthy and told them:

"you must give me [the President] the money to meet the basic needs of the masses of people to be massively helped or the goose that lays your golden egg is going away."
He was able to convince half of them. I always wondered how crucial it was to persuade any of them to pass the New Deal reforms?

Why did many of them accept stakeholder capitalism?  Did the Great Depression teach them it was necessary to capitalism to survive? In the 1930's the Soviet Union and other countries turned to Communism as the answer to Capitalism's inability to create shared prosperity. Was it because it worked better? Was it because the New Deal, solid labor unions, and an activist government made it the pragmatic thing to do?  

The next generation's investor class considered stakeholder capitalism (not to mention labor unions and a lot of other New Deal reforms) as a pesky problem that prevented them from being even more wealthy. How could they better align executive and board of director decisions with shareholder interests? The answer was pay for performance, stock options, and equity based compensation.

Lynn Stout notes on page 20 of her book:

In 1984, equity based compensation accounted for zero percent of the median executives's compensation at S&P 500 firms: By 2001, this figure has risen to 66%.

But does the principal-agent relationship apply to huge multinational corporations the way it might a small closely held business?  

In her book, Lynn Stout says no:

But its patently and demonstrably wrong, as a descriptive matter, to claim that Jensen and Meckling's simple model captures the economic reality of a public corporation with thousands of shareholders, scores of executives, and a dozen or more directors. The standard model may describe some kinds of firms...but it grossly mistates the economic structure of public corporations.
I'm not a lawyer, and I don't want to copy long multiple paragraphs out of concern for both being brief and copyright. I'll explain her arguments as I best understand them briefly as I can. The principal-agent claim is based on a few assumptions. First, that shareholders own the corporation. Second, that shareholders have a residual claim to profits left over after all contractual obligations are paid. Third, that shareholders are the principal and executives their agents.

In Chapters 2 and 3, Lynn Stout argues a corporation is an independent legal entity that owns itself. Shareholders own shares. Those shares give them very limited rights. She argues the residual claim theory has its roots in bankruptcy law, but a living corporation has a different purpose than a dead one.

In her book, Lynn Stout also indicates that shareholder primacy appears to have reached its zenith and is "poised for decline."

At least among experts, shareholder value thinking had reached its zenith and was poised for decline. The first sign was the number of articles that began appearing in legal journals in the late 1990's and early 2000's. These articles, written by lawyers, began pointing out a truth the Chicago School economists seem to have missed: U.S. corporate law does not, and never has, required public corporations to maximize shareholder value.
Where did the idea U.S. corporate law requires corporations to maximize shareholder wealth?  In her book and her paper Why We Should Stop Teaching Dodge v Ford she says:
Much of the credit--or perhaps more accurately, the blame—for this state of affairs can be laid at the door of a single judicial opinion. That opinion is the 1919 Michigan Supreme Court decision in Dodge v. Ford Motor Co
In the paper, she notes Dodge v. Ford is the only legal authority cited to back up the view corporations are legally required to maximize shareholder wealth. What were the facts of the case?

The case wasn't about a public corporation. The case was about a majority shareholder (Henry Ford) using his power to oppress a minority one (John and Horace Dodge). The Dodge brothers wanted to start their own car company. Henry Ford withheld dividends to to deprive them of capital necessary to do that. The court ordered Ford to pay a special dividend, and in response to Ford's ridiculous claims as to why he withheld dividends, the court made an offhand remark - or dicta - how a business should be carried on for the profit of stockholders. Note: dicta is not precedent and future courts can disregard it. It is just an observation unnecessary to reach a decision.

Again, this was a case about a majority shareholder oppressing a minority one and not a case about a public corporation (which Ford Motor wasn't at the time). In the book, Lynn Stout notes:

The one Delaware opinion that has cited Dodge v. Ford in the last 30 years, Blackwell v. Nixon, cites it for just this proposition.
In Chapter 7, Lynn Stout talks about how shareholder primacy looks at the world from the perspective of the "Platonic investor." The platonic investor is someone who has no other assets or interests to protect but the short term value of one company's stock. In reality, the platonic investor doesn't exist however the undiversified hedge fund comes close.

The reality is most shareholders are "universal investors" with a stake in the economy at large, in communities, and in our planet.

When a public company announces it will move a facility overseas and lay off workers to boost its stock price, are any of those employees also shareholders?  What if Worker A used to frequently dine out at a nearby Denny's but no longer can?  Does that help or hurt Denny's shareholders?  What about the waitress he used to tip who now cuts back on her grocery bill at Target?  What about the many other businesses with less revenue because various people aren't spending quite as much?  What about governments who now take in less tax revenue?  What about local charities Worker A used to donate to?  Did anyone benefit from this greed grab except the rare platonic shareholder?

When a public company neglects the environment don't their shareholders also have to breath the air and drink the water?  When oil companies spend millions of dollars to promote climate change denial, does this help or hurt their shareholders? Aren't oil company shareholders also impacted by increasingly unstable weather patterns? Don't they own homes, and pay taxes?  The rare platonic investors no doubt plan to move to the coming climate haven.

If large public companies individually and collectively have the ability to make decisions that can ruin hundreds, thousands, even millions of lives why should they be run for the benefit of the very rare platonic shareholder?  

In my reading, I learned many knowledgeable people believe we are near the start of a new era in capitalism. In the final chapter of her book, Lynn Stout wrote:

The good news is among experts shareholder value dogma shows signs of being in decline. To return to Thomas Kuhn, the shareholder primacy paradigm is failing and alternative paradigms are rising to take its place

What are those alternative paradigms?  After all, it isn't enough to say something isn't working - we need workable alternatives. The Forbes article Is the Hegemony of Shareholder Value Finally Ending mentions two alternative paradigms. The first would returning to the Stakeholder model that worked so well during the New Deal era.

(1) We could return to the Stakeholder model that worked so well from the 1930's to the 1970's. Proponents of this model include Lynn Stout (cited earlier), Berle and Means (cited earlier), and Justin Fox and Jay Lorsch noted in their Harvard Business Review article What Good Are Shareholders?  

(2) There is "Customer Capitalism" embraced by Roger Martin in his book Fixing The Game. In this model, a business should focus on servicing and keeping customers, and not on maximizing shareholder wealth. If customers are taken care of, all other stakeholders will be. While I haven't read Roger Martin's book yet, I'm not convinced this model would adequately consider employees and the environment.  

Finally, I want to address the need for corporate tax reform. In his interview, Ralph Gomory talks about why IBM wanted to sell its PC business to China and why China wanted to buy it. The PC business was a low profit margin business. It didn't make a ton of money for IBM shareholders. However, a business can have a low profit but add high value to our economy. For example, a low profit margin business may employ a lot of workers at a fair wage who spend their income which helps other businesses adding a lot of value.

In a 2008 testimony before Congress, Ralph Gomory proposed changing the corporate tax code so instead of taxing corporations by profit we tax them according to the value they add to our economy. A company that adds little value - outsources jobs, doesn't pay a living wage, etc. - would face a very high corporate tax. A company that adds a lot of value to our economy - keeps jobs in the U.S., pays a fair wage, etc. - would have a very low tax. In his testimony, he said this would be easy to measure. An article on this can be found - here. While I don't know exactly how this would work, I'm intrigued by the idea. I would support making the environmental part of the value added measure. A company that is a poor environmental steward obviously detracts from our country's value. A company that is a good one adds to it.

The floor is yours.

Originally posted to joedemocrat on Wed May 28, 2014 at 02:29 PM PDT.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement and Community Spotlight.

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Comment Preferences

  •  The fiduciary duty rules vary by state (28+ / 0-)

    About half the public companies in the US are incorporated in Delaware. A 1985 Delaware Supreme Court case, Revlon v MacAndrews that revolved around a hostile take over bid and the defenses employed by the Revlon board of directors, resulted in a changed interpretation of the "business judgement rule". While Revlon only applies to a board when a company has received an offer to be purchased, the successful challenge to the business judgement rule has made boards of directors, and their outside counsel, view many judgements through the single prism of the long term interest of the shareholders. However, many states in the Midwest, and I am most familiar with Indiana corporate governance law, allow the board to view its decisions taking into account a broad group of stakeholders, including shareholders, employees, suppliers, and communities.

    I have thought for a long time that we should pressure the Delaware legislature to change its corporate governance laws to the Indiana standard. I think its a change that would have bipartisan support, including by corporate boards of directors.

    "let's talk about that" uid 92953

    by VClib on Wed May 28, 2014 at 02:58:48 PM PDT

    •  The Revlon case is actually mentioned in the book (19+ / 0-)

      Revlon planned to go private and that was why the directors lost the protection of the business judgement rule.

      subsequent Delaware cases made clear as long as the corp. planned to remain public, directors have no "revlon duty" to maximize shareholder wealth.

      There are also "B" corporations - something I didn't cover as the diary is just so long. That is social benefit corporations.

      •  California passed legislation a few years ago (11+ / 0-)

        establishing a class of social benefit corporations. I think those are great, but it's highly unlikely that you can attract significant, passive, investor capital to a social benefit corporation.

        Revlon has had a much more pervasive impact on boards of directors than the case would suggest. In large part because, at it relates to decisions by the board, only shareholders have standing to sue. As long as a corporation is following all of the local, state and federal laws other entities have a difficult time proving standing in any civil case.

        I do think a change in Delaware law would be very beneficial.

        "let's talk about that" uid 92953

        by VClib on Wed May 28, 2014 at 03:14:34 PM PDT

        [ Parent ]

        •  but you could get foundation capital or pensions (5+ / 0-)
          Recommended by:
          joedemocrat, Egg, VClib, Yonit, k9disc

          to invest in social benefit corporations.

          A social benefit corp that provides low income housing
          may have massive affects on San Francisco where you can't
          get an apartment.

          as such CALPers may find it useful, because many
          CALPERS employees may want to live there.

          •  Sure, and I love the concept of social (3+ / 0-)
            Recommended by:
            joedemocrat, patbahn, k9disc

            benefit corporations. I think they will be widely used.

            "let's talk about that" uid 92953

            by VClib on Thu May 29, 2014 at 08:46:29 AM PDT

            [ Parent ]

          •  That violates the fiduciary duty of the trustees (0+ / 0-)

            and also has major equity issues.

            If a foundation wants to provide low income housing it should do so as part of its spending program, not its investment program.

            Mixing social goals with investment has many negative impacts.  For example, it is no longer possible to look at returns and determine if the trustees are doing a good job investing the company's assets.  So it becomes a way for incompetent or self dealing trustees to excuse poor returns.

            as such CALPers may find it useful, because many CALPERS employees may want to live there.
            The problems here are far worse.

            First off, CALPERS has promised its beneficiaries pensions, not low income housing.  Many people believe that CALPERS is going to have a hard time meeting its pension commitments.  Should it really be putting those commitments more at risk by doing anything other than maximizing its investment returns?  If it does do so and is later unable to pay pensions, who should be liable?  (I think any trustee who voted to invest based on anything other than maximizing returns should be liable, in which case no trustee would ever vote to do socially responsible investing.  Who do you think should be liable?)

            Secondly, many CALPERS beneficiaries will not want to live in San Francisco.  How do you justify lowering their pension returns (putting at risk their pensions or at minimum forcing them to make higher contributions to the pension fund) in order to benefit just a small group of beneficiaries who happen to benefit from that low income housing in San Francisco?

            I think we should keep doing well and doing good separate.  If we want low income housing in San Francisco we should get it by relaxing building restrictions to increase the supply of housing at all prices and/or by paying for it through taxes or charity.

    •  Incorporated in DE but stock sold on Wall Street (0+ / 0-)

      And very few individuals but money managers and programmed trading. These "shareholders" look for churn (rapid change in share price) so decisions for the long term company well being are irrelevant. In fact kind of like our two year Federal election cycle. Perhaps a penalty "for early withdrawal" or create a minimum one year stock hold time (especially in the OTC "dark market" that operates in an unregulated fashion).

      An unsavory but necessary change would be a VAT (Value Added Tax) as used in Europe and elsewhere (and abhorred by multinationals) that essentially becomes a tax on profitability. Not really leveling the playing field but a tax on excess profits. A company making shoes for $1 overseas and selling in US for $100 would pay $35 on $99 but a domestic company making shoes for $5 and selling for $25 would pay $7. Many Infrastructure critical US industries are low profit and compete for Capital from high profit multinationals.

      Did you know that Apple, Google, etc got permission to hide their profits overseas from the  Bush IRS? One call from Obama would stop that (or at least they'd have to get creative).

  •  This type of formula is very interesting (32+ / 0-)

    This one you've posted:

    A company that adds little value - outsources jobs, doesn't pay a living wage, etc. - would face a very high corporate tax. A company that adds a lot of value to our economy - keeps jobs in the U.S., pays a fair wage, etc. - would have a very low tax

     - emphasis added

    One way to measure a companies value to society could be based on these other kinds of indicators Meteor Blades introduced in a number of Diaries

    Here are some:

    Inadequacies in the GDP gauge have spurred efforts to develop a better measure or supplements to it. These include France's Commission on the Measurement of Economic Performance and Social Progress, Canada's Genuine Progress Index (a version of which has recently been tried out in Maryland), the Human Development Index and the Gini coefficient. .
    Maybe if these type of measurements of employees' satsifaction could be used to establish what kind of tax expenditures a company can earn and what tax rate a corporation is set to. Start with a tax rate that is high enough to incentivize companies to meet these criteria.

    Also too: since corporations/companies already write cost of labor off of their reported earnings, but many still pay crap wages (Walmart et al.) , their could be a ratio established between what percentage of company's gross sales vs what is paid out in labor costs/wages per worker. If a company is making huge profits compared to what they pay the workers their tax rate goes up exponentially

    Thx joedemocrat for the interesting ideas and writing it up

  •  A Paul Krugman lecture, circa 1999 (23+ / 0-)

    He said three things that have stuck in my mind these fifteen years:

    Up until 1980, American companies were "little social democracies" by present standards.

    Adam Smith and his fellows considered the joint stock company to be a passing fad, for what hired manager could attentive to the firm as an owner would be.

    If something can't last forever, it won't.

    All of which feeds into this nagging feeling I can't shake, that something terrible changed around 1980 in America and that difficulties will not end until we understand the deep causes.

    Vai o tatu escamoso me encontrar onde estou escondendo? Lembro-me do caminho de ouro, uma pinga de mel, meu amado Parati

    by tarkangi on Wed May 28, 2014 at 03:41:40 PM PDT

    •  Ronald Reagan. The election of pure unadulterated (27+ / 0-)


      I worked for a major corporation in the 1980s and saw the company literally change before my eyes.

      Reagan's firing of the FAA Air Traffic Controllers gave CEOs permission to deal brutally with unions, and they relished the role.

      Soon they were pumping up their own salaries, while wiping away the concept that employees were stakeholders. Instead, employees because liabilities. Costs to be cut.

      During the 1980s, America was severely damaged and the clowns in the Reagan administration brought it all on.

      I don't know if you remember, but they were so crass that members of the White House staff were buying luxury cars on official overseas trips, shipping them back to the USA, and selling them at a big profit. I mean they were just shameless about the greed.  Greed is good.

      And it was so easily predictable that would lead to disaster, but Clinton did little to slow down the concept and neither has Obama.  Bush II was Reagan on steriods. Cowboy clown.  And look where that got us.

      "The law is meant to be my servant and not my master, still less my torturer and my murderer." -- James Baldwin. July 11, 1966.

      by YucatanMan on Wed May 28, 2014 at 10:24:16 PM PDT

      [ Parent ]

  •  Very well written diary (13+ / 0-)

    Well done Joe.

    I believe a corporation's primary responsibility is indeed to its shareholder. I think whenever a CEO speaks of social responsibility, its just fluffy words.

    That said, the only thing to keep corporations from being socially irresponsible to its employees, the environment and to consumers is a robust regulatory structure. As Democrats, we need to keep fighting for that. Republicans have been all too successful at trying to weaken, if not decimate that structure.

    KOS: "Mocking partisans focusing on elections? Even less reason to be on Daily Kos."

    by fcvaguy on Wed May 28, 2014 at 04:03:55 PM PDT

  •  That's one heckofadiary you've written (24+ / 0-)


    I remember the olden days when families owned companies (and most of the farms) and spent their profits on improving or expanding the family business.  Taxes were high so if they didn't invest in their business, they paid higher taxes.

    Business did well, kept up, modernized, treated their employees as assets and valued the most experienced workers, and they made more money.  The business that was passed down to their kids was in better shape than it was when they received it.

    Today, business is crumbling because every penny they make goes to the executives or shareholders and not much is invested in business.   CEOs complain about the workers, failing to remember that loyalty is a two way street.  

    They strip and strip and strip from their employees paying them as little as possible, stealing their pensions, vaporizing any benefits they might have, and go out of their way to avoid even basic health and safety rules.  They'd kill dozens of workers if it would save them a nickel and they thought they could get away with it.

    Doing this, they fail to realize that their employees (and the employees of other business using the same "maximize the profits" strategy) are (or WERE) their customers.  Today, they can't buy those products or services because they can't afford to pay for the basics, so business is going bust.

    No problem, they say.  They move production to a cheap labor/slave labor country.  Well, back home they just made matters worse.

    These are supposed to be smart guys.  I'd think they would have figured this out by now.

    There already is class warfare in America. Unfortunately, the rich are winning.

    by Puddytat on Wed May 28, 2014 at 04:31:20 PM PDT

  •  This is a great diary, joedemocrat. (11+ / 0-)

    This diary has been listed under Community Spotlight. (Thank you, Rescue Rangers!)

    I will return later for study.

    Thanks, joe.


  •  Great diary joedem, (16+ / 0-)

    Seems like the drive to maximize the next quarterly earnings report trumps all else in corporate America, even the long-term viability of the business itself.

    It's a kind of madness.

  •  Hooray! (7+ / 0-)

    Good work in a good diary with good points that need to be made, good and hard.

    "man, proud man,/ Drest in a little brief authority,. . . Plays such fantastic tricks before high heaven/ As make the angels weep; who, with our spleens,/ Would all themselves laugh mortal." -- Shakespeare, Measure for Measure II ii, 117-23

    by The Geogre on Wed May 28, 2014 at 05:44:52 PM PDT

  •  Compensation (7+ / 0-)

    In fairness, part of the move to align CEO pay with the stock was because there was outcry about large cash compensation to executives.

    The argument was that they were making a ton of cash without regard to the stock price (which plays into the shareholder value idea).

    Companies decided to pay executives less in cash with the idea that if the stock price increased then everyone won because the shareholders were getting richer and the executive "earned" his money through merit.

    I am not saying I agree with it, but there is a reason that stock compensation became an increasingly large part of executive compensation.

    People used to get outraged about large cash salaries as it was easy to demagogue.

    Returning to the days of large cash payouts with no tie to the stock price would almost certainly end up devolving into the same outcry's it used to.

    There is no perfect system, and in a globalized world we are never going back to the old days.

    Someone up thread commented on things "changing" in 1980. Well what changed is that we left the dark ages and have lived in a modern world where you can easily outsource things and transport goods in short time frames.

    Modern technology has made business models possible now that just weren't in 1960.

    Not to mention that by the mid-70's we had largely finished the 20+ year post war period where we were solely responsible for rebuilding the world economy. Every other country had their infrastructure decimated by the war, and we were the world' s manufacturer with essentially no competition.

    Nothing we do will take us back to that golden era, as there is fierce competition now from countries all over the world in ways that didn't exist in our golden era of business from the post war to 70's period.

    It is often disregarded as an economic phenomenon, but no set of policies we implement can recreate that type of business environment because we are no longer the world's sole manufacturer in charge of rebuilding the world.

    I am not entirely sure what the answers are to our current problems, but I think sometimes we fall into the trap of thinking that if things were like they used to be it would solve our problems and I don't think it deals with the realities of the world as it is now.

    Our best growth period post war is largely an anomaly and I think would have happened no matter what economic policies we had in place because of the unique circumstances the world was in during that period.

    I don't know that there is anything we can do to recreate that period of prosperity for this country.

    •  Tariffs (10+ / 0-)

      A 10% tariff on every good that came into this country would be a boon to every working American.  Manufacturing jobs would come back, the demand for labor would increase, increasing wages.  Workers would then have leverage to start strong unions which would bring back pensions.  The demand for an educated workforce would mean businesses would embrace public education.  

      A single payer health care system would help small business growth.  There is no logical reason for health care to be tied to a job.  HR departments would be much smaller because they wouldn't have to deal with health insurance.

      Taxing all income at the same rate with a truly progressive tax structure would enable to government to build a 21st century infrastructure that would be another boon to business.

      Cutting the military in half and closing most foreign bases would save trillions an almost no one would notice.

      In other words, the progressive agenda could bring back that prosperity.  We tried conservatism since 1980 and it has failed us.

      Republican tax policies have led to financial conditions which have caused Republicans to demand cuts to programs they have always opposed.

      by AppleP on Wed May 28, 2014 at 06:22:46 PM PDT

      [ Parent ]

  •  To what extent (8+ / 0-)

    is extremely high pay for management against the interest of the shareholders? I suspect that at least in some cases we've moved from Shareholder Interest to Executive Management Interest. Certainly, this coincides with what I perceive as a gradual circumscription of the rights of small shareholders.

  •  Good post. (6+ / 0-)

    Join us on the Black Kos front porch to review news and views written from a black pov—everyone is welcome.

    by TomP on Wed May 28, 2014 at 07:06:54 PM PDT

  •  Excellent diary, Joe. (11+ / 0-)

    Hotlisted and will be back for a second read.

    Maya Angelou: "Without courage, we cannot practice any other virtue with consistency. We can't be kind, true, merciful, generous, or honest."

    by JoanMar on Wed May 28, 2014 at 07:56:22 PM PDT

  •  It is interesting that (9+ / 0-)

    while shareholders may take the view that the company whose stock they own has the sole duty to maximize shareholder value, that really isn't the reason they buy the stock.

    Shareholders have no way to tell if the board is maximizing value, and the companies are not measured by this because it's not an intrinsic "thing".

    Sure they may expect it to be uppermost in the minds of the directors and executives, but company stock is based on long term performance and future predictions.

    Shares are not normally (other than by speculators, and we can manage without them) bough for immediate return, but as part of a strategic investment portfolio. Many of the Blue Chips are bought for reliable dividends and long-term growth. That growth, and the stability of a company can be positively influenced by a corporation investing in the community that supports it.

    "Good" companies live a long time, and investors love them.

    I hope that the quality of debate will improve,
    but I fear we will remain Democrats.

    Who is twigg?

    by twigg on Wed May 28, 2014 at 09:41:19 PM PDT

  •  Milton Friedman is responsible for so much (21+ / 0-)

    economic destruction, it would make a very interesting accounting for some intrepid economic writer.

    His "free trade" and "free market" and "shareholder value" bullshit has so deeply harmed the United States.

    The end of anyone believing anything that came from him should have been when Greenspan admitted to Congress that all his previous assumptions about economics were just plain wrong.

    But. no. We have billionaires whose wealth can still be increased.

    "The law is meant to be my servant and not my master, still less my torturer and my murderer." -- James Baldwin. July 11, 1966.

    by YucatanMan on Wed May 28, 2014 at 10:15:04 PM PDT

  •  You need to take this lecture ... (11+ / 0-)

    ... on the road, joedemocrat, to every business school in the country. They've heard quite enough from this guy:


    My dog likes me because I'm salty. Not salty like a pirate. Salty like a pretzel.

    by Tortmaster on Wed May 28, 2014 at 11:48:32 PM PDT

  •  I lived through this change in corporate (26+ / 0-)

    America, and I left it in disgust and shame after 15 years (1987 - 2002).  During this time, I rose through managerial levels, working for one Fortune 500 to another, mainly in high tech, financial, or science based businesses including AT&T, Motorola, Unisys, Microsoft, Shearson Lehman, Firestone, KPMG, Apple, and Eli Lilly.

    I worked in their Training, Development and Quality departments using my MS in Instructional and Organizational Development.  My personal business goal and reason I earned the degreee I did was to help and empower employees by increasing their skills and knowlegde, optimizing processes, removing obstacles, and aligning resources to strategic goals.  When I first started in my career in corporate America, the strategic goals in companies included goals meant to serve employees, customers, and communities/ the environment.  Profits above 15% were considered irresponisble and suspect.

    I left when I was a V.P. at a GE Capital business (Jack Welch was still there at the time).  When I joined GE Capital in 1999, vulture capitlalism didn't have a name, but it was alive and active at that point.  I was deeply confused by what was happening in the company I was supposed to be a leader in; I really didn't get it even though I was sent for training as a leader in GE.  I distinctly remember talking with my husband about how the whole direction was going to kill the Golden Goose, and I used this very analogy in those discussions.  

    I left, because I could not be a part of what corporate America was and what it was becoming.  The best I can figure it, the purpose of GE Capital was to be a vulture capital wing to increase GE's cash/ profitability/ capital bases through basically any legal means possible.  The last thing I did in corporate life -- to my eternal sadness and shame -- was to help GE Capital to buy up mom and pop IT service companies all over the country, consolidate (fire people) processes, and cut costs while the sales force increased contracts with big players like GE.  I even helped them fire my own department by moving training to a computer based system.  The HR department then shifted all Help Desk services to India, and we were able to cut 1000+ high tech US jobs. With the destruction of local/ regional competition, and at least in the short term, a picture of profits at extremely low costs, we were a "success as a management team," and the corporate creature we had created was ready to sell for a tremendous ROI.

    We all got a nice bonus for our efforts, and instead of taking the next plum position they were offering, I left.

    I went back to school to get another degree, and I became a public school teacher.  I lost the 6 figure income and the perks, but I can sleep at night without feeling like I was a traitor to my family's progressive values.  

    Since then, I've watched from the side-lines.  For example, I watched Eli Lilly shift from being a company that was deeply committed to the previous set of balanced set of goals to getting themselves into this mess with Zyprexa.  It is difficult to describe how much shock and horror I've felt over this since I had been responsible for the initial training rollout for the global salesforce and there was NONE of that crap in that rollout.  

    It has been very difficult for my family to make it through the recent recession, and we almost lost the house as we struggled through my husband's long unemployment.  However, I will always be content with my decision to leave.  I sincerely hope that corporate America will regain it's moral center someday since I firmly believe that killing the Golden Goose is not only immoral, but also really stupid and a bad business move, as well.

    Plutocracy (noun) Greek ploutokratia, from ploutos wealth; 1) government by the wealthy; 2) 21st c. U.S.A.; 3) 22nd c. The World

    by bkamr on Thu May 29, 2014 at 04:01:10 AM PDT

    •  They don't care as long as "they got theirs" wins (3+ / 0-)
      Recommended by:
      joedemocrat, 2thanks, JeffW

      elections & enables few to steal big bucks. This country is back to the bad old days if disrespecting work & workers. Workers voted for these monsters. Now they're getting bashed.

      Too bad!?

      I voted Tuesday, May 6, 2014 because it is my right, my responsibility and because my parents moved from Alabama to Ohio to vote. Unfortunately, the republicons want to turn Ohio into Alabama.

      by a2nite on Thu May 29, 2014 at 06:03:32 AM PDT

      [ Parent ]

      •  GE's Jack Welch was the the pioneer (10+ / 0-)

        of maximizing shareholder value. His speech in 1981 was thought to be the beginning of the change in business strategy.

        On August 12, 1981, Jack Welch made a speech at The Pierre in New York City called ‘Growing fast in a slow-growth economy’.[1] This is often acknowledged as the "dawn" of the obsession with shareholder value. Welch's stated aim was to be the biggest or second biggest market player, and to return maximum value to stockholders.

        He now denounces the concept and says his speech/quotes were taken out of context but it is amazing how all of this coalesced with Ronnie Raygun coming into office. Destroy unions, maximize shareholder value, deregulate across the spectrum along with other sorted political and business beginnings. 80/81 was prime time. The seeds were sewn and the outcome is the disaster we have today.

        The era of procrastination, half-measures, soothing & baffling expedients, & delays, is coming to a close. We are entering a period of consequences - Churchill

        by PrometheusUnbound on Thu May 29, 2014 at 07:07:55 AM PDT

        [ Parent ]

    •  Thank you so much for your comment (9+ / 0-)

      and sharing your story. I've submitted it to Top Comments!

      I think corporate America will eventually have to regain its moral center. I don't see how this show goes indefinitely. It can't if we are to ever solve this economic & environmental mess.

      Wendell Potter also left corporate management because he couldn't do it anymore.

      I'm sorry you have struggled in this economy as so many have and I wish you the best!

    •  Former KPMG CPA here, who saw the change (9+ / 0-)

      in accounting firm culture while I was there in the early 80s, then later saw it decline further from the industry side.  It went from providing clients real services to "selling products".  
        And the departments within firms that had high profits decided they wanted to keep those profits for themselves instead of sharing them with low (or no) profit departments like auditing.  Thus, the auditing dept. had more pressure to make its own profit, which led to the corrosion of ethics that created messes like Enron.
        Long story, but I left accounting after, among other things, trying to stand up aginst my then boss (also a CPA) when he wanted to blatantly ignore tax law, all to squeeze out a few extra profit points.   Seems I'm too ethical for the accounting profession these days.

      My Karma just ran over your Dogma

      by FoundingFatherDAR on Thu May 29, 2014 at 11:57:38 AM PDT

      [ Parent ]

  •  You should check out BCorp (7+ / 0-)

    It is 1000 companies strong.

    What is Bcorp

    We envision a new sector of the economy
    which harnesses the power of private enterprise to create public benefit. This sector is comprised of a new type of corporation —the B Corporation — which is purpose-driven, and creates benefit for all stakeholders, not just shareholders.

    As members of this emerging sector and as entrepreneurs and investors in B Corporations,

    We hold these truths to be self-evident:
    That we must be the change we seek in the world.

    That all business ought to be conducted as if people and place mattered.

    That, through their products, practices, and profits, businesses should aspire to do no harm and benefit all.

    To do so, requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations.

    Loyalty to petrified opinion never yet broke a chain or freed a human soul in this world--and never will. Mark Twain

    by whoknu on Thu May 29, 2014 at 06:17:52 AM PDT

  •  maximizing shareholder worth (5+ / 0-)

    is basically a  lie,  except to the extent top officers are major shareholders.    Promoting short term profits, playing the market price (which only matters if the shareholder stops being a shareholder) and payment of enough dividends to keep shareholders quiet, all of which creates a large payout for management right away.   That is what drives corporate policy.  Not any other stakeholder, shareholder, employee, customers, suppliers, etc.

  •  Stakeholder vs Stockholder (6+ / 0-)

    I got my undergraduate degree in 1984 - when Stakeholder was still terminology - and then got my MBA in 1999 when Shareholder was the terminology.  I argued many times during my MBA classes that shareholders WERE NOT the only people that had interest in a corporation's successes or failures.  IIRC my Business Policy Cases professor agreed with me but many of the students - in the particular class - were night class students that worked in the corporate world disagreed with me.  I now need to go get Professor Stout's book. :-)  

    Why do Republicans Hate Americans?

    by Caniac41 on Thu May 29, 2014 at 06:40:16 AM PDT

  •  Excellent diary, thanks n/t (3+ / 0-)
    Recommended by:
    joedemocrat, 2thanks, 417els

    Excellent diary, thanks n/t

  •  Don't forget the 401(k) "forced capitalists" (4+ / 0-)

    This is an excellent post and it sounds like an excellent book.  There are constituencies to be served beyond the greed of CEOs and their tame boards--some efforts to bring more balance are afoot in the corporate world, but the problem is complex and the CEOs still get to use corporate funds to argue their side of the case.  

    With respect to share returns, however, it is important to remember that private sector employees who fund their retirements and kids' college plans with 401(k)s, and state and private pension funds such as CALPERS, TIAA, and the like, need to make returns for their beneficiaries, the "forced capitalists" (in Leo Strine's words) who have a stake in a rising stock market.

  •  Adam Smiths' insight -wages of unskilled labor (8+ / 0-)

    wages of unskilled labor indicates  the health of the economy

    Among Adam Smith’s many insights, one deserves special attention. It is his observation that the condition of unskilled wages is a reliable indicator of the overall health of an economy. In his words:
    The liberal reward of labor, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the laboring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going backwards fast.1
    The wages of unskilled workers are the canary in the coal mine. As Adam Smith warned in the quote above, when these wages stop growing it is a sign the economy has ground to a halt. When they are falling, it is a sure bet the economy is shrinking and in serious trouble.

    There are records of unskilled wages going back to 1774.

    For nearly two hundred years (1774-1973) these wages kept rising. They doubled four and a half times, even after adjusting for inflation.2 The speed of the doubling picked up in the twentieth century. It was like accelerating from 55 to 80 mph. Unskilled wages were on track to double again in 1983. And there was a good deal of the century left for even more wage growth.

    Yet the doubling did not happen. After 1973, the unskilled wage stopped growing altogether. Instead, the real wage paid to laborers, the wage after adjusting for inflation, began to fall and continued falling. By 2008, the unskilled wage was down to one-third of what it was in 1973. This is the equivalent to the wage paid to laborers seventy-five years earlier in 1933 (See Figure 1.)

    I was unable right now to upload the graphic which shows that unskilled wages are now at the level of 1933

    I have permission from the author to post anything from the book.

    Worse than You Think: The Real Economy Hidden Beneath Washington’s Rigged Statistics, And Where To Go From Here”, by Keith Quincy. Available and barnes and for $16. Kindle 99 cents
  •  Go back a hundred years or more (4+ / 0-)
    Recommended by:
    joedemocrat, 2thanks, Caniac41, Just Bob

    and the same mentality was at work in many of the country's richest and most powerful corporations, the maximization of shareholder wealth and profit over everything else, via exploitative labor practices, union busting--often lethal--monopolistic business practices, collusion, price-fixing, bribery, and a complete disregard for consumer safety and environmental stewardship, all based on, or at least justified by, self-servingly, a Spencerian view of the "Survival of the Fittest", that basically amounted to "Win or Die".

    I happen to believe that over the long run, engaging in ethical and moral business practices is the most profitable way to run a business, apart from the fact that it's the right thing to do. But stockholder, board and financial media-beholden corporations run by vain and self-interested yacht, mansion and trophy wife-acquiring CEOs mostly don't think in terms of the long run, let alone what's right. They think about their corporate and personal bottom lines in the next quarter, and to hell with what comes next.

    Which is why the idea of a self-regulating "free market" that forces companies to do what's best for them AND society in order to succeed is such bullshit, believed in by sheltered morons and advocated by self-serving liars. Sure, some companies DO go under by engaging in such poor practices, but only after years of causing immense harm to society, which, if at all addressed, is paid for by the taxes of the very people they've harmed (e.g. Lehman, Bear Stearns, Enron, LTCM, etc.). But many manage to stay hugely profitable for decades, at the expense of their employees, customers and society.

    Which is why a well-regulated market is the only one that works, makes sense, and is both moral and ethical. If you care about such things, that is.

    "Reagan's dead, and he was a lousy president" -- Keith Olbermann 4/22/09

    by kovie on Thu May 29, 2014 at 07:14:03 AM PDT

    •  rec'd for this (2+ / 0-)
      Recommended by:
      joedemocrat, 2thanks


      But stockholder, board and financial media-beholden corporations run by vain and self-interested yacht, mansion and trophy wife-acquiring CEOs mostly don't think in terms of the long run, let alone what's right. They think about their corporate and personal bottom lines in the next quarter, and to hell with what comes next.
      Thanks.. :-)

      Why do Republicans Hate Americans?

      by Caniac41 on Thu May 29, 2014 at 10:47:43 AM PDT

      [ Parent ]

  •  only 2 duties, duty of care, duty of loyalty (5+ / 0-)

    that's what the agents owe their principals.

    I've always thought this "Duty to maximize shareholder
    duty" is nonsense.  

    There is effectively a fiduciary duty and as such the
    agents must act with care and loyalty, but,
    it seems like nobody in modern business
    works that way

    they just rip the face off the muppets and when it
    explodes the treasury bails them out for free.

  •  ... and now on the Recommended List. (2+ / 0-)
    Recommended by:
    Don midwest, joedemocrat

    Well deserved, Joe, well deserved.

    I do not have time to study this now, but I will. (Bookmarked.)

  •  excellent diary, Joe! (3+ / 0-)
    Recommended by:
    joedemocrat, 2thanks, Eric Nelson

    A very good read~

    I shave my legs with Occam's razor~

    by triv33 on Thu May 29, 2014 at 08:14:45 AM PDT

  •  There was a Humphrey Bogart monolog (5+ / 0-)

    in the movie Sabrina with Audrey Hepburn about this very thing.  He plays the CEO of Larabee Industries, and he gives a very stirring speech of why he does it, that it's not about the money, but about helping the community, in the end helping poor children.

    This was mainstream box office.  I can't imagine a similar scene in a movie today, people would laugh at the idea of a CEO being concerned about poor people.

  •  What Do We Get Back (4+ / 0-)
    Recommended by:
    2thanks, joedemocrat, Caniac41, Yonit

    The public subsidizes corporations, gives them access to tax shelters, absorbs their liabilities in a million different ways ... so what do we get in return?

    "I'll believe that corporations are people when I see Rick Perry execute one."

    by bink on Thu May 29, 2014 at 09:01:58 AM PDT

  •  I agree with JoanMar, joe. (1+ / 0-)
    Recommended by:

    I would love to see more of your writing here on Daily Kos.

  •  Pirate Captains of Industry (5+ / 0-)

    I remember when the heads of many a corporation were widely respected as Captains of American industry. It seems to me that we have moved a point where many corporations are instead headed by pirates. The contrasts are many. Captains of American Industry are proud to fly the flag and pledge to fight to the end and go down with the "ship" if necessary. Pirate captains fly only the jolly roger and are willing to change loyalties/abandon ship as necessary. Captains of American industry were respected members of the broad community and had a nice house in town. Pirate captains bury large amounts of loot on Caribbean islands and hide in friendly luxurious havens.  

    "There is only one good, knowledge, and one evil, ignorance." -Socrates

    by cava on Thu May 29, 2014 at 09:18:13 AM PDT

  •  Imagine the horror (7+ / 0-)

    of working for the largest employer in W. PA, which is also the largest landowner in Allegheny Co., where the CEO Romoff recently got close to a half-million $ raise. (He is now Western Pennsylvania's $6.5 Million Dollar Man) The very same company that has fought tooth and nail against our efforts to unionize the service workers for the past two years, has settled unfair labor practices charges brought before the NLRB, has consistently violated the terms of that settlement and is now awaiting the NLRB judge to hand down a second ruling sometime this Summer. And the irony or it all is that there are no shareholders, no stock, and no (or very little) taxes. The not-for-profit public charity I work for is the University of Pittsburgh Medical Center, which is now trying to deny access to its Doctors and facilities for those with Highmark Blue Cross/Blue Shield insurance. So stock options and market value are not necessary conditions for this evil of greed to do its damage. All you need are people who bow down to the Golden Calf of money!

  •  When I was in MBA school in 1976 (2+ / 0-)
    Recommended by:
    joedemocrat, 2thanks

    we were taught to never maximize value (that is impossible to do) but to optimize value for all stakeholders thus ensuring the medium term survival of the corporation.

    By 1980 greed was in the air and by 1984 the greed was so thick you could fell it all slimy on your fingers and hands.

  •  Corporations were once meant to benefit all. (3+ / 0-)
    Recommended by:
    joedemocrat, Major Kong, Yonit

    Something very important has been lost over the years, and that's the enforcement of the corporate charter. Corporations, being devices of legal privilege, must apply to the government to be permitted to exist whatsoever. There was a point in time when the corporation was not allowed to exist 'for all legal purposes' - that is, it had to have a specific kind of good or service it meant to provide to the public, and this provision was the entire point of their existence from the public's point of view.

    And this provision is also the foundation of the stakeholder model. When the corporation serves the public well, and the public grants them profit, the stakeholders are rewarded. When the corporation serves the public poorly, and there is no profit, the stakeholders are not well rewarded - they have a very good reason to balance their needs and make the corporation work. Furthermore, when the corporation serves the public very, very poorly, and injures it more than its service provides, the government maintains the authority to strip it of its charter, thus ending the corporation, and distributing its assets as owed in balance to the stakeholders.

    The poison that has occurred to break the system, then, is two fold - One, that the stakeholders other than the shareholders have been stripped of both influence inside the company, and reward from the service of the public. But this is just a manifestation of a deeper problem: We have neglected to enforce that a corporation must have a purpose, unlinking it from the need to actually serve the public. We have gone so far as to create charters 'for all legal purposes', setting them up as pure profit machines; this must end if we want them to come back to their role in capitalism as serving the public.

    All the regulations in the world won't help until we restore that link, and start to reject the charters of corporations designed to plunder.

    -- If corporations are people, is the stock market for the sale of slaves?

    by Orakio on Thu May 29, 2014 at 01:02:35 PM PDT

  •  Syndicalism anyone? (1+ / 0-)
    Recommended by:

    A million Arcosantis.

    by Villabolo on Thu May 29, 2014 at 01:33:00 PM PDT

  •  A great diary that makes an important (2+ / 0-)
    Recommended by:
    joedemocrat, 2thanks

    distinction between shareholders and stakeholders. So much food for thought here.

    Perhaps, by corporate law, employees and customers and citizens (i.e. the government) should have a vote at the annual meeting, as they all have a stake in the outcome. (Just thinking out loud)

    Primo pro nummata vini [First of all it is to the wine-merchant] (-7.25, -6.21)

    by Tim DeLaney on Thu May 29, 2014 at 01:53:58 PM PDT

  •  Corp tax and Gini coefficient There has been th... (1+ / 0-)
    Recommended by:

    Corp tax and Gini coefficient

    There has been this idea evolving in my mind regarding taxes on c class corporations, since all other entities should be taxed at the personal income level and not directly. There is a whole other idea for personal income tax that i would like to share later.

    Anyway, the tax would be calculated base on a measure of the company's distribution of equity payouts and compensation to shareholders and jr executives and higher vrs compensation to all other employees.

    It could be simply stated, and allowing for no exemptions execpt for startup costs, R&D an other reinvestment expenses,,, perhaps I could just say taxes on net profit and assume reinvestment is incentivized. Then the only adjustments our govy could make would be the core rate, and it would be the same for all corps. Tax equality means paying the same as someone who makes the same as you. not paying the same amount.

    Maybe its a little more complex than a comment post will allow. Especially one from a phone...

  •  Good work, Joe. Thank you. n/t (2+ / 0-)
    Recommended by:
    joedemocrat, 2thanks

    I'm a Vietnam Era vet. I'm also an Erma Bombeck Era vet. When cussing me out and calling me names please indicate which vet you would like to respond to your world changing thoughts.

    by Just Bob on Thu May 29, 2014 at 07:02:09 PM PDT

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