Dell, a former titan of the computer industry, is shortly due to go private in a deal worth $22bn. As the PC sector is reshaped by competition from tablets and smartphones, Dell reportedly believes that its strategic shift from commodity PC manufacturer to purveyor of business services is best carried out ‘behind closed doors’ of private rather than public ownership.
This is odd. If shareholder control and the metric of the share price, the central pillars of today’s governance, provide the best possible compass for running a company, as the dominant wisdom asserts, why would a company voluntarily forgo them? Even odder is that it’s actually not odd. Dell is far from alone. As the officially sanctioned corporate form loses its appeal, stock markets on both sides of the Atlantic are shrinking. According to research by Grant Thornton, from 1997 to 2009 the number of publicly listed companies in the US declined by 39 per cent, and Will Hutton’s Ownership Commission found a similar trend in the UK.
There’s more. Not only are investors not clamouring for companies to invest in that specifically state shareholder value maximisation as their purpose, they flock to buy shares in firms with A and B-class equity that deliberately weaken shareholder rights, such as Google, Linked in and Zynga. In other words, shareholders themselves don’t seem to value shareholder control very highly. Finally, ponder this. The UK has taken the shareholder-primacy model considerably further than the US (indeed, compared to the latter it is sometimes termed a ‘shareholder paradise’). But if the standard model were truly superior, and companies run accordingly were the most efficient, the UK would be world champion at breeding successful global companies. Which it, er, conspicuously isn’t.
So what’s going on here?
What’s going on, says Lynn Stout in her forensic study of the subject, self-explanatorily entitled The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public, is the implosion of the shareholder-value paradigm that has held business and academic thinking in a vice for the last four decades.
For sure, by the end of the 20th century the idea that the purpose of companies is to maximise returns to shareholders was entirely dominant. And it continues to hold much sway. In the UK it’s behind Vince Cable’s reforms to give shareholders a binding vote on executive pay. In the US a famous essay termed it ‘the end of history for corporate law’: ‘The triumph of the shareholder-oriented model of the corporation is now assured,’ the authors wrote in 2001, ‘not only in the US, but in the rest of the civilized world’.
Yet it’s a myth. No slogan-chanting revolutionary, Stout is a well-regarded legal scholar who in admirably clear and concise language successively demolishes every one of the props of shareholder hegemony.
In the US, shareholder value’s spiritual home, ‘corporate law does not, and never has, required directors of public corporations to maximise shareholder value,’ she writes. ‘Second, closer inspection of the economic structure of public corporations reveals that shareholders are neither owners, nor principals, nor residual claimants. Third, the empirical evidence does not provide clear support for the proposition that shareholder primacy rules produce superior results. Indeed, once we shift our focus from the performance of individual firms to the performance of the corporate sector as a whole, it suggests the opposite’.
In other words, the 40-year-experiment proves that shareholder primacy is a con. It has neither descriptive nor normative value. Not only is it not a panacea; prescriptions based on it are the cause of many of the things that are going wrong.
Although CEOs and some hedge fund managers have done exceedingly well, it has failed to live up to the promise of making shareholders as a class better off. Worse, says Stout, it encourages amoral, selfish behaviour that erodes the commons and undermines the economy as a whole. Its fingerprints are all over the succession of scandals that culminated in the meltdown of 2008. It is implicated in the slowdown of innovation, the rise of outsourcing and offshoring, and the demise of pensions. In its name, the salaries of CEOs soar while those of ordinary workers are held down. Shareholder value fuels the inequalities that destabilise societies and keep economies in the doldrums.
Shareholder value may be a zombie, but the undead grip is still strong. Why? The central idea has the virtue of being simple and easily understood by the public and the press, for which it plays into the need for strong stories, and by managers too, even when it is leading them astray. By lending itself to numbers and equations, shareholder value serves the academic need for management to look like a science; and it’s hard for scholars to accept that more than a generation’s worth of work was futile. It’s no less difficult to convince shareholders long used to being theoretical emperors that they have no clothes. And CEOs who have grown fat on the comfortable idea that they deserve to be rich as benefactors of shareholders have too much at stake to give up without a struggle. More subtly – and this Stout only hints at – by teaching that the baser instincts are not only normal but desirable in the shareholder interest, it turns the fiction of homo economicus into reality, with incalculable consequences for the future.
There is no longer room for doubt: recovery from the crisis is not a matter of business as usual with an added layer of regulation. It’s kicking out the shareholder-value paradigm and the destructive management model that goes with it. By taking her sharp legal axe to the accepted framework, Stout continues the urgent demolition work begun by Rakesh Khurana’s magisterial account of the betrayal of the business schools, From Higher Purpose to Hired Hands, and Roger Martin’s Fixing the Game (see my interview with Martin here). Stout demonstrates that the edifice was all front and no foundation from the start. Now the cracks are on the outside. So all together now: a few more coordinated shoves and we’re there.