6 ms·

The thing I really don't understand is the persistent meme that companies have some obligation to their shareholders above and beyond their obligation to their

by jbooth 13y ago

The thing I really don't understand is the persistent meme that companies have some obligation to their shareholders above and beyond their obligation to their employees, common ethics or the spirit of the law. It's practically an article of faith in the business community that you deserve an 'attaboy' for laying a bunch of people off if it increases profit. But stiff the shareholders? Oh, the humanity! We're developing morals all of a sudden! If all's fair in business, why don't we treat the shareholders as suckers, too? If enough of them get together, they can vote to fire you, but short of that, why do they deserve additional respect?

csbrooks 13y ago
Coincidentally, the executives making the decisions are shareholders, too.
- AsymetricCom 13y ago
  This seems to me that you're saying that they shouldn't be responsible for their failure. This leads to the discussion of whether or not people who start or back failed/failing businesses have made a net contribution to society or are simply leaching off the contributions/momentum of others. Obviously, there is a balance to these things. You're both contributing and leeching with a failed business. Monopolies are the same as well. Each one can be abused or used to create a contribution or to coopt value. What really matters is when you're all said in done, is everyone, including the employees, better off?
- wmeredith 13y ago
  Ding, ding, ding. The people calling the shots are more invested in the share price than in some public perception of the company, that is until the bad PR affects the share price.
rayiner 13y ago
Business ethics is dead in America. It has been replaced by faith in the market, the belief that market outcomes are intrinsically moral.
- thetrumanshow 13y ago
  This is why you should buy a nice car and wear nice clothes... it signals that you're a better person. {wink, wink, nod}
mathattack 13y ago
For better or worse, the shareholders are the ones who set the pay of the CEO. Much of that pay is in shares. The way to fight this is twofold: 1) Make it easier for people to start new companies and competitors. This serves both employees and customers. As a customer I get the best price when I have multiple people competing for my business. As an employee, I'm best treated and paid when there are multiple people bidding for my service. 2) Increase the penalty for legal violations, and make examples of people who violate the spirit of the law as well as the letter. Don't invite CEOs of companies who dodge taxes "To the letter but not spirit" of the law to the White House.
- dctoedt 13y ago
  > For better or worse, the shareholders are the ones who set the pay of the CEO. Um, no. At publicly-traded U.S. companies, executive compensation is set in the first instance by the compensation committee of the board of directors [1]. The law requires only that shareholders be allowed to vote on non-binding "say on pay" resolutions at least every three years (or more often if the shareholders so vote) [2]. It's been suggested that executive compensation naturally and inexorably ratchets upward because: + Comp committee members don't want to be sued by shareholders for negligence or gross negligence in setting executive comp. (That's just what happened when Disney was required to pay ex-CEO Michael Ovitz a $140 million severance package even though he'd been on the job only a year or so when he was shown the door [3].) + So, comp committees rely on survey reports about existing executive compensation levels in the relevant industry, market segment, etc. (They also hire professional consultants to provide documentation and political cover.) + Comp-committee members are supposed to be independent, that is, not beholden to management. BUT, board members tend to be supportive of management: They might well have been recruited by management. Business friendships develop among management- and non-management board members as well as with senior executives. The board as a whole feels it's a team; its members naturally want to be perceived as team players (they probably wouldn't be on the board in the first place if that weren't the case). + Here's where it gets interesting: Comp-committee members like it when they can tell company executives, your comp is in the top half for our industry. They might also honestly think that their company's executives deserve to be paid at least in the top half of the "comparables," that is, above either the average or the median for the company's industry segment. So consider what happens mathematically to executive compensation across the board when lots of comp committees have this mindset: The mid-range of the compensation band floats upward over time. + As the mid-range of the band rises over time, future compensation committees may feel pressure to raise executive compensation to keep up with the Joneses, that is, with the rising mid-range. [1] http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.18330.11.pdf http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.1833... [2] http://www.law.cornell.edu/uscode/text/15/78n-1; http://www.law.cornell.edu/uscode/text/15/78n-1; see also http://www.sec.gov/rules/final/2011/33-9178-secg.htm http://www.sec.gov/rules/final/2011/33-9178-secg.htm [3] http://www.integrogroup.com/data/File/white-papers/exec_comp_disney_decision_jan_06.pdf http://www.integrogroup.com/data/File/white-papers/exec_comp...
ChuckMcM 13y ago
In the case of publicly traded companies It isn't a meme, its a rule. And it is enforced (or not) by the SEC and the shareholders themselves. This is how it works, in order to sell securities in your company to people who aren't part of the company (stock), you have to pledge a 'fiduciary responsibility' to those people. This is a pledge that you aren't going to just take their money and burn it up in a bonfire or blow it on hookers and cocaine in Vegas. If you violate your pledge the SEC can (and sometimes does) come and put you into jail. Now all bets are off if you tell those security buyers in your prospectus, "Proceeds of this sale will be used to buy hookers and cocaine at a venue of the director's choosing." then well, said what you were going to do with it so the shareholders (people who gave you the money) really can't complain can they? Then there is another part of the equation is that the governance, or "how the company is run" is controlled by the companies by-laws. And in those by-laws there are things that are decided on by a shareholder 'vote'. Usually simple majority but sometimes 2/3rds or some other number. Those things, one of which is who sits on the board of directors, allow "influence" of other things (like who the CEO is). But let's take a moment to look at that. So the Board of Directors hires and fires the CEO and determines the CEO's compensation (often all of the senior employees compensation but that is a different story). Since who is on the board is a function of nomination and shareholder voting every 'n' years (where n is in the bylaws) If you have enough stock in the company you can suggest who you are going to vote for (or not vote for) in the board election and influence who is on the board. And you tell people who want to be on the board and are courting your vote, what you look for in a board member (like say "Someone who can help find a decent CEO to run this place.") This is how 'activist' shareholders make trouble for the company. And using that influence you influence the CEO and senior staff of the company. So it is very much true that you have to think about share holder value as part of your fiduciary duty, and you have to insure that enough voting shares support your current plans such that any attempt to derail then will be safely voted down. That is why it isn't a "meme" it is an actual thing.
- xradionut 13y ago
  " It isn't a meme, its a rule. And it is enforced (or not) by the SEC and the shareholders themselves." Enforced "selectively" by the SEC...
- 13y ago
tomc1985 13y ago
If it's publicly traded, then their obligation is to shareholders. That's the rule, and that's what Wall Street expects
300bps 13y ago
The thing I really don't understand is the persistent meme that companies have some obligation to their shareholders above and beyond their obligation to their employees What you call "meme", most people call "law". Directors and Officers of a corporation have a fiduciary duty to shareholders by law. They do not have a fiduciary duty to employees of the corporation.
arbuge 13y ago
Because shareholders own the company. Employees don't, unless they are shareholders themselves also. A company exists to make money for its owners. Ideally, stiffing the shareholders would be impossible. In practice bad management actors find plenty of ways to do that every day.
jonnathanson 13y ago
Shareholder Value Theory became all the rage in the '80s, which generally coincided with the 'financialization' of the US economy and of major US corporations. Jack Welch, former CEO of GE, is famous for being a big proponent of this ideology. In his tenure at GE, he earned heaps of praise from Wall Street for cutting costs (read: lots of layoffs) and for transforming the company from a manufacturer into basically a financial institution, because the margins are so much better in the latter. Welch had a very solid run, and accordingly, his theories and practices were seen to have been validated by his success. A lot of interesting chickens came home to roost after he left, however, and in recent years, history is starting to look a lot less kindly on his track record, and on Shareholder Value theory in general. That being said, it's still the rule of the game in the F500, because it's an ideology very favorable to the financial institutions on the 'shareholder' side.
- 127001brewer 13y ago
  Actually: ...the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure." The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf. The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker's foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders. To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering. Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom.[1] [1] http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/ http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...
harryh 13y ago
Because the shareholders generally aren't actually suckers. They will, in fact, get together and fire management if it strays too far away from manufacturing a good return on investment.
mseebach 13y ago
The more important angle here isn't pitting shareholders against employees, it's keeping an eye on the ball: The ultimate purpose of a company isn't employing the highest possible number of employees, it's providing a product or a service to customers. If an employee isn't contributing to providing that product or service (even through no fault of their own), both parties are (ultimately, in the long term) better off if there are lay-offs. The longer an employee that isn't creating value is kept around, the harder it will be for him to get another job - not the mention the impact on morale not actually doing anything useful has. Of course, I don't mean to imply that it's doing the employee a favour to lay them off - but the choice typically isn't between business as usual or mass lay-offs for the fun of it, it's between high probability of failure and a lower probability of failure (with a shot at turning the business around). Forcing shareholders to prop up a failing business to save a few jobs for a short time is more than a little counter-productive.

by jbooth 13y ago

csbrooks 13y ago

Coincidentally, the executives making the decisions are shareholders, too.

AsymetricCom 13y ago
This seems to me that you're saying that they shouldn't be responsible for their failure. This leads to the discussion of whether or not people who start or back failed/failing businesses have made a net contribution to society or are simply leaching off the contributions/momentum of others. Obviously, there is a balance to these things. You're both contributing and leeching with a failed business. Monopolies are the same as well. Each one can be abused or used to create a contribution or to coopt value. What really matters is when you're all said in done, is everyone, including the employees, better off?
wmeredith 13y ago
Ding, ding, ding. The people calling the shots are more invested in the share price than in some public perception of the company, that is until the bad PR affects the share price.

rayiner 13y ago

Business ethics is dead in America. It has been replaced by faith in the market, the belief that market outcomes are intrinsically moral.

thetrumanshow 13y ago
This is why you should buy a nice car and wear nice clothes... it signals that you're a better person. {wink, wink, nod}

mathattack 13y ago

For better or worse, the shareholders are the ones who set the pay of the CEO. Much of that pay is in shares. The way to fight this is twofold: 1) Make it easier for people to start new companies and competitors. This serves both employees and customers. As a customer I get the best price when I have multiple people competing for my business. As an employee, I'm best treated and paid when there are multiple people bidding for my service. 2) Increase the penalty for legal violations, and make examples of people who violate the spirit of the law as well as the letter. Don't invite CEOs of companies who dodge taxes "To the letter but not spirit" of the law to the White House.

dctoedt 13y ago
> For better or worse, the shareholders are the ones who set the pay of the CEO. Um, no. At publicly-traded U.S. companies, executive compensation is set in the first instance by the compensation committee of the board of directors [1]. The law requires only that shareholders be allowed to vote on non-binding "say on pay" resolutions at least every three years (or more often if the shareholders so vote) [2]. It's been suggested that executive compensation naturally and inexorably ratchets upward because: + Comp committee members don't want to be sued by shareholders for negligence or gross negligence in setting executive comp. (That's just what happened when Disney was required to pay ex-CEO Michael Ovitz a $140 million severance package even though he'd been on the job only a year or so when he was shown the door [3].) + So, comp committees rely on survey reports about existing executive compensation levels in the relevant industry, market segment, etc. (They also hire professional consultants to provide documentation and political cover.) + Comp-committee members are supposed to be independent, that is, not beholden to management. BUT, board members tend to be supportive of management: They might well have been recruited by management. Business friendships develop among management- and non-management board members as well as with senior executives. The board as a whole feels it's a team; its members naturally want to be perceived as team players (they probably wouldn't be on the board in the first place if that weren't the case). + Here's where it gets interesting: Comp-committee members like it when they can tell company executives, your comp is in the top half for our industry. They might also honestly think that their company's executives deserve to be paid at least in the top half of the "comparables," that is, above either the average or the median for the company's industry segment. So consider what happens mathematically to executive compensation across the board when lots of comp committees have this mindset: The mid-range of the compensation band floats upward over time. + As the mid-range of the band rises over time, future compensation committees may feel pressure to raise executive compensation to keep up with the Joneses, that is, with the rising mid-range. [1] http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.18330.11.pdf http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.1833... [2] http://www.law.cornell.edu/uscode/text/15/78n-1; http://www.law.cornell.edu/uscode/text/15/78n-1; see also http://www.sec.gov/rules/final/2011/33-9178-secg.htm http://www.sec.gov/rules/final/2011/33-9178-secg.htm [3] http://www.integrogroup.com/data/File/white-papers/exec_comp_disney_decision_jan_06.pdf http://www.integrogroup.com/data/File/white-papers/exec_comp...

ChuckMcM 13y ago

In the case of publicly traded companies It isn't a meme, its a rule. And it is enforced (or not) by the SEC and the shareholders themselves. This is how it works, in order to sell securities in your company to people who aren't part of the company (stock), you have to pledge a 'fiduciary responsibility' to those people. This is a pledge that you aren't going to just take their money and burn it up in a bonfire or blow it on hookers and cocaine in Vegas. If you violate your pledge the SEC can (and sometimes does) come and put you into jail. Now all bets are off if you tell those security buyers in your prospectus, "Proceeds of this sale will be used to buy hookers and cocaine at a venue of the director's choosing." then well, said what you were going to do with it so the shareholders (people who gave you the money) really can't complain can they? Then there is another part of the equation is that the governance, or "how the company is run" is controlled by the companies by-laws. And in those by-laws there are things that are decided on by a shareholder 'vote'. Usually simple majority but sometimes 2/3rds or some other number. Those things, one of which is who sits on the board of directors, allow "influence" of other things (like who the CEO is). But let's take a moment to look at that. So the Board of Directors hires and fires the CEO and determines the CEO's compensation (often all of the senior employees compensation but that is a different story). Since who is on the board is a function of nomination and shareholder voting every 'n' years (where n is in the bylaws) If you have enough stock in the company you can suggest who you are going to vote for (or not vote for) in the board election and influence who is on the board. And you tell people who want to be on the board and are courting your vote, what you look for in a board member (like say "Someone who can help find a decent CEO to run this place.") This is how 'activist' shareholders make trouble for the company. And using that influence you influence the CEO and senior staff of the company. So it is very much true that you have to think about share holder value as part of your fiduciary duty, and you have to insure that enough voting shares support your current plans such that any attempt to derail then will be safely voted down. That is why it isn't a "meme" it is an actual thing.

xradionut 13y ago
" It isn't a meme, its a rule. And it is enforced (or not) by the SEC and the shareholders themselves." Enforced "selectively" by the SEC...
13y ago

tomc1985 13y ago

If it's publicly traded, then their obligation is to shareholders. That's the rule, and that's what Wall Street expects

300bps 13y ago

The thing I really don't understand is the persistent meme that companies have some obligation to their shareholders above and beyond their obligation to their employees What you call "meme", most people call "law". Directors and Officers of a corporation have a fiduciary duty to shareholders by law. They do not have a fiduciary duty to employees of the corporation.

arbuge 13y ago

Because shareholders own the company. Employees don't, unless they are shareholders themselves also. A company exists to make money for its owners. Ideally, stiffing the shareholders would be impossible. In practice bad management actors find plenty of ways to do that every day.

jonnathanson 13y ago

Shareholder Value Theory became all the rage in the '80s, which generally coincided with the 'financialization' of the US economy and of major US corporations. Jack Welch, former CEO of GE, is famous for being a big proponent of this ideology. In his tenure at GE, he earned heaps of praise from Wall Street for cutting costs (read: lots of layoffs) and for transforming the company from a manufacturer into basically a financial institution, because the margins are so much better in the latter. Welch had a very solid run, and accordingly, his theories and practices were seen to have been validated by his success. A lot of interesting chickens came home to roost after he left, however, and in recent years, history is starting to look a lot less kindly on his track record, and on Shareholder Value theory in general. That being said, it's still the rule of the game in the F500, because it's an ideology very favorable to the financial institutions on the 'shareholder' side.

127001brewer 13y ago
Actually: ...the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure." The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf. The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker's foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders. To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering. Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom.[1] [1] http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/ http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...

harryh 13y ago

Because the shareholders generally aren't actually suckers. They will, in fact, get together and fire management if it strays too far away from manufacturing a good return on investment.

mseebach 13y ago

The more important angle here isn't pitting shareholders against employees, it's keeping an eye on the ball: The ultimate purpose of a company isn't employing the highest possible number of employees, it's providing a product or a service to customers. If an employee isn't contributing to providing that product or service (even through no fault of their own), both parties are (ultimately, in the long term) better off if there are lay-offs. The longer an employee that isn't creating value is kept around, the harder it will be for him to get another job - not the mention the impact on morale not actually doing anything useful has. Of course, I don't mean to imply that it's doing the employee a favour to lay them off - but the choice typically isn't between business as usual or mass lay-offs for the fun of it, it's between high probability of failure and a lower probability of failure (with a shot at turning the business around). Forcing shareholders to prop up a failing business to save a few jobs for a short time is more than a little counter-productive.