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The American economy may lose its position as the leading economy in the world if corporate officers and directors maintain their fixation on maximizing shareholder value for stockholders, said Vanderbilt Law School professor Margaret Blair.
“The only positive thing you can say about maximizing shareholder value is that it’s simple,” said Blair, the Milton R. Underwood Chair in Free Enterprise at Vanderbilt. “But being simple doesn’t mean being smart.”
But what is the purpose of a corporation if it’s not to make money for its shareholders?
“Corporations are supposed to try to make a profit,” Blair said. “But economic theory acknowledges other participants in addition to investors. You’ve got creditors, suppliers, communities and employees. All of these groups make ongoing investments in order for the firm’s enterprise to succeed.”
Simply maximizing profits leaves out the concerns of these other stakeholders. This adversely affects the corporation and the overall economy over the long haul, Blair said.
“Creditors will charge a higher price because they know they could be betrayed at any time,” Blair said. “Employees behave in very different ways. They become far less likely to be loyal to their employer, and they have less incentive to be innovative.”
And the real value of a corporation isn’t its bricks and mortar, she said, but the intellectual property – patents, brands and such – and the ability of its employees to generate more of the same as time goes on.
The mandate to maximize shareholder value is a relatively recent development, dating back to a 1980s court ruling in Delaware, Blair said. That case involved a hostile takeover attempt of the Revlon Corporation. The corporate raider sued when Revlon cut a deal with a third party to buy it.
“The Delaware court said that in the event that it becomes clear that a corporation is going to be sold and cease to exist as a separate independently traded organization, it becomes the duty of the directors and officers to maximize the value of the stockholders, basically to get the highest price they can for the stockholders,” Blair said. “That makes sense if it’s the end game for those shareholders.”
The case was seized by some as a general mandate that all corporations were supposed to maximize shareholder value all the time. That’s a misreading of the case, Blair said. She’s been arguing her views in books (Ownership and Control, 1995) and prominent journals (Virginia Law Review, 1999; The Journal of Corporation Law, 1999) ever since, sometimes in collaboration with Lynn Stout, Distinguished Professor of Corporate and Business Law at Cornell University Law School.
“As a result of businesses feeling that their first and only duty is to maximize shareholder value, corporate loyalty is just gone now,” Blair said. “U.S. corporations have not and will not lead technologically because we’re not doing our own research and development here – it’s being outsourced to countries like India and China.
“It may look good on paper now, but intellectual property – the most important asset of most corporations – walks out the door every day and may not come back at some point. You’re going to lose it, and it’s happening in corporation after corporation, because corporate directors and officers have been told their job is to maximize shareholder value.”
Blair suggests that corporations operate on what she calls a “team production” model instead of maximizing profits. That theory directs corporate directors and officers to work for the continuing and long-term health of the companies they oversee.
“It has to be the job of corporate directors to try to maximize the whole pie, not just the slice of the pie that shareholders get,” Blair said.
Jim Patterson, (615) 322-NEWS
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