The positive view
Earlier this month America’s Business Roundtable, which includes the CEOs of the largest corporations, decided to abandon the view that maximizing shareholder value should be a company’s primary objective. This implies that shareholders will no longer always take precedence over other stakeholders such as customers, employees, suppliers, and the communities in which firms operate.
[T]he group’s statement this month is a clear signal of American CEOs’ intention to change not just corporate governance, but also the role of business enterprises in society. It establishes new boundaries for the pursuit of returns on capital – boundaries that are meant to protect constituencies (employees, poorly informed customers, suppliers, future generations) that often lack the market power to protect themselves. Most important, the move comes at a time when wealth inequality is rising, and when the ownership of financial assets is becoming increasingly concentrated.
The End of Shareholder Primacy?
By: Michael Spence – New York University
The opposite view
It is therefore all too fashionable today to argue that certain recent events have exposed a fatal weakness in the traditional model of corporate responsibility—a model that has generated so much wealth and economic success over the years. This overwrought charge should be rejected. The key problems run in the opposite direction: government regulations and taxes imposed on corporations attempting to advance certain social improvements. Socialism, heal thyself!
What Is The Purpose Of A Corporation?
By: Richard A. Epstein – Stanford University
Investor concentration and shareholder value
The issue of common ownership, i.e. when powerful investors have stakes in competing firms, is often linked to the rise in concentration among a firm’s investors, and the “Big Three” (BlackRock, Vanguard, and State Street) in particular. Backus and al. find that the “Big Three” owned approximately 6% of the average firm in 2000, and 21% percent of the average S&P 500 firm by the end of 2017. When maximizing shareholder value is of primary importance, such investor concentration leads to tunneling, the practice of transferring profits, whether via acquisition, mispriced purchase orders, or direct transfer, from one company to another in order to benefit the interests of a controlling stakeholder in both.
When competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms.
Common Ownership in America: 1980-2017
Authors: Matthew Backus, Christopher Conlon, Michael Sinkinson
From: Columbia University, New York University, Yale University
