Shareholders Are Not the Problem

Susan Holmberg has a sincere, thoughtful, but occasionally misguided new paper, Economic Inclusion, Finance, and Wealth.

The ideology of “shareholder primacy”—the belief that businesses function solely to profit and “maximize value” for shareholders—has had a profound and toxic effect on our economy. Corporate executives used to, in large part, manage companies for the long term, workers had more bargaining power and greater economic security, and the economy was more dynamic. Today, however, the balance of power among the various corporate stakeholders has shifted in favor of CEOs and shareholders who prioritize next-quarter’s share price at the expense of all other corporate stakeholders, particularly workers and consumers.

We cannot address this power imbalance that undergirds our high-profit, low wage economy without first identifying who shareholders are, how they behave, and what this means for broader economic outcomes. In Who Are the Shareholders?, Roosevelt Fellow Susan R. Holmberg examines them through three dimensions: their identity—who shareholders are in terms of demographics (predominantly wealthy and white households); their role—which challenges mainstream assumptions that shareholders are owners of the corporation and that they provide the majority of firm financing; and their power—the outsized influence a subset of shareholders, predominately hedge funds, have over corporate decision-making by CEOs and boards of trustees.

The problem is the distorted definition of “shareholder primacy,” as though all shareholders are day-trading hedge funds.  But the majority of stock is owned by long-term or permanent shareholders like pension funds and index funds, invested on behalf of the ultimate long-term investors.  Shareholders do not drive short-termism; corporate executives with inadequate oversight by shareholders do. The incentive compensation schemes approved by boards demonstrate and drive it.

Putting the focus on some vague sense of stakeholder values is just another opportunity for diversion of corporate (shareholder assets) to executives. Accountability to everyone is accountability to no one. By all means, plan for (and incentivize for) the long term. But if the ultimate goal is not sustainable shareholder returns, it will benefit no one in the long run, not employees, suppliers, or the community.

The focus should be on better oversight by investors, reducing conflicts of interest and enforcing fiduciary obligation.

Of course, though, we strongly support the idea of stakeholder-based or worker-owned corporations, as long as they go public with that explicit promise, are transparent about it, and accept the appropriate discount in valuing their stock.

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