The Shareholder Value Myth
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102 John C. Bogle, “Reflections on the Evolution of Mutual Fund Governance,” Vol. 1, No. 1 Journal of Business & Technology Law 47 (2006).
103 Stout, “Mechanisms,” 651–69.
104 John R. Graham, Cam Harvey, and Shiva Rajgopal, “Value Destruction and Financial Reporting Decisions,” 62 Financial Analysts Journal 27–39 (2006).
105 Stout, “Mechanisms,” 647–48.
106 Bratton, “Hedge Funds,” 1401.
107 Martin Lipton, “Takeover Bids in the Target’s Boardroom,” 35 Business Lawyer 104 (1979)(emphasis deleted).
108 For example, ISS routinely recommends that corporations de-stagger their boards to make hostile takeovers easier and historically supported pay-for-performance schemes linking executive compensation to share price.
109 Roger Martin, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL (Boston, Massachusetts: Harvard Business Review Press, 2011), 12–13.
110 Id., 21, 23.
111 Id., 193.
112 Gena Chon et al., “Activists Pressed for Kraft Spinoff,” Wall Street Journal (August 5, 2011), http://online.wsj.com/article/SB10001424053111903454504576487720348267828.html.
113 Bratton, “Hedge Funds,” 1410, 1419.
Notes to Chapter Six
114 Harold Demsetz, The Economics of the Business Firm: Seven Critical Commentaries (Cambridge: Cambridge University Press, 1995), 50.
115 Demsetz, The Economics of the Business Firm, 51.
116 Margaret M. Blair, “Locking In Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century,” 51 UCLA Law Review 404 (2003).
117 Henry Hansmann and Reinier Kraakman, “The Essential Role of Organizational Law,” 110 Yale Law Journal 404 (2000).
118 Margaret M. Blair and Lynn A. Stout, “A Team Production Theory of Corporate Law,” 85 Virginia Law Review 247, 303 (1999).
119 Mutual funds are more likely to support dismantling takeover defenses in the firms they own, than other shareholders are. “ICI Defends Mutual Fund Voting Record,” Vol. 8, No. 10 Investor Relations 15 (October 2008).
120 Andrei Shleifer and Lawrence H. Summers, “Breach of Trust in Hostile Takeovers,” in Corporate Takeovers: Causes and Consequences (Alan J. Auerbach ed.) (Chicago and London: University of Chicago Press, 1988), 35, 49–50.
121 Henrick Cronqvist, et al., “Do Entrenched Managers Pay Their Workers More?” 64 Journal of Finance 309 (2009); Andrew Von Nordenflycht, “The Public Corporation—Friend of Foe of Professional Ethics? Ownership and Ethics in Securities Brokerage,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1819339 (April 22, 2011).
122 MetLife, 9th Annual Study of Employee Benefits Trends 3, 9, 15 (2011), www.metlife.com/business/insights-and-tools/industry-knowledge/employee-benefits-trends-study/index.html.
123 Six of the ten largest U.K. companies are in finance or commodities extraction. “Top Ten Most Valuable Companies in the FTSE 100: In Pictures,” The Telegraph (March 10, 2011), www.telegraph.co.uk/finance/markets/8371481/Top-ten-most-valuable-companies-in-the-FTSE-100-in-pictures.html.
124 Mark Atherton, “BP—Is Your Pension Safe?,” Sunday Times (June 11, 2010), www.timesonline.co.uk/tol/money/pensions/article7148161.ece.
Notes to Chapter Seven
125 William W. Bratton, “Hedge Funds and Governance Targets,” 95 Georgetown Law Review 1375, 1425 (2007).
126 Id.
127 James P. Hawley & Andrew T. Williams, The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic, (Philadelphia: University of Pennsylvania Press, 2000).
128 In November 2011, CalPERS reported $236 billion in assets under management as of August 31, 2011. www.calpers.ca.gov/eip-docs/about/facts/investments.pdfr.
129 Matteo Tonello, “Hedge Fund Activism: Findings and Recommendations for Corporations and Investors,” Conference Board Research Report R-1434–08, 11 (2008).
130 Bratton, “Hedge Funds,” 1377–1378. Another study of activist funds concluded generally that “as shareholders of the potential acquirer, hedge funds have tried to prevent the consummation of the transaction.” Marcel Kahan and Edward B. Rock, “Hedge Funds in Corporate Governance,” 155 University of Pennsylvania Law Review 1034 (May 2007).
Notes to Chapter Eight
131 “Percentage of Americans with Stock Hits Eleven Year Low, Gallup Says,” Huffington Post (April 21, 2011), www.huffingtonpost.com/2011/04/21/stock-market-us-real-estate-gallup_n_851786.html
132 Lynn Stout, Cultivating Conscience: How Good Laws Make Good People (Princeton and Oxford: Princeton University Press, 2011), 98.
133 Einer Elhauge, “Sacrificing Corporate Profits in the Public Interest,” 80 New York University Law Review 793 (2005). A 2011 survey of individuals in the top quarter of wage-earners in different countries found that nearly half of those in the U.S. disagreed with Milton Friedman’s proposition that the only social responsibility of business is to increase its profits. “Attitudes to Business: Milton Friedman Goes on Tour,” Economist 63 (January 29, 2011).
134 See generally www.sristudies.org/Key+Studies.
135 The Forum for Sustainable and Responsible Investment estimates that one in every eight dollars under professional management in the U.S. is now in a socially responsible fund, http://ussif.org/resources/sriguide/srifacts.cfm.
136 Elhauge, “Sacrificing Corporate Profits,” 733.
137 Id., 792.
138 Stout, Cultivating Conscience, 94.
139 Stout, Cultivating Conscience, 118.
140 Elhauge, “Sacrificing Corporate Profits,” 800–801.
141 Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power (New York, London, Toronto, Sydney: Free Press, 2004), 37, 60.
142 Ian B. Lee, “Corporate Law, Profit Maximization, and the ‘Responsible’ Shareholder,” 10 Stanford Journal of Law, Business and Finance 71 (2005).
143 Ivar Kolstad, “Why Firms Should Not Always Maximize Profits,” Vol. 76, No. 2 Journal of Business Ethics 143–144 (2007); Forum for Sustainable and Responsible Investment, “Performance and Socially Responsible Investment, ussif.org/resources/performance.cfm.
Notes to the Conclusion
144 Louis K. Liggett Co. et al. v. Lee, Comptroller et al., 288 U.S. 517 (1933) 548, 567.
145 Cynthia L. Estlund, “Working Together: The Workplace, Civil Society, and the Law,” 89 Georgetown Law Journal 1, 3–5 (2000).
146 Darrell West, The Purpose of the Corporation in Business and Law School Curricula (Brookings, July 19, 2011) www.brookings.edu/~/media/Files/rc/papers/2011/0719_corporation_west/0719_corporation_west.pdf., 17–18
147 Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007), 69.
148 Michael C. Jensen, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function,” 12 Business Ethics Quarterly 238 (April, 2002).
149 Id., 235.
150 William T. Allen, “Our Schizophrenic Conception of the Business Corporation,” 14 Cardozo Law Review 261, 280 (1992).
151 Iman Anabtawi, “Some Skepticism About Increasing Shareholder Power,” 53 University of California Los Angeles Law Review 561, 564 (2006).
152 West, The Purpose of the Corporation, 3.
Index
AIG, 34
Air Products Inc. v. Airgas, Inc., takeover attempt and business judgment rule, 30
Aspen Institute, 66–67
Bakan, Joel, 25, 101–102
Behavioral finance, 65, 96. See also Efficient market hypothesis; Homo economicus model of human behavior
Berle, Adolph, 17. See also Purpose of public companies, Great Debate about
Black, Fischer, 65
Black Monday. See Stock market, Black Monday
The Black Swan (Taleb), 106
Blair, Margaret, 75, 77
Business judgment rule, 29–31
Air Products Inc. v. Airgas, Inc., 30
&
nbsp; Chicago Cubs and Wrigley Field, 29–30
Chicago Law School
Posner, Richard, 35
Chicago School of Economics, 18
and Great Debate about purpose of public companies, 21
Law and Economics School of legal jurisprudence and, 19
Columbia Law School
Berle, Adolph, 17. See also Purpose public companies, Great Debate about
Gordon, Jeffrey, 21. See also Shareholder primacy, zenith of
Congress change in tax code, as consequence of shareholder primacy view, 20
Corporate Law, US
Delaware’s, 28
Dodge v. Ford Motor Company, 25–29, 31
mistaken assumptions about duty of corporate directors, 24–27
respect for boards’ decisions, 32
sources of, 27
Corporate performance effect of individual
governance mechanisms on, 49–50
individual versus aggregate metric, 50–51
Corporate purpose. See Purpose of a public company
Corporate social responsibility. See Purpose of a public company
The Corporation (documentary) (Bakan), 101–102
Deepwater Horizon disaster, 1
causes of, 2, 5
total cost to BP’s shareholders, 2
Director independence, 47, 48
Dodd, Merrick, 17. See also Purpose of public companies, Great Debate about
Dodge v. Ford Motor Company, 25–29, 31. See also Corporate Law, US
The Economics of Corporate Law and Securities Regulation (Posner and Scott), 35
The Economic Structure of Corporate Law (Easter-brook and Fischel), 35, 45
Efficient market hypothesis, 63–65. See also Behavioral Finance
“The End of History for Corporate Law” (Kraakman and Hansmann), 21–23, 33, 58–59, 79. See also Shareholder primacy, zenith of
Enron, 5, 34
Equity-based (stock-based) compensation for CEOs
impact on ratio between compensation of a CEO and an average employee, 21
impact on short-term results, 72
1984–2001 change as percent of median executive’s compensation, 20
Exxon Valdez environmental disaster, 98. See also Homo economicus model of human behavior; Behavioral finance
“Financial engineering” tricks to raise share price, 68.
Friedman, Milton, 18, 34. See also Shareholder primacy; Chicago School of Economics
GE, 5, 15
The Georgetown Law Journal, 21
Gordon, Jeffrey, 21. See also Shareholder primacy, zenith of
Hansmann, Henry, 21, 33, 35. See also Shareholder primacy, zenith of; “The End of History for Corporate Law”
Harvard Law Review, 17
Harvard Law School
Dodd, Merrick, 17. See also Purpose of public companies, Great Debate about
Elhauge, Einer, 99, 101. See also Shareholders and prosocial behavior
Kraakman, Reinier, 21
Roe, Mark, 45
Hedge funds, 66–67
advantage over universal owners, 93–94
versus universal investors, 86–94
harm to universal investors, 92–94
Icahn, Carl, 92–93
Homo economicus model of human behavior, 96
Jensen, Michael, 18–19, 107–108. See also Shareholder primacy, rise of; Principal-Agent model
Keynes, John Maynard, 113–114
Kraakman, Reinier, 21, 33, 35. See also Shareholder primacy, zenith of; “The End of History for Corporate Law”
Kraft and Cadbury, 72–73. See also Shareholders, short-term speculators versus long-terminvestors
Law and Economic School of legal jurisprudence, 19. See also Shareholder primacy, appeal of; Chicago School of Economics
Macondo project. See Deepwater Horizon disaster
Maximization of corporate profits. See also Shareholder primacy
Meckling, William, 18–19. See also Shareholder primacy, rise of; Principal-Agent model
The Modern Corporation and Private Property (Berle and Means), 17
Poison pills (anti-takeover defense), 34, 48, 56
Principal-Agent model, 18–19, 32, 34–46. See also Shareholder primacy, rise of; Chicago School of Economics; “The Theory of the Firm” (Meckling and Jensen)
and agency costs, 19, 35, 45–46
authors of, 18–19, 34–35
critique of, 37–44
as intellectual origin of shareholder primacy, 34–35
underlying assumptions, 36–44
Private, companies going, 5
Public companies
abandonment of “staggered” board structures by, 20
as business form, and share holder value ideology, 54–55
compared to privately held companies, 16
listed on US exchanges, decline in number of, 5, 54
origins of, 15–16
purpose of. See Purpose of public companies
separation of ownership from control in, 16
Purpose of public companies
alternatives to shareholders versus stakeholders view, 7
Chicago School of Economics view, 18
and corporate social responsibility, 4
current view, 3
former view, 3
Great Debate about, 16–18, 21, 114–115
managerialist view about, 17. See also Dodd, Merrick
Ratio between compensation of average CEO and average employee
evolution of during 1991 2003, 21. See also Equity based compensation for CEOs; Shareholder primacy, appeal of
RCA, 15
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 30–31. See also Dodge v. Ford Motor Company; Corporate Law, US
Roe, Mark, 45
Romano, Roberta, 49
Sarbanes-Oxley Act, 54
SEC (Securities and Exchange Commission)
change in shareholder proxy voting rules, 20
decision to impose “proxy access” rule, 50
rules that interfere too directly with state corporate law, 28
Shareholders
abstract concept versus concrete concept, 7
conflict between initial and subsequent interests, 74–85
and external costs, 87–89
as fictions, 86–87
as principals, 42–44. See also Principal-Agent model, underlying assumptions, and critique of
and prosocial behavior, 97–101
as residual claimants in corporations, 38–41. See also Principal-Agent model, critique of, and underlying assumptions
short-term speculators versus long term investors, 63–73
as Ulysses (Odyssey), 75–76. See also Shareholders, conflict between initial and subsequent interests
Share structures, classified (dual class), 34, 47
Shareholder primacy. See also Shareholder value
appeal of, 19–21
change in former supporters, 5
consequences of, 5
as dogma, 21. See also Shareholder primacy, zenith of
evidence from abroad, 56–57
good corporate governance, according to, 20
hegemony of, 35
impact on prosocial behavior, 101–102
influence on SEC shareholder proxy voting rules change, 20
and investor returns, 52–54
lack of, in corporations charters, 47
lack of investor demand for, 55–56
as normative view of corporate structure and governance, 45
and psychopathic behavior of corporations, 25
and public company as business form, 54–55
rise of, 18–19
stock market’s recent perfor mance, lack of support for, 52–54
and US corporate law, 23–32
zenith of, 21–23
Shareholder value
compared to stakeholder value, 4
and corporate law, 3
duty of
maximizing, misconception about, 24
unlocking of, 3, 73
Staggered boards, 34, 47–48
Stanford Law School Scott, Kenneth, 35
Stock market
average holding period for equities, change in, 66. See also Shareholders, short term speculators versus long-term investors
Black Monday (October 19 1987), 64
myopia and short-term versus long term investors, 65
role of short-term investors in, 66–69
tech stock bubble, 64
value loss, as result of corporate mergers, 89
The Structure of Scientific Revolutions (Kuhn), 58, 114
Tax code, change in, as consequence of shareholder primacy view, 20
“The Theory of the Firm” (Meckling and Jensen), 34–35. See also Principal-Agent model
“Tragedy of the Commons,” 51–52
2008 financial crisis, 5–6
Unocal Corp. v. Mesa Petroleum Co., 28–29
US Court of Appeals for District of Columbia, and SEC “proxy access” rule, 50
Welch, Jack, 5. See also Shareholder primacy, change in former supporters
Worldcom, 5
Yale Law School
Hansmann, Henry, 21
Romano, Roberta, 49
About the Author
Lynn Stout is the Distinguished Professor of Corporate and Business Law, Clarke Business Law Institute, at Cornell Law School. She is the author of more than forty books and articles on corporate governance, financial regulation, law and economics, and moral behavior. She is an internationally recognized expert who lectures widely and has written for the Wall Street Journal, the New York Times, and the Financial Times.
Stout is deeply involved with and committed to the business world. She serves as an independent trustee and chair of the governance committee for the Eaton Vance family of mutual funds; as a member of the board of advisors for the Aspen Institute’s Business & Society Program; as an executive advisor to the Brookings Institution’s project on the purpose of the corporation; and as a research fellow for the Gruter Institute for Law and Behavioral Research. She has also served as principal investigator and founder of the UCLA-Sloan Foundation Research Program on Business Organizations; as a member of the American Bar Association’s Task Force on the Changing Nature of Board/Shareholder Relations; as a member of the board of directors of the American Law and Economics Association; as chair of the American Association of Law Schools Section on Law and Economics; and as chair of the American Association of Law Schools Section on Business Associations.