Sinceġ979, US productivity has risen 8 times faster than wages. Prior to 1979, productivity and hourly compensation grew at near equal rates. This has led to a slew of snowballing effects: 1) short term thinking to increase today’s share price with less regard to the future, 2) reduced employee compensation (to maximize profits), 3) increased stress on employees (to maximize profits), 4) increased pressure on vendors to reduce costs (and maximize profits) 5) reduced employee benefits, 6) ballooning chief executive and senior management salary compensation 7) greater income inequality between owners and workers, 8) increased disconnection between the company and its neighbors/community 9) reduced regard for the environment ( )
The shareholder primacy theory led corporations to incentivize managers to maximize share price. As such, maximizing shareholder value is not a managerial obligation, but rather a managerial choice ( Lynn Stout). Corporate law provides wide latitude to directors in choosing the best path for the corporation and simply requires that they lawfully pursue their activities. In reality, corporate law does not mandate that corporate managers/directors maximize profits or shareholder value.
This “theory” (not law) has gained widespread acceptance in the corporate world, partially due to its simplicity and its “seeming” fit with pure capitalism- and America prides itself on its capitalist history and ideals. Customers, vendors, employees, the environment and the community are pawns to be managed through negotiated contracts and agreements, but the bottom line is to maximize shareholder value (Lynn Stout).
The theory postulates that the sole responsibility of a corporation is to maximize profits and increase the company share price. Shareholder primacy theory was advanced by Milton Freedman (1970), Michael Jensen and William Meckling (1976). This team approach took a beating the 1970s. It was at the discretion of the board of directors/company managers to fine tune this balance and formulate a strategy that benefits all There was always a strong desire to be profitable, however, corporate managers/directors were cognizant that long term profits and company viability/health are also dependent on maintaining good relations with employees/community/vendors and customers (collectively the “team”). In general, during this 20-30 year period of time, US corporations were generally profitable, were connected to their communities, valued their employees, customers and vendors. Shareholder Primacy- Facts Acknowledged by the Left and the Right: US corporations have never been model citizens- Actually, corporations are not citizens and historically have not had the same rights that US citizens do- but that’s a whole other issue ( Citizens United) that should be addressed on its own merits – US corporations were never altruistic and often took advantage of their workers- but there was a “golden age” for the publicly held US corporation and that golden age was from the 1950s to the 1970s- coincidently, that is likely the age that Trump refers to as “When America Was Great”. Figure 1 presents the inter-relationship of the issues.
Business schools replenish corporations with income hungry graduates. Income inequality has disenfranchised many working Americans and coupled with technological advances (automation) has fueled the rise of populism, resurrected/enabled bigotry towards trade and immigration (someone to blame) and brought us Donald Trump. At the forefront of the liberal viewpoint is the assertion that corporate greed and the “shareholder primacy theory” of corporate governance have damaged the ethics of US corporations. The more liberal viewpoint provides a similar acknowledgement (that income inequality exists and is problematic) but a different analysis. Conservatives believe that less regulation and lower taxes stimulate economic growth, which in turn generates jobs for all Americans. Conservatives espouse removing the barriers to upward mobility, including elimination of crony capitalist policies and burdensome regulations. The conservative solution is to improve opportunity so that all society members can achieve economic growth so that poor people can climb the economic ladder.
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The conservative viewpoint acknowledges the existence of income inequality as an undesirable byproduct of a growing free market economy.
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