Photo by Barnes & Noble
An interest in corporate greed and the corruption of the
democratic system by corporations led me to the bookstore and there to scan
Lynn Stout’s The Shareholder Value Myth: How Putting Shareholders First
Harms Investors, Corporations, and the Public. On closer reading, I found
that I did not get what I expected from the book. I read, not a rant against
Milton Friedman’s insane economic views, but a reasoned and sober review of the
problem with the idea of shareholder primacy.
Lynn Stout (September 14, 1957-April 16, 2018) was at the
time of publication of The Shareholder Value Myth, the
Distinguished Professor of Corporate and Business Law at the Clarke Business
Law Institute, Cornell Law School. Ms. Stout died at age 60 after a long
struggle with cancer. She graduated summa cum laude from in 1979 and earned a
master’s degree in public affairs in 1982, both from Princeton University; and
a J.D. degree from Yale Law School also in 1982
Through news media and internet slop, I had been led by
online news and social media to the belief that shareholder primacy was the
corporate law of the land. That belief was shot down by the author by only the
second paragraph and the fact is repeated throughout this, the last publication
before the author’s death. Shareholder primacy (or shareholder dictatorship, as
she referred to it at one point) is not corporate law. The book’s author
established the fact with careful documentation and meticulous attention to
detail. She established connections between the more infamous corporate
scandals to the ideology of shareholder value, and yes, she made clear that
shareholder primacy is an ideology.
Adolph Berle, an early proponent of that ideology in his
1932 publication The Modern Corporation and Private Property, had
abandoned his position by the time of the 1954 printing of his The 20th
Century Capitalist Revolution (found here: https://ia804605.us.archive.org/31/items/in.ernet.dli.2015.190591/2015.190591.The-Twentyth-Century-Capitalist-Revolution.pdf).
Economist Milton Friedman, however, didn’t get the word that shareholder
primacy was a dead issue, or he disagreed with it, in the creation of the
Friedman Doctrine through his 1971 New York Times article, “The Social
Responsibility of Business is to Increase Its Profits” (https://yieldpro.com/pdf/infographics/2024/0910/friedman.pdf)
The book links various corporate corruption and criminality
to shareholder primacy ideology; disasters ranging from the 2010 British
Petroleum Deepwater Horizon oil spill to escalating CEO compensation that
reached five hundred times that of the average employee by 2003. The rue
professional, Stout pulls that off without a hint of rant or rave, but with
well-researched references and a cool, detached voice. Her telling of the 1919
Michigan Supreme Court’s Dodge v. Ford decision and its relation to the
myth of shareholder primacy as a legal requirement, alone, makes the price of
the book a bargain. ($20.95 at Barnes & Noble https://www.barnesandnoble.com/w/the-shareholder-value-myth-lynn-stout/1110855846?ean=9781605098135.)
Lynn Stout delivered on the book’s subtitle, How Putting
Shareholders First Harms Investors, Corporations, and the Public. She
challenged Friedman’s opinion on the social responsibility of corporations by
introducing the stakeholder: the debtors, contractors, employees, and the
public. I found her argument convincing that “shareholders and debtholder alike
have equal—and equally fallacious—claims to corporate ‘ownership.’” (Stout, 38)
She went from there to knock down the claim that
shareholders are the “residual claimants” in corporations, that is, the party
that has priority access to the residual profits of a corporation after it has
met its legal obligations.
Ms. Stout packed a lot of punches into a thin book, covering
such areas as the principal-agent model of corporate structure That model states
that the owner of a business, assumed to be the shareholder, hires an agent,
the manager(s) to run the business. The principal-agent model gained traction
in the business world with the 1976 publication of a work by Michael Jensen of
Harvard Business school and William Meckling, University of Rochester (Theory
of the Firm: Managerial Behavior, Agency Costs and Ownership Structure) The
author knocks down that argument by pointing out the corporation’s
responsibility to the stakeholder and role of the stakeholder in the corporate
structure.
Before reading The Shareholder Value Myth, I knew
only enough about corporate law to consider Milton Friedman’s and the Chicago
School’s as intellectually unhinged. I thank Lynn Stout for providing solid framework
to support that opinion.
