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Economy
In reply to the discussion: STOCK MARKET WATCH -- Friday, 24 January 2014 [View all]antigop
(12,778 posts)24. The Myth of Maximizing Shareholder Value
http://www.nakedcapitalism.com/2014/01/myth-maximizing-shareholder-value.html
This is a subject near and dear to my heart. So many of the assertions made about maximizing shareholder value are false that they should be assumed to be a lie until proven otherwise. The first is that board and managements are somehow obligated to maximize shareholder value is patently false. Legally, shareholders equity is a residual claim, inferior to all other obligations. Boards and management are required to satisfy all of the companys commitments, which include payments to vendors (including employees), satisfying product warranties, paying various creditors, paying taxes, and meeting various regulatory requirements (including workplace and product safety rules and environmental regulations). As we wrote last year:
If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you wont find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. Its not a legal requirement. And there is a good reason for that.
Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular Shareholders are at the very back of the line. They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit dont go bankrupt duty clearly trumps concerns about shareholders
So how did this the last shall come first thinking become established? You can blame it all on economists, specifically Harvard Business Schools Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.
Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular Shareholders are at the very back of the line. They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit dont go bankrupt duty clearly trumps concerns about shareholders
So how did this the last shall come first thinking become established? You can blame it all on economists, specifically Harvard Business Schools Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.
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Demeter
Jan 2014
#6
It hasn't gottten any easier, either. And DEFINITELY not any fairer or equitable.
Demeter
Jan 2014
#22