Potentially Big News: Top CEOs Realizing That 'Maximizing Shareholder Value' Isn't A Great Idea
from the well-look-at-that dept
For the better part of two years, I've been noodling on a post (I've half written it a bunch of times) talking about how perhaps the biggest problem with so much of what we see today can be tied up in two related concepts: "fiduciary duty to shareholders" and the idea of "maximizing shareholder value." I talked a little about this a few weeks back in highlighting how almost all of the problems that people talk about when they complain about big tech can really be traced back to Wall Street and this idea of maximizing shareholder value.
Conceptually, maximizing shareholder value makes some sense, but only if you don't think about it for more than a few minutes. Because the whole thing falls apart as soon as you ask "over what time frame?" I first wrote about this back in 2006, in what I called the "time function of profits," in trying to understand why so many people were claiming that Craigslist's approach to grow slowly (but massively) by leaving most of their site free and not doing all sorts of icky stuff, was seen by some as "leaving money on the table" or even being anti-capitalist. As I pointed out then, that only made sense if you thought in the very short-term. Taking a longer term view suggests that "maximizing" profits in the short run is likely to create significant problems in the long run, whether it be competition or customers annoyed at you and the like. In a follow up post I did in 2008, I pointed out that maximizing profits shouldn't mean screwing your customers. The real issue is the time frame. If you want to maximize profits for just this quarter, then, yes, screwing over your customers is a viable strategy.
However, if it's more long term, then the incentives should change quite a bit. It's just like the Prisoner's Dilemma. If you are playing that game once, the incentives are heavily weighted towards cheating. However, if you're playing it many, many times, the incentive structure changes, and it should move to a more cooperative model. For some reason, however, this hasn't happened that much in real life. Many businesses (and many folks on Wall Street) assume that having a "fiduciary duty" to "maximize shareholder value" or "shareholder profits" means squeezing out every penny of profits right away, with no concern for the future.
Perhaps stating this backwards thought process most clearly was former big record label exec Dick Morris who once famously told Wired magazine that if someone is asking you to give up some money now to make more later, it means that "someone, somewhere, is taking advantage of you." And, of course, one of the foremost proponents of this theory was Milton Friedman, who argued that the only responsibility of a company is to its shareholders, and that companies need to maximize the return to those shareholders. Friedman trashed the idea of social responsibility for corporations, but he, himself, didn't seem to recognize how the long term played against the short term here. Ignoring any sense of social responsibility, in favor of short term maximization, would lead not just to long term social harms, but also to limits on the long term value for shareholders.
In recent years, we've started to see some pushback on these ideas. A few months ago, there was the announcement of a new Long Term Stock Exchange, designed to respond to these challenges, by giving companies more time to accomplish stuff than the usual quarterly heartbeat. But perhaps much bigger news is that the Business Roundtable, a gathering of top CEOs, has now put out a letter saying that shareholder value cannot and should not be the only focus of a corporation.
I'd argue that the letter is not that well-written, and given the signatories, I'm sure it went through millions of dollars worth of lawyering before anyone agreed to sign onto it. However, it does set up a much more thorough framework for thinking about all of the stakeholders that a company should consider in doing business: customers, employees, suppliers, communities, and shareholders. It's signed by a bunch of big company CEOs (the letter itself is one page, then there are 11 more with signatures).
Of course, it pays to be cynical about such things. It's one thing to say all of this, another thing altogether to actually walk the walk. And, certainly, some of the signatures come from CEOs who run companies who don't exactly have a strong history of paying attention to most of the stakeholders listed above. Indeed, if you want to find some of the worst behaving companies -- especially towards customers, employees, and communities -- this is a ready-made list (I mean, AT&T's and Comcast's CEOs, Randall Stephenson and Brian Roberts, both signed on to this). So, no one should take this as a real commitment to change.
That's only going to come if the companies are seen to be putting this into action, and that's where the public (and the media) need to come into play. When companies -- especially those who signed onto this document -- are seen behaving badly, it should be called out, and this letter should be referenced. Yes, it's quite probable that many signed onto this thinking that it's a good PR effort to pretend to be good corporate citizens for a day or two. But if we want to enact real change, and have companies get past the short term view of screwing over everyone to "maximize shareholder value," it's only going to happen if these execs are held to the very standards they claim to support.
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Filed Under: business roundtable, maximizing shareholder value, priorities, profits, shareholder value, shareholders, stakeholders
Reader Comments
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Typo
That typo almost seems Freudian.
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Well, to be fair, somebody is always going to get fucked in this situation.
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Re: Typo
Good catch. ;P
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Step 1 of 31337 to fixing the problem
Step one is recognizing you have a problem and identifying what it is.
I agree it will be interesting to see what happens going forward but at least they admitted that maybe the way things have been going is hurting the long term gain.
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Re: Step 1 of 31337 to fixing the problem
Step 2 is to completely ignore it, or "solve" it by proxy. I still would like to see some action.
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Re: Re: Step 1 of 31337 to fixing the problem
“Be able to” what? Tell me, damn you!
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Re: Re: Re: Step 1 of 31337 to fixing the problem
this name is so long that I shall never be able to type it out again without making a mistake
;)
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If giving up some money now to make more money in the future means you are being taken advantage of, then you should never invest in anything, since that is exactly what investing is. That solves the problem of maximizing shareholder value by eliminating the shareholders. Who the fuck thought it was a good idea to nominate friedman for a nobel prize?
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Re:
The quote you referenced wasn't from Friedman. "Who the fuck" taught you to read?
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Re:
A record label executive said that, not Friedman.
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Re: Re:
It must have been Friedman! Can't you see the comment was voted "insightful"?
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Harvard also knew about this.
"Serving Shareholders Doesn’t Mean Putting Profit Above All Else"
OCTOBER 12, 2017
https://hbr.org/2017/10/serving-shareholders-doesnt-mean-putting-profit-above-all-else
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Sustainability is more.
Just focusing on shortterm profits without monetizing the inexhaustible pool of gullibility humans provide to businesses willing to work with it is not doing your shareholders a favor. Ask Zuckerberg or any other "We are a new $company. We listen to our stupid trusting naïve cattle and will not do this again. And again. And again. And again and again and again. Or this. And this. And this and this and this and this." storyteller.
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Re: Sustainability is more.
When a company acts greedy I like to call them a new Scum-pany
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Re: Re: Sustainability is more.
...which pegs you at about a 9th grade level of maturity.
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Re: Re: Re: Sustainability is more.
Still way above the preschool antics of our elected officials.
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Re: Re: Re: Sustainability is more.
Oh no, please not an insult to my maturity level. Anything but that.
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Ponzi scheme
The way most corporations work got short term gains at the expense of longer growth reeks of being a ponzi scheme. A CEO comes on board, makes the company look good, then they tank it, and get a lot shares. The cycle repeats, hence new money is used to pay off the old guard.
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This would sound better
if their pockets weren't as full as their crocodile tear ducts.
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Computer Trading
They are going to need to write a whole bunch of new algorithms for all those computers that trade on nano second reactions. While computer trading did not cause or even start this phenomenon, they sure are likely making it worse. And those new algorithms will not be easy to write, as there is a certain amount of human cognition in the decisions, and there will likely be a variety of strategies in play that will be difficult to quantify. At the same time, there will be a certain amount of secrecy (aka trade secrets) involved in those decisions as no one wants their strategies to be copied.
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translation request
...would some charitable person here please translate the original post here into plain English?
Thank You
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Re: translation request
Short term profit hunting not necessarily good.
Long term thinking about total results over say a 10 or 20 year plan might be better, depending on the plan.
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Re: Re: translation request
what about that "social responsibility" stuff?
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Re: Re: Re: translation request
If a company has to pay to clean up after itself, and they make a concerted effort to not make a mess, to avoid the cost of cleanup, then they have accomplished some 'social responsibility' stuff.
If you mean satisfying some unduly passionate spasm of the week, there may or may not be any economic value in that, especially when next weeks spasm might cause courses to be reversed, wasting money.
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This is clearly just a PR move to try to assuage the growing discontent with corporate culture. These CEOs have always known that the concept of fiduciary duty to shareholders was bullshit. As long as their financial incentives are tied to artificial stock price goals, nothing is going to change.
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Another driving force for the short term thinking, is the federal tax code. It jumps all over the place depending upon who is in office. It is very hard to make a 20 year plan, when the rules of the game change as the game progresses.
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Re:
So you accept that the tax rules are subject to change without notice regardless, and plan so you maximize long-term revenue overall and let the changes come as they will. You may not optimize for any particular set of rules, but long-term you'll come out ahead.
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Maximizing Shareholder Wealth is Good
Maximizing shareholder wealth is good. It's exactly what for profit companies should be doing. The problem is maximizing shareholder wealth right now. Screwing your customers might raise shareholder wealth right now but will lower the long term net present value of shareholder wealth.
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Re: Maximizing Shareholder Wealth is Good
You’re not wrong about that. In particular, helping shareholders make more money is a good idea. Additionally, lengthening the amount of time it takes will likely mean that the business will see growth for a longer period of time and the “soft” ceiling on growth will likely be higher due to more, happier customers, fewer PR disasters, and fewer cleanups, which in turn means more profits overall for everyone involved.
However, it’s worth noting that there is a “hard” ceiling to growth that many large companies and stockholders can’t seem to understand: there is only so much wealth to go around, only so many potential customers that may be interested in what you sell, and only so many additional potential customers you can expand into. In other words, even under ideal circumstances, there is a hard maximum that any company can grow over any length of time. No company can grow forever without ever seeing some loss at some point.
I’m always amazed when I see news of a game that sell incredibly well, more than any other game made by that company or in that franchise, only to find out that they still “failed to meet expectations”. It took me many years, a lot of research, and a lot of thinking before I found out why game companies seem to always set their expected sales so unrealistically high: in order to be able to tell their shareholders that they will see enough growth in the company, they have no choice but to say that they will sell an unreasonably large number of copies of their games. They don’t seem to realize that their audience and their audience’s collective funds are limited, and so there’s only so many copies they can sell, only so much they can grow before the bubble inevitably bursts or the growth flattens out (and by “they” I mean all of the people running the company, the people doing the calculations for these predictions, and the shareholders).
These unreasonable predictions always remind me of Atari’s early failings that led to the Video Game Crash of '83. Both Pac-Man and ET for the Atari 2600 sold incredibly well—record-breakingly well even—but even before considering the quality of the games that would lead to them later being returned in droves, they were already losing Atari money because Atari—in its infinite hubris—assumed that the number of customers would be more than double the number of Atari 2600 consoles that had been sold up to that point. As a result, despite record-breaking sales, only a fraction of the cartridges produced ever left store shelves, and those things weren’t cheap to produce. And that’s not considering the massive returns that happened shortly afterwards, which made things even worse.
The moral of the story is that, while stretching out expectations over a longer period of time is definitely an improvement, it’s also important to keep one’s expectations reasonable, and be prepared for if things go south.
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Re: Re: Maximizing Shareholder Wealth is Good
However, it’s worth noting that there is a “hard” ceiling to growth that many large companies and stockholders can’t seem to understand: there is only so much wealth to go around, only so many potential customers that may be interested in what you sell, and only so many additional potential customers you can expand into.
This has never made sense to me either. You'd think the idea that growth can never be consistently exponential. We have economists who know that recessions are an affair every decade. And yet governments, corporations, the creme de la creme of the financial world continue to fuck shit up like clockwork by promising positive growth, raking in the profits, rewarding or pardoning the CEOs and authority figures responsible for running the planet into the ground in 2008.
The 2018/2019 big recession, you say? I don't even think the 2008 recession has actually ended. Costs went up and they sure as hell didn't go down. Now we get to enjoy another economic fuck-up and have no say in preventing it or being involved in it outside of being on the receiving end of some banker's shit stick? Wonderful!
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Costs vs Benefits in a Social World
Disclaimer: I am a former corporate officer of a US public corporation. I am a current corporate officer of several US nonpublic corporations and limited liability companies. I have been an officer of a US private nonprofit corporation.
People buy shares in a public company for one of two reasons: 1) Long-term growth... I buy it today for X and I sell it next year for much more than X. 2) Short-term profits... I buy it today for X and every quarter I get some money and I sell it when the price drops but my dividends plus the sales price are greater than X.
Either way I expect the corporate officers, directors, managers, and employees to ensure I make a profit... even though the irony is that in the stock market for every dollar I make, someone loses a dollar. [Extra issuance of stock aside. That's an Oroborous problem.]
Fiduciary responsibility to the shareholders, or to society, or to short-term or long-term profits, or even in a nonprofit) are usually spelled out in the incorporation or founding documents. This is vital because if it's not done, than any number of entities [shareholders, customers, vendors, FTC, FDA, etc.] can claim in court a violation of this inviolable requirement.
Corporations are formed because of many reasons, but number one in US corporations is either growth (long term gain but perhaps lose money for 14 years like AMZ.) Then there's bottom-line profit (short term gain, but if you're eking out an existence to reward with dividends, bonuses, or other distributions, you're not able to reinvest into the company.
If the founding documents are in conflict with the focus on either top-line growth or bottom-line revenue then someone will file suit. Suits are expensive because already overworked CEOs, CFOs, etc. now have to sit for depositions, go through documents, and pay hundreds of thousands or millions to lawyers.
The only corporation I've seen in the US in the last two decades that had a high-profile IPO and said they care about society would be GOOG's "Do no evil." That didn't last long, as profits and a large bank balance and DARPA contracts seemed a bit of an easier target.
E
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Re: Costs vs Benefits in a Social World
Corporations are formed because incorpoating creates a legal entity (the corporation) that shields the owners' personal assets from coporate malfeasance.
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Re: Costs vs Benefits in a Social World
Interesting how "long term" is defined as "next year". From a sustainability point of view, for policy making, I would rather define long term as looking forward seven generations (yes, that is over two centuries, and yes, this is a radical break with the current thinking that causes so many environmental and social problems). From the position of an individual, long term in my opinion means life-planning. Investing in education, then building up a resource-pool for retirement, part of which would be investing in public corporations. In this model, going for corporations with long-term vision makes perfect sense.
Medium term investments (less than 10 years) can be fine for intermediate saving targets. "Investing" for short time (less than a few years) is pure speculation -- unfortunately, current investment practices encourage it, even when dealing with long term (retirement) savings. Lots of people are in investment funds with extremely high turnover rates (often above 100%), which is nice for the bottom line of traders, but makes little sense otherwise.
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ya know?
Stocks are funny, as they can make them do/say anything.
And there is NO guarantee of payment of Anything.
Its more a Long term, Low interest loan at BEST.\
NO company has gone under and destroyed lives WITHOUT distributing Stock.
Even of the LLC...look it up.
Craigs list..
Think hard about leaving money on the table... Its great when playing Poker, for the NEXT HAND.
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See also: the Music industry now starting to go "Hey, wait, maybe things went a little too far here."
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Re:
For all the stomping the RIAA/MPAA have done,
They could of bought out Some of those they Stomped on, and had a pre-built setup, ready to do direct sales..
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Now for the whale-hunting triple-ayyy game publishers to get a clue.
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Re:
NEVER,..
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"Many businesses (and many folks on Wall Street) assume that having a "fiduciary duty" to "maximize shareholder value" or "shareholder profits" means squeezing out every penny of profits right away, with no concern for the future."
Funny also, that those execs have no problem taking huge swaths of money for themselves instead of, you know, actually maximizing value for the shareholders.
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Re:
For all the TOP raises since 2000, IMHO, they could of bought back All of the shares..
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Funny how replacing "leaving money on the table" with the (IMHO) much more relevant "leaving seed in the ground" immediately makes it sound much less like a bad idea. People seem to understand quite well that nobody stops one from consuming or selling the entire harvest except the fact that there won't be any harvest next year. And yet as soon as money gets involved it suddenly turns into YOLO all the way, tomorrow be damned...
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Clarity
"seed in the ground" implies the investment of a resource in the hope of gaining a greater resource later. "leaving money on the table" encapsulates the concept of failing to invest so as to reap the greater reward. These two are not at all the same thing. The first is action, the second is inaction.
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Society rewards the worse aspects of human behavior
That's why we have sociopaths that don't care about human life in charge. We created a gauntlet that everybody has to run to obtain power. It requires you to stop caring about the value of human life, and to put profits above all, while pretending you care about human life more than anyone else. Then we pretend it's some great honor or secret that you will casually throw away lives for profit.
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Communist!
There's been moves to look at a 'balanced scorecard' approach to plc management in Europe for a while but it never gets anywhere. Probably for a couple of reasons, one being the inertia of a governance system that has developed under the old model and can't really see an alternative, another being a fear that doing this unilaterally will make you vulnerable to those who haven't.
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Not surprised Dan Amos is a signatory
Dan Amos is front and center of the signatory list - hardly surprising, as Aflac treat their employees (apart from the sales team, for the most part) very well, and treats their customers as well.
Aflac stock is up 80% over the past 5 years, and is consistently recognized as a best place to work, most ethical, eco-friendly company.
Now, if only the CEOs of the the Toxic 500 would learn these lessons...
disclosure: worked there for 5 years and only left because the family moved.
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The changes are irreversable
Eighty years ago, most American corporations were led by engineers, they were located in a community where workers and managers lived and they felt a social responsibility to that community and they supported schools, playgrounds, and the opera. I know it sounds far-fetched but look up the story of George Westinghouse.
But by the seventies, finance types were taking over chief executive roles, and vulture capitalists (eg, KKR) were beginning to buy up corporations, dump their civic duties, and load them up with debt.
Then they started compensating CEOs with stock options so they would obsess over the short-term.
Now every corporation lies, commits fraud, manipulates stock and cheats on taxes. We expect all corporations to be hostile to customers and no one expects them to do anything but make money.
What is democracy with this sort of psychopathic capitalism?
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Re: The changes are irreversable
AFAIR, it all started when those finance types began to challenge the executive engineer's statements that the fine tuning of the production they'd made couldn't be more efficient and there wasn't anything left to do that could cut down the production costs to save the company more money.
Back then it was common that large public corporations were lead by people who had an engineering background with knowledge of both production and the business area the company operated in. The economical details were delegated to the department where the economics degrees ruled.
All that the finance types had to do to win and take over of the helm, was to cut a penny somewhere in the production and multiply by the number of produced items.
The executive engineer stood corrected and the company board usually replaced him with someone more focused on finance.
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Re: The changes are irreversable
Change is entropy and it is always toward chaos.
50 years ago Internet standards were made by engineers, who worked out the best way to do things. It started with open non-patented requests for comments (RFCs). After strenuous discussions at Internet Engineering Task Force (IETF) conferences and online, decisions would be made.
Today standards are made by committees of vendor representatives, each pushing their [patented] [proprietary] method of accomplishing the new standard. The winner takes all because everyone else must pay licensing fees. These decisions take multiple meetings, in multiple cities, in multiple countries, to give every "stakeholder" a chance to spend their company's money in a new hotel, over multiple years.
5G is a perfect example. TD has eloquently explained why there's no 5G. There's some new WiFi thing that each company offering it is doing in different ways that allows the two new phones (S10, MotoZ) to access... but it has nothing to do with making your phone go to the Internet any faster out there on Route-66 [I-40].
All of this is driven by shareholder value. Pretend you are about to release 5G and people will buy your shares. Say you don't intend to deploy 5G and the masses think you have no "vision" and will leave you. Either way there's still no 5G, nobody has phones that get 5G, 5G doesn't work any further than a Wi-Fi hotspot... but go buy that stock now before others raise its price up!!
Entropy causes chaos. It works in shareholder value. It works in government regulations (always more, always more limiting, always removing rights). Inevitably it leads to an ending, either in that chaos, or in a revolution that replaces the whole system with something sane. Neither option sounds like it would be fun to go through.
E
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To show a commitment to more stakeholders than shareholders, companies need to start reporting metrics that are relevant to more than just shareholders. In addition to P&L, companies will need to develop, measure, and report environmental/community/employee/supplier/customer impacts in quarterly and annual reports.
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Re: To show a commitment to more stakeholders than shareholders
Your suggestion also fits a political solution to reduce unemployment numbers:
Put more administrative burdens on all companies in order to force extra employments, for small companies at the external firms they seek for help to comply.
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What kind of religion is it that you want to practice? I hear your moral preaching, but I can't identify just what you are trying to say, other than "corporations are bad" and "shareholders are bad" and "CEOs are bad".
You are the "good guys" in this analysis, right? What is your moral basis? Who are you to preach to us? Do you have a leftist bible? Al eftist Koran?
Or is it just moralizing bullshit without a point?
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Re:
"Corporations are bad" is something your boy out_of_the_blue has been preaching since Day 1 of him spamming this site. Try to keep up with your party line, Hamilton. This sort of internal confusion is embarrassing for you.
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Big news? No.
'Maximizing Shareholder Value' is still the name of the game. And if a little PR bullshit helps to hide it from those who object, then so be it. It's not the actual law. It is, however, disappointing when people fall for such apologetics.
Now if the law is suddenly changed so that corporations can no longer be legally required to 'maximize shareholder value' that would be news. But don't hold your breath. Hell will freeze over first.
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Re: Big news? No.
HELL freezes over quite admirably on an annual basis.
Now the mythical realm is not all fire and brimstone either. There are 9 layers to the place. Guess what? One is a lake/ocean of ice, another is a fetid swamp etc etc. So if Hell (tm) can do it then why not Washington and Wallstreet?
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Re: Big news? No.
The idea that corporations are legally required to "maximize shareholder value" over all other priorities is...dubious at best, as a statement of law, to the best of my understanding.
Also, pro tip: out of shareholders, employees, suppliers, and customers, what can a business live/operate without?
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Re: Re: Big news? No.
If your goal is to burn through investment dollars while doing no real business, all you really need is shareholder. No employees, vendors, nor customers are needed.
If your goal is to meet customer expectations you need customers, employees, and likely vendors.
If your goal is to chew through your own funds appearing to have a business (see e.g. Jeffrey Epstein) you need none of the above.
E
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Re: Big news? No.
Show me where any company has ever been sued for mismanagement by its shareholders. Ever! You can't because it never happened because companies are under no legal obligation to their shareholders. Period! How stupid can you be?
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Re: Re: Big news? No.
How about:
Cates v Sparkman
Uri Sikorski v Chiptole Mexican Grill, Inc.
R Andre Klein v Timothy D. Cook et al
Hind Bou Salman v Peter A Darbee et al
E
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Re: Re: Re: Big news? No.
And the law goes back quite a way on this. See, for example, Dodge v. Ford Motor Co, from 1919.
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Re: Re: Big news? No.
As others pointed out, it’s far from unheard of for shareholders to sue a company for mismanagement. It’s actually relatively common. That’s not even considering other reasons a shareholder might sue a company.
Like it or not, reasonable or not, logical or not, and for better or for worse, companies are, in fact, legally obligated to their shareholders. It’s one of the many problems I have with publicly-traded companies. They have to balance their duties to their employees, their customers, and their shareholders, and the thumb is pressed firmly on the side of the shareholders.
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UPL
Yes, perfect example of UPL.
And a total lack of knowledge of law.
E
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Who is shareholders?
Any research about why people buy company shares and who buys company shares. I think many customers and employees own company shares.
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It is the investors themselves. Stocks are meant to be a long term investment, hence "ownership" not bond or loan. But every one wants to make a quick buck by investing low today and selling high tomorrow. This includes the brokers as well, pushing the investors in that direction of making some quick money.
After the last inheritance transfer to the boomers, it got worse, as people were watching the new stocks they just bought daily, if not hourly. Like any climate, you don't worry about daily fluctuations.
This put pressure on companies to show a return on investment, next quarter, not the next five years, if they wished to attract investor money
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Current day shareholders would fare poorly on the Stanford marshmallow experiment.
There is definitely a need to change the rules, although I suspect 1. the lobbying will be intense against this and 2. after some time, people will find a way to abuse the new rules anyway.
Shouldn't keep us from trying though.
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