If you own stock, invest in companies, or are starting a new business, read this book!

A review of The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, by Lynn Stout

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If you so much as skim the business pages in a newspaper, there’s little doubt you’ve heard it said or seen it written that corporate officers and directors are required by law to maximize shareholder value and that they’re subject to lawsuits if their decisions favor any other stakeholder such as employees, customers, or suppliers over profit. The well-entrenched view that shareholders are paramount is widely regarded as the cornerstone of contemporary business law — and it’s flatly untrue.

In The Shareholder Value Myth, business law professor Lynn Stout proves this point, citing chapter and verse in court decisions going back more than a century. “So long as a board can claim its members honestly believe that what they’re doing is best for ‘the corporation in the long run,’ courts will not interfere with a disinterested board’s decisions — even decisions that reduce share price today.” Having laid the legal groundwork, Stout then proceeds to explain how this mistaken view of shareholder primacy is bad for business.

“Put bluntly,” she writes, “conventional shareholder value thinking is a mistake for most firms — and a big mistake at that. Shareholder value thinking causes corporate managers to focus myopically on short-term earnings reports at the expense of  long-term performance; discourages investment and innovation; harms employees, customers, and communities; and causes companies to indulge in reckless, sociopathic, and socially irresponsible behaviors.” Among the examples Stout cites is the Gulf oil spill, caused by excessive cost-cutting on the part of BP. “In trying to save $1 million a day by skimping on safety procedures at the Macondo well, BP cost its shareholders alone a hundred thousand times more, nearly $100 billion.” Q.E.D.

Stout deftly demonstrates that this irrational focus on shareholder value has been harmful in other ways as well. For example, “[b]etween 1997 and 2008, the number of companies listed on U.S. exchanges declined from 8,823 to only 5,401.” Of several factors that help explain this trend, shareholder primacy clearly stands out. Smart people know that there’s more to success in business than a rising stock price.

The origin of this misguided notion lies in the thinking of the so-called Chicago School of free-market economists best known through the work of the late Nobel Prize-winner Milton Friedman. Friedman had written a book in the 1960s that highlighted the idea, but it was his essay in 1970 in the New York Times Magazine that gained wide attention. There, he “argued that because shareholders ‘own’ the corporation, the only ‘social responsibility of business is to increase its profits.'” Stout argues that “shareholders do not, and cannot, own corporations . . . Corporations are independent legal entities that own themselves, just as human beings own themselves.” Shareholders merely own shares of stock that constitute a contract with the corporation to receive certain financial benefits.

They’re not in charge of the show, either. Some lawyers and economists writing after Friedman contended that  shareholders appoint the directors as their agents. This too, Stout contends, is mistaken. She devotes two chapters to prove that this description of shareholders as principals “mischaracterizes the actual legal and economic relationships among shareholders, directors, and executives in public companies . . . Moreover,” Stout writes, this assumes “that shareholders’ interests [are] purely financial,” when in fact shareholders may have any one of a great many different reasons for buying and holding shares in a company.

A fair portion of The Shareholder Value Myth is focused on analyzing the impact of several popular measures promoted by shareholder advocates, the SEC, and Congress over the past two decades: “de-staggering” boards, so that all directors may be removed at once; giving shareholders the right to circulate proxies to all other shareholders on issues of interest; and equity-based compensation. Ask yourself: How often have shareholders removed the entire membership of a corporate board with a single vote? And how often have shareholders of a public company — other than corporate raiders or hedge funds — successfully obtained proxies to overturn a corporate board policy? You can guess the answer to those questions. But the very worst impact of these efforts to strengthen the shareholders’ hand has come from the popularity of equity-based compensation. “In 1991, just before Congress amended the tax code to encourage stock performance-based pay, the average CEO of a large public company received compensation approximately 140 times that of the average employee. By 2003, the ratio was approximately 500 times.” That policy isn’t the only factor to account for this dramatic rise in the ratio, but it’s certainly a major one. And it only seems to work on the upside. How many times have you read about board decisions to lower a CEO’s pay in proportion to the decline in its stock price the past year? You probably know the answer to that one, too. 

The Shareholder Value Myth is an important contribution to a growing body of thought that seeks to re-conceive the role of the corporation in a more expansive manner commensurate with its growing importance in contemporary society.

Citizens United, corporate personhood, and the movement to restore political power to the people

A review of Corporations Are Not People: Why They Have More Rights Than You Do and What You Can Do About It, by Jeffrey D. Clements

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If you’re like most Americans, you may think that the Supreme Court’s decision in Citizens United v. Federal Election Commission is the root cause of the stranglehold on U.S. elections by major corporations and the 1%.

If you follow public affairs more closely than most, you’re aware that the situation is more complicated than this — that the misbegotten principle of “corporate personhood” that underpins Citizens United is a major element in the picture. I knew that much before I read Jeffrey Clements’ eye-opening book, Corporations Are Not People – but I didn’t have a clue where that concept came from, how it grew into one of the dominant judicial doctrines of the last several decades, or the truly pivotal role it has played in recent American history.

In fact, Citizens United was only one of the latest episodes in a four-decade-long history of legal, political, and social change that has moved the center of gravity in public discourse in America so far to the right that our last two Democratic Presidents can only be seen in global context as moderate conservatives, while today’s Republican leaders hold such extreme views that to term them “conservative” is a gross misuse of the language.

As Jeffrey Clements tells it, the story begins in 1970 with the first Earth Day. The mobilization of more than 20 million Americans in that masterful organizing effort led to the passage of a long series of laws that established the basis for long-overdue environmental regulation: the creation of the Environmental Protection Agency, the Occupational Health and Safety Act that created OSHA, the Clean Air Act, and a host of others.

Then the corporate world struck back.

A soft-spoken Southern attorney named Lewis F. Powell, Jr. led the charge. Powell was defending Philip Morris in the growing wave of lawsuits about cigarette smoking in the 1960s and sat on its board. Shortly before accepting his appointment to the Supreme Court by Richard Nixon in 1971, Powell wrote a now-infamous memo to a friend at the U. S. Chamber of Commerce, the bastion of corporate America. The “Powell Memo” kicked off the four-decade assault by the corporate elite and the 1% that stifles American democracy today.

Under the title “Attack on American Free Enterprise System,” Powell explained, “‘No thoughtful person can question that the American economic system is under broad attack.’ In response, corporations must organize and fund a drive to achieve political power through ‘united action.’” As a lawyer, Powell naturally saw the courts as the centerpiece of the pro-corporate strategy he advocated. “Activist judges” on courts throughout the land, and especially on the U. S. Supreme Court, would roll back legislation such as the flood of new environmental laws.

The corporate campaign rolled out in the years after Powell’s memo in spheres of activity: lobbying Congress, state legislatures, and the public through industry front groups such as the Tobacco Institute and the Edison Electric Institute; electing or appointing pro-corporate judges such as Powell himself; and influencing public education and shaping public opinion through a flotilla of Right-Wing think tanks including the Heritage Foundation, the Cato Institute, the Manhattan Institute, and many others.

Since Powell’s memo circulated in the upper echelons of corporate America in 1971, corporations, primarily the large transnational companies that dominate the Chamber of Commerce, have poured billions of dollars into these activities. However, until his death in 1998, Lewis Powell continued to lead the pro-corporate effort from his seat on the U. S. Supreme Court. In the early and mid-1970s, Powell was thwarted by Chief Justice William Rehnquist, but the tide turned in 1978 when Powell prevailed over strenuous objections from the Chief in a case that firmly established the “right” of corporations to flaunt laws passed to keep them in check by establishing the principle of corporate personhood.

Corporations Are Not People is an activist plea for readers to join the gathering movement to overturn Citizens United, wrest political power from the corporations, and put it back in the hands of people. As Jeffrey Clements sees it, there are “three essential steps to roll back corporate dominance of government: (1) a twenty-eighth amendment to the Constitution that will overturn Citizens United and corporate rights and restore people’s rights; (2) corporate accountability and charter reform to ensure that corporations better reflect the public policy reasons for which we allow the legal benefits of incorporation, such as limited liability, in the first place; and (3) election law reform, including increased public funding, greater transparency, and an end to legal political bribery.”

As an advocate for public funding of elections since 1972 and a long-time participant in electoral politics at every level – local, regional, statewide, and national – I find Clements’ three steps to be right on target. The structural reforms he proposes would strike at the heart of the forces that are strangling our political rights and advancing the interests of the 1% against those of the 99%.

Much of Corporations Are Not People is devoted to the many resources offered readers at the back of the book: the wording of the proposed 28th Amendment; a draft resolution favoring passage of the amendment that organizations and local governmental bodies may adopt; and contact information for the growing list of organizations that are coming together in the new movement to roll back corporate power.

Jeffrey D. Clements is an attorney in Concord, Massachusetts. A former Assistant Attorney General of his state, he cofounded Free Speech for People following the ruling in Citizens United.