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

@@@@@ (5 out of 5)

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.

The sorry record of microcredit laid bare by an industry veteran

A review of Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor, by Hugh Sinclair

@@@@@ (5 out of 5)

“Some microfinance is extremely beneficial to the poor, but it is not the miracle cure that its publicists would have you believe. Microfinance has been hijacked by profiteers, and we need to reclaim it for the poor. The problem is not with a few rogue operators, alas, but with systemic flaws that permeate the sector.”

Thus does Hugh Sinclair lay out the thesis he pursues in Confessions of a Microfinance Heretic. If you skip over this statement in the opening pages of the book, you could easily conclude that Sinclair can see no good at all in the $70 billion industry that has grown up under the impetus of Muhammad Yunus’ 2006 Nobel Peace Prize. After all, Sinclair writes — at least twice — that he wouldn’t invest a single dollar in microfinance today. Nonetheless, he insists that the “debate is not whether microfinance works, but how the inherent conflicts of interest can be managed.”

The systemic flaws Sinclair perceives are eye-opening:

• A majority of the money loaned to poor people goes not to help them launch or sustain microbusinesses to supplement family income but rather for current consumption, sometimes to buy food during a time when there’s not enough money coming in, sometimes just to buy TV sets.”Estimates for consumption loans range from 50 percent to 90 percent of all microfinance loans,” depending on the study. As Sinclair points out, citing numerous sources, the proportion of entrepreneurs among the poor is no bigger than it is among the rich. It’s naive of us to expect otherwise.
• The interest rates charged for microloans are, far too often, prohibitively high. Muhammad Yunus’ benchmark — 10 to 15 percent above the cost of money — is rarely observed. Though there are indeed many, mostly small, nonprofit MFIs (Microfinance Institutions, generally microloan lenders) that charge no more than 25 or 30 percent, the bigger institutions, and most of the for-profit banks in the industry, typically charge far more. In one notorious case, the effective interest rate runs as high as 195 percent, but there are many other instances in which the rate exceeds 100 percent.
• The amounts of money loaned by MFIs are far too small to permit businesses to grow to a size where they may employ workers outside the family. In fact, to the extent that businesses remain family-run, they frequently employ even the youngest children, sometimes withdrawn from school to work in the business. However, there’s another side to this question, as Sinclair reveals in an exchange with one businesswoman: “[W]e asked her about her future plans for the business, and whether she thought it could be built up further and be a useful business for her children to take over. ‘You misunderstand me. I don’t do this job because I like it or want to grow it into a big business. I do it so my children will never have to do work like this.'”
• In countries where local laws and a lack of government oversight give free rein to the MFIs, competition run wild among them has sometimes led to credit crises. In India’s Andhra Pradesh state, for example, “There were more microloans than poor people.” And in Nicaragua “total lending by MFIs was estimated at $420 million in 2008, in a country of about 5.5 million, not all of whom were poor (and MFIs generally don’t lend to children).” Microloan customers frequently borrowed from several of the country’s 19 MFIs — the nationwide average was four — often to be able to pay back loans to other MFIs. “One particularly ambitious client in Jalapa had managed to rack up $600,000 in micro-loans.” As Sinclair disclosed in a talk he gave in Berkeley a few weeks ago, Nicaragua was only the first of several countries where the microcredit bubble is likely to burst. Stay tuned, he said.
• The profit motive appears to have become the central preoccupation of the microfinance funds, which function like private equity funds, gathering together investment dollars and placing them in selected MFIs. Even some of the biggest and most prestigious of these funds — including the Grameen Foundation (USA), Calvert Foundation, Kiva.org, and BlueOrchard (the world’s largest) — have been tainted by longstanding investments in some of the most egregiously exploitive MFIs, brushing aside mountains of evidence that their investments were helping victimize poor people in Nigeria, Mexico, and other countries.

Despite all this, there is NO documented evidence that microfinance has achieved any reduction at all in the level of poverty. As a 2007 article in the Harvard Business Review stated, “In 1991, for example, Bangladesh ranked 136th on the UN Development Programme’s Human Development Index (a measure of societal well-being); 15 years later it ranked 137th.” And Sinclair writes, “In 2001, Nicaragua was the 106th poorest country in the world . . . Microfinance was almost unheard of in Nicaragua at this point, and there were no large microfinance funds throwing money around. By 2009, when the full Nicaraguan microfinance meltdown occurred, Nicaragua had slipped to 124th place.”

Hugh Sinclair is no cranky, slapdash journalist taking on a controversial subject for the sake of selling books. He is a ten-year veteran of the microfinance industry and has been involved as either an employee or a consultant in dozens of MFIs around the world and in several microfinance funds. He clearly knows whereof he writes, his citation of sources is extensive, and his publisher, Berrett-Koehler, is a highly respected source of books on business and current affairs.

Confessions of a Microfinance Heretic is an important book that should be must reading for anyone involved in international development.

Narrowing global inequities: a reading list

Lately I’ve been working with Paul Polak on a book about how to end global poverty. (Berrett-Koehler will publish the book in 2013.) Paul’s previous book, Out of Poverty, was published six years ago, and this new work – provisionally titled The Business Solution to Poverty – represents the evolution of his thinking, six more years of work with poor people in developing countries, and the reading and relevant field experience I’ve had over the years.

As I’ve dug more deeply into the subject of global poverty, it has become increasingly clear to me that truly understanding how today’s glaring inequities have come about requires extensive knowledge in a wide array of topics, from Third World history to social psychology, development economics to the history of business and international trade.

Well, I confess I’m no expert in any of those fields. I’ve read widely in some, superficially in others, and I’m learning a lot.

My reading has emphasized economic history, the economics of poverty, colonialism, Third World development, social enterprise, and the ongoing debate about the impact of “foreign aid” (more properly, overseas development assistance). Along the way, I’ve reviewed in this blog many of the books I’ve read.

In previous posts, I’ve offered up reading lists on some of these subjects individually. Here, I’m sharing a compiled list. These are the books I’ve actually read. Where I reviewed a book, you’ll find boldfacing and underlining that signifies a link to my review. The books are listed alphabetically by the author’s last name.

Banerjee, Abhijit, and Esther Duflo, Poor Economics A Radical Rethinking of the Way to Fight Global Poverty. PublicAffairs, 2011. (review to come)

Bornstein, David, How to Change the World: Social Entrepreneurs and the Power of New Ideas. Oxford University Press, 2007.

——, The Price of a Dream: The Story of the Grameen Bank. Oxford University Press, 2005.

——, and Susan Davis, Social Entrepreneurship: What Everyone Needs to Know. Oxford University Press, 2010.

Clark, Gregory, A Farewell to Alms: A Brief Economic History of the World. Princeton University Press, 2007.

Cohen, Ben, and Mal Warwick, Values-Driven Business: How to Change the World, Make Money, and Have Fun. Berrett-Koehler Publishers, 2006.

Collier, Paul, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. Oxford University Press, 2007.

Collins, Daryl, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton University Press, 2009.

Crutchfield, Leslie R., and Heather McLeod Grant, Forces for Good: The Six Practices of High-Impact Nonprofits, 2nd Edition. Jossey-Bass Publishers, 2012.

Diamond, Jared, Collapse: How Societies Choose to Fail or Succeed. Viking Press, 2005.

Easterly, William, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Penguin Press, 2006.

Elkington, John, and Pamela Hartigan, The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World.Harvard Business Review Press, 2008.

Govindarajan, Vijay, and Chris Trimble, Reverse Innovation: Create Far From Home, Win Everywhere. Harvard Business Review Press, 2012.

Guha, Ramachandra, India After Gandhi: The History of the World’s Largest Democracy. HarperCollins Publishers, 2007.

Hochschild, Adam, King Leopold’s Ghost: A Story of Greed, Terror, and Heroism in Colonial Africa. Houghton Mifflin Company, 1998.

Kamkwamba, William, and Bryan Mealer, The Boy Who Harnessed the Wind: Creating Currents of Electricity and Hope. HarperCollins Publishers, 2009.

Kidder, Tracy, Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, a Man Who Would Cure the World. Random House,2003.

Kristof, Nicholas D., and Sheryl WuDunn, Half the Sky: Turning Oppression Into Opportunity for Women Worldwide. Knopf, 2009.

Light, Paul Charles, The Search for Social Entrepreneurship. Brookings Institution Press, 2008.

Lynch, Kevin, and Julius Walls, Jr., Mission, Inc.: The Practitioner’s Guide to Social Enterprise. Berrett-Koehler Publishers, 2008.

Mehta, Pavithra, and Suchitra Shenoy, Infinite Vision: How Aravind Became the World’s Greatest Business Case for Compassion. Berrett-Koehler Publishers, 2011.

Moyo, Dambisa, Dead Aid: Why Aid is Not Working and How There Is a Better Way for Africa. Farrar, Straus and Giroux, 2009.

Polak, Paul, Out of Poverty: What Works When Traditional Approaches Fail. Berrett-Koehler Publishers, 2006.

Prahalad, C. K., The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Pearson Prentice Hall, 2004.

Sachs, Jeffrey D., The End of Poverty: Economic Possibilities for Our Time. Penguin Press, 2005.

Schwartz, Beverly, Rippling: How Social Entrepreneurs Spread Innovation Throughout the World. Jossey-Bass Publishers,2012.

Sullivan, Nicholas P., You Can Hear Me Now: How Microloans and Cell Phones Are Connecting the World’s Poor to the Global Economy. Jossey-Bass Publishers, 2007.

Wrong, Michaela, It’s Our Turn to Eat: The Story of a Kenyan Whistle-Blower. HarperCollins Publishers, 2006.

Eight recent books that illuminate the state of affairs in America today

In recent months I’ve reviewed eight nonfiction books in this blog that collectively represent a panoramic view of America today — and of our prospects to thrive in the future. It’s a decidedly mixed picture, but I’m convinced it’s real. Together, the books in this accessible little collection constitute a primer on the challenges we face as a nation.

If you want to read the original review of one of these books, simply click on the title below.

Hot: Living Through the Next Fifty Years on Earth, by Mark Hertsgaard. An able journalist who specializes in reporting on the environment generally and global warming in particular interviews many of the world’s top scientists in the field — and comes away gloomier than ever.

The Self-Made Myth, and the Truth About How Government Helps Individuals and Businesses Succeed, by Brian Miller and Mike Lapham. The directors of United for a Fair Economy and its project, Responsible Wealth, respectively, explode the Ayn Rand myth that corporate leaders are self-made “job creators” who did it all on their own, and that the rest of us deserve our fate.

99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It, by Chuck Collins. The founder and former director of United for a Fair Economy, now at the Institute for Policy Studies, is one of the country’s top experts on the gap between the really rich and the rest of us. He prescribes action to build a new economy that will benefit all 100%.

The New Jim Crow: Mass Incarceration in the Age of Colorblindness, by Michelle Alexander. A veteran civil rights lawyer exposes the horrific consequences of the War on Drugs, including the institutionalization of racism in American jurisprudence. This is a shocking indictment of our political and judicial leadership over the past three decades.

Corporations Are Not People: Why They Have More Rights Than You Do and What You Can Do About It, by Jeffrey D. Clements. A former Massachusetts assistant attorney general examines the four-decade legal history that culminated in the Citizens United decision, details how it undermines American democracy, and lays out a strategy to fight back.

Rebuild the Dream, by Van Jones. One of our nation’s most passionate and insightful young leaders, building on his experience both as an activist and in the White House, analyzes the similarities and differences among the Tea Party, the Occupy Movement, and the 2008 Obama campaign and its aftermath. He advocates a grassroots citizens’ movement to regain political advantage over the extreme Right Wing.

Republican Gomorra: Inside the Movement That Shattered the Party, by Max Blumenthal. A young journalist, author, and blogger digs through the history of the Religious Right and turns up an astonishing story of its antecedents — and of the true, often masked, beliefs of its current leaders.

Top Secret America: The Rise of the New American Security State, by Dana Priest and William M. Arkin. A Pulitzer-Prize-winning reporter for the Washington Post and her researcher and co-author root around through the maze of our country’s 16 federal intelligence agencies and reveal just how far we’ve come in the years since 9/11 from our cherished self-image of a government “of the people, by the people, and for the people.”