The American economy may lose its position as the leading economy in the world if corporate officers and directors maintain their fixation on maximizing shareholder value for stockholders, said Vanderbilt Law School professor Margaret Blair.
鈥淭he only positive thing you can say about maximizing shareholder value is that it鈥檚 simple,鈥� said Blair, the Milton R. Underwood Chair in Free Enterprise at Vanderbilt. 鈥淏ut being simple doesn鈥檛 mean being smart.鈥�
But what is the purpose of a corporation if it鈥檚 not to make money for its shareholders?
鈥淐orporations are supposed to try to make a profit,鈥� Blair said. 鈥淏ut economic theory acknowledges other participants in addition to investors. [rquote]You鈥檝e got creditors, suppliers, communities and employees. All of these groups make ongoing investments in order for the firm鈥檚 enterprise to succeed.鈥漑/rquote]
Simply maximizing profits leaves out the concerns of these other stakeholders. This adversely affects the corporation and the overall economy over the long haul, Blair said.
鈥淐reditors will charge a higher price because they know they could be betrayed at any time,鈥� Blair said. 鈥淓mployees behave in very different ways. They become far less likely to be loyal to their employer, and they have less incentive to be innovative.鈥�
And the real value of a corporation isn鈥檛 its bricks and mortar, she said, but the intellectual property 鈥� patents, brands and such 鈥� and the ability of its employees to generate more of the same as time goes on.
The mandate to maximize shareholder value is a relatively recent development, dating back to a 1980s court ruling in Delaware, Blair said. That case involved a hostile takeover attempt of the Revlon Corporation. The corporate raider sued when Revlon cut a deal with a third party to buy it.
鈥淭he Delaware court said that in the event that it becomes clear that a corporation is going to be sold and cease to exist as a separate independently traded organization, it becomes the duty of the directors and officers to maximize the value of the stockholders, basically to get the highest price they can for the stockholders,鈥� Blair said. 鈥淭hat makes sense if it鈥檚 the end game for those shareholders.鈥�
The case was seized by some as a general mandate that all corporations were supposed to maximize shareholder value all the time. That鈥檚 a misreading of the case, Blair said. She鈥檚 been arguing her views in books (Ownership and Control, 1995) and prominent journals (Virginia Law Review, 1999; The Journal of Corporation Law, 1999) ever since, sometimes in collaboration with at .
鈥淸rquote]As a result of businesses feeling that their first and only duty is to maximize shareholder value, corporate loyalty is just gone now,鈥� Blair said.[/rquote] 鈥淯.S. corporations have not and will not lead technologically because we鈥檙e not doing our own research and development here 鈥� it鈥檚 being outsourced to countries like India and China.
鈥淚t may look good on paper now, but intellectual property 鈥� the most important asset of most corporations 鈥� walks out the door every day and may not come back at some point. You鈥檙e going to lose it, and it鈥檚 happening in corporation after corporation, because corporate directors and officers have been told their job is to maximize shareholder value.鈥�
Blair suggests that corporations operate on what she calls a 鈥渢eam production鈥� model instead of maximizing profits. That theory directs corporate directors and officers to work for the continuing and long-term health of the companies they oversee.
鈥淚t has to be the job of corporate directors to try to maximize the whole pie, not just the slice of the pie that shareholders get,鈥� Blair said.