Unpicking the myth of shareholder capitalism

This article from Harvard Business Review points out succinctly that directors of companies are not required by law to maximise profits at all times, but that they believe that they are.

Two key paragraphs are:

“…the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time.”

Sounds positive for the idea of longer term stewardship, doesn’t it? The problem is though:

“And yet, in an important 2007 article in the Journal of Business Ethics, 31 of 34 directors surveyed (each of whom served on an average of six Fortune 200 boards) said they’d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximize shareholder wealth, they believed it was their duty to do.”

The authors argue that “…lack of communication has led to the election of directors who, frankly, don’t know what their legal duties are. Indeed, they’re being taught the wrong things”.

So if they are right (and my own academic research does back this up) the idea of always considering the short term benefits of shareholders (e.g. selling) over the longer term benefit of stakeholders (e.g. not selling), is a total myth.

The problem is, if everyone believes it to be true, then it becomes truth. It becomes what is expected, justified as it is right now, by pseudo-legal pretend case law.

Part of our jobs in sustainability then, should be to help unpick this myth and show company directors that short term is not just what they are paid to think about.

The question is: How can we do that better? We could start by educating non-executives, somehow.

The other problem is of course, fund managers, and how they pressure companies under mandates from pension fund trustees, among others.

The Financial Times has a lengthy (for them) and interesting piece on this here.

1 Comment

  1. Like the post Toby.

    I've often fallen into a few 'discussions' around the whole profit maximisation responsibility myth that has evolved over the ages, and more importantly its use as an argument against CSR / sustainability.

    As the responsibility agenda matures, and with increasingly available credible data and knowledge as ammunition, the detractors will have less armour to deflect their ever weakening riposte.

    How about a ethical Mythbuster article in EC?

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