As a naive 19 year old Finance major, I was taught that public corporations were supposed to maximize shareholder value. It was pretty straightforward and I am fairly confident I got that answer right on the final exam. As a legal entity that took other people’s money, the publicly traded corporation had a responsibility to use the capital provided by its shareholders to generate profits and then pay dividends from retained earnings. The shareholders could exercise their ability to open & close off access to capital – the lifeblood of any growing corporation – and thus held the power.
Yet, unchecked exertion of power by shareholders to see that their interests are served first can be incredibly destructive in the long run. The consistent short-term focus (beating of estimated quarterly earnings) demanded by shareholders has prevented innovation and forced CEOs to treat a corporation’s human capital (labor) as second-rate to profits.
HP is one company that has consistently sacrificed investment in research & development for the sake of short-term earnings and it is now their employees who are the first to go – as HP plans to cut 27,000 jobs to save $3.5 billion annually. Overlooking innovation and treating your employees as a commodity seriously undermines a corporation’s ability to generate long-term sustainable value for all stakeholders, not simply shareholders.
How did we come to the point of favoring the interests of shareholder capital over the interests of society’s labor? Why are the earnings from putting one’s capital to work taxed differently from the earnings that come from putting one’s own body and mind to work?
Labor in the US has always struggled against the interests of corporations. One only needs to read the Robber Barrons & Rebels chapter in Howard Zinn’s A People’s History of the United States to understand this. However, in recent years, labor has been weakened by globalization (as corporations race to the bottom of labor markets around the world) and advances in technology that yield human workers obsolete. Simultaneously, capital has been strengthened by the development of highly efficient global capital markets and countries doing whatever they can (usually in the form of highly favorable tax law) to attract capital for the sake of job creation. So, while the balance of power is tilted towards capital, I believe it is only a matter of time before workers once again realize that their greatest asset is their strengthen in numbers to get favorable labour laws passed – just check out the power yielded by IG Metall (Germany’s equivalent to the United Automobile Workers union).
It is important to remember that capital and labor go hand-in-hand and are equally reliant on each other to perform the functions of business and generate value for all corporate stakeholders. Alexis de Tocqueville explained that when people channeled their individualism into finding ways to work together for common purposes, it was seen as “self interest properly understood.”
It seems that once again the ways in which the self-interests of labor and capital can be channeled are once again being properly understood. Joe Nocera recently published a NY times article that shared the same growing sentiment that corporations should not simply pander to the interests of shareholders. The article quotes Jay Lorsch, a professor at Harvard Business School, who says:
The function of business in a society is not just a return to investors, but to provide goods and services, provide employment, pay taxes, and so on.
I am glad to see a discussion taking place that recognizes the interests of all stakeholders, shareholders and labor alike, and academia exposing students to new ways and reasons why it is important to strike a balance between both. God save the next naive Finance major.