The Myth of Maximizing Shareholder Value

Jamie Dimon (courtesy of Steve Jurvetson/Wikimedia Commons)

Profit maximization is often taught to law and business students as a primary driver for corporate leaders in the United States.  Put another way, students learn that corporate executives are bound to consider shareholder enrichment as a primary motivator in their leadership of U.S. corporations.  While critics like Lynn Stout and Yves Smith decry this notion as false, the duty of "profit maximization," the principle persists, as if members of corporate boards and company executives spend much of their time planning how to increase profits for the shareholders that ostensibly hire them.  In my own writing and thinking, I am convinced that profit maximization is no myth but just misconstrued; profit maximization does exist for corporate leaders, but not for increasing shareholder profit, but for increasing their OWN profit.  Stated differently, if profits increase for a corporation, that often means that executive compensation will increase remarkably if corporations show a successful bottom line.  So evidence suggests that corporate leaders make decisions that will increase their own bottom line, rather than that of the company's owners, the shareholders.

At Naked Capitalism, Yves Smith writes that the notion of shareholder profit maximization is bunk.  He writes:  "So many of the assertions made about 'maximizing shareholder value' are false that they should be assumed to be a lie until proven otherwise. The first is that board and managements are somehow obligated to 'maximize shareholder value' is patently false. Legally, shareholders’ equity is a residual claim, inferior to all other obligations. Boards and management are required to satisfy all of the company’s commitments, which include payments to vendors (including employees), satisfying product warranties, paying various creditors, paying taxes, and meeting various regulatory requirements (including workplace and product safety rules and environmental regulations)."

Rather, Smith continues "For the past three decades, top executives have been rewarding themselves with mega-million dollar compensation packages while American workers have suffered an unrelenting disappearance of middle-class jobs. Since the 1990s, this hollowing out of the middle-class has even affected people with lots of education and work experience.  As the Occupy Wall Street movement correctly recognized, the concentration of income and wealth of the economic top 'one percent' of society has left the rest of us largely high and dry. Corporate profits are increasingly going to share buybacks or dividend distribution, but very little is going back into research and development efforts, capital reinvestment, and employment. Corporations, in other words, are devoting increasing amounts of their considerable and growing financial resources to redistribution rather than innovation. And they are doing so based on the justification of 
'increasing shareholder value.'"

This redistribution of wealth is from corporate coffers into corporate executives pockets, NOT to shareholders or charitable organizations.  Evidence of this comes this week with reports that Jamie Dimon, CEO of JP Morgan Chase (pictured above), has been rewarded a 74% pay hike (18.5 million dollar bonus), despite a very rocky past two years of leadership where JP Morgan has paid billions of dollars in fines for regulatory failures.

Redistribution of wealth occurs in the United States, just not in the way folks are often led to believe.  Corporate profits are increasingly landing in the pockets of the 1%, not in the pockets of the shareholders.

Mid-Atlantic People of Color Legal Scholarship Conference 2014

University of Baltimore School of Law

The Mid-Atlantic People of Color Legal Scholarship Conference will hold its annual meeting on January 23-25, 2014, at the University of Baltimore School of Law.  The Conference theme is "President Lyndon B. Johnson's Great Society and Beyond: The Historical and Contemporary Implications of Progressive Action and Human Fulfillment - Honoring and Critiquing the 50th Anniversary of Johnson's Vision."  In considering Johnson's "Great Society" in 2014, one must evaluate whether the problems of poverty, education, civil rights and equality, and crime have been effectively handled over the past 50 years.

From the conference website:  "In May 1964, President Lyndon Baines Johnson unveiled his revolutionary plan for a “Great Society.” As he explained it, Americans had 'the opportunity to move not only toward the rich society and the powerful society, but upward to the Great Society. … The Great Society rests on abundance and liberty for all. It demands an end to poverty and racial injustice.'

According to Doris Kearns Goodwin, author of Lyndon Johnson and the American Dream, Johnson’s Great Society would be based on “progressive action” and the “possibilities for human fulfillment.” These ideas meant Americans needed to regain control over their society and end policies that threatened and degraded humanity.

With the passage of Johnson’s Great Society reforms—including the Voting Rights Act of 1965, Medicare, Medicaid, the Equal Opportunity Act, the Elementary and Secondary Education Act, Social Security, the Earned Income Tax Credit, the Higher Education Act, Head Start, the Civil Rights Acts of 1964 and the Housing and Urban Development Act of 1965—America’s official poverty rate declined throughout the 1960s and early 1970s, reaching a low of 11.2 percent in 1974, down from 19 percent in 1964. (The rate was 15.1 percent in 2010.)

According to Washington Post reporter Dylan Matthews, who in 2011 wrote 'Poverty in the 50 years since ‘The Other America,’ in five charts,' Johnson’s Great Society programs—which included the War on Poverty—made a 'real and lasting difference.'

But some of Johnson’s less fortunate legacies are still with us: the effects of the Vietnam War, which Johnson escalated, as well as racially concentrated poverty. In the decades since his presidency, America has weathered several recessions, the 1990s boom years, the 2008 financial collapse and the continuing slump brought on by banking policies and Wall Street’s disastrous gambit of issuing mortgage-backed securities, as well as the national security apparatus’ encroachment on civil liberties, the rise and fall of the Occupy Movement and the Arab Spring, and the wars since 9/11.

It is clear that Johnson’s Great Society programs saved millions of Americans from the depth of official poverty. It is also true that Johnson’s great plan failed as his presidency was rocked by opposition to the Vietnam War and urban unrest across the country, notably by the 1965 Watts riots. Johnson never did redress poverty in America."

Scholars of color will examine and address the promise of Johnson's grand proposals and examine where we stand today and what challenges remain.

MLK Day and Citizen's United

courtesy of Marion S. Trikosko/Library of Congress

In an AlterNet article appearing today, the day we celebrate the legacy of Dr. Martin Luther King, Jr., entitled "As We Celebrate MLK Day . . . Tomorrow's Anniversary of Citzen's United Reminds Us of Increasing Injustice," Professor Ian Haney Lopez discusses the connection between Dr. King's economic equality message which dominated the final years of his life, and increasing wealth inequality in America, represented strongly by the Supreme Court's Citizen's United opinion.

Per AlterNet:  "Monday is the national holiday honoring Martin Luther King Jr., and  Tuesday marks the fourth anniversary of Citizens United, the case that dramatically widened the flood of big money in elections. Their confluence is opportune, for while each seems to invite reflection on a different core social problem—respectively racial inequality and the power of concentrated wealth—each teaches lessons relevant to the other.

King clearly saw how racial and economic justice formed mutual requirements. The strike by African American sanitation workers in Memphis, where King was assassinated, reflected the truth that racial justice for minorities would depend on economic opportunities. In the other direction, the Poor Peoples’ March on Washington that King labored for in the months before his death arose out of the conviction that economic security for persons of every race depended on transcending racial divisions."

Derivatives and Deregulation

Russel Funk and Daniel Hirschman, both PhD candidates at the University of Michigan, have just released an interesting paper entitled "Derivatives and Deregulation: Financial Innovation and the Demise of Glass-Steagall."  In the paper, they look closely at the first major currency swap in history, a 1981 exchange between IBM and the World Bank, and trace how this financial innovation (swaps primarily) literally drove the demise of the firewall between commercial and investment banks established in the 1933 Glass-Steagall Act. 

Here is the abstract:

"Just as regulation may inhibit innovation, innovation may undermine regulation. Regulators, much like market actors, rely on categorical distinctions to understand and act on the market. Innovations that are ambiguous to regulatory categories but not to market actors present a problem for regulators and an opportunity for innovative firms to evade or upend the existing order. We trace the history of one class of innovative financial derivatives — interest rate and foreign exchange swaps — to show how these instruments undermined the separation of commercial and investment banking established by the Glass-Steagall Act of 1933. Swaps did not fit neatly into existing product categories — futures, securities, loans — and thus evaded regulatory scrutiny for decades. The market success of swaps put commercial and investment banks into direct competition, and in so doing undermined Glass-Steagall. Drawing on this case, we theorize some of the political and market conditions under which regulations may be especially vulnerable to disruption by ambiguous innovations."

The paper can be downloaded here.

Dog Whistle Politics

Professor Ian Haney López has just released his latest important book Dog Whistle Politics:  How Coded Racial Appeals Have Reinvented Racism and Wrecked the Middle Class.

Description:  "Campaigning for president in 1980, Ronald Reagan told stories of Cadillac-driving 'welfare queens' and 'strapping young bucks' buying T-bone steaks with food stamps. In trumpeting these tales of welfare run amok, Reagan never needed to mention race, because he was blowing a dog whistle: sending a message about racial minorities inaudible on one level, but clearly heard on another. In doing so, he tapped into a long political tradition that started with George Wallace and Richard Nixon, and is more relevant than ever in the age of the Tea Party and the first black president.

In Dog Whistle Politics, Ian Haney López offers a sweeping account of how politicians and plutocrats deploy veiled racial appeals to persuade white voters to support policies that favor the extremely rich yet threaten their own interests. Dog whistle appeals generate middle-class enthusiasm for political candidates who promise to crack down on crime, curb undocumented immigration, and protect the heartland against Islamic infiltration, but ultimately vote to slash taxes for the rich, give corporations regulatory control over industry and financial markets, and aggressively curtail social services. White voters, convinced by powerful interests that minorities are their true enemies, fail to see the connection between the political agendas they support and the surging wealth inequality that takes an increasing toll on their lives. The tactic continues at full force, with the Republican Party using racial provocations to drum up enthusiasm for weakening unions and public pensions, defunding public schools, and opposing health care reform.

Rejecting any simple story of malevolent and obvious racism, Haney López links as never before the two central themes that dominate American politics today: the decline of the middle class and the Republican Party's increasing reliance on white voters. Dog Whistle Politics will generate a lively and much-needed debate about how racial politics has destabilized the American middle class -- white and nonwhite members alike."

Happy New Year

courtesy of Alex Simms/Wikimedia Commons

We at the Corporate Justice Blog are grateful to our readers, commentators, and contributors.  Thanks to all of you that support our work, challenge our insights, and work with us toward social and economic justice.  Happy New Year to all of our readers and supporters.  We wish everyone a safe and prosperous 2014.

Let us hope and work together for fairness and economic equality.