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.