The Activist Investor Blog
The Activist Investor Blog
Lynn Stout Should Spend More Time With Economists
When corporate cheerleader Marty Lipton and corporate critic James McRitchie both heap praise on a new book (Lipton blurbed it), it’s probably worth a look. And when Joe Nocera at the NY Times, Jesse Eisinger at muckraker ProPublica, and the managing editor of industry paper The Deal all highlight it, investors might want to know what’s going on.
Law professor Lynn Stout published The Shareholder Value Myth earlier this year. It prompted all manner of thinking about the relationship between public companies and their shareholders. (We weighted in on this earlier, too.)
Granted, the title isn’t promising. Yet, we hoped it offered a clear path for investors, between those who would leave corporations alone to spend or squander assets as directors and executives see fit, and those who would have shareholders waste time voting on everything, including the color of the CEO’s carpet.
Alas, it would be merely a hot mess if it wasn’t actually somewhat dangerous: it has fired a public debate that essentially proposes we abandon “shareholder value” as the singular goal of a public company.
Corporate law, corporate finance
While we don’t review the book here, a couple of comments about the argument merit attention.
It proves something that few observers dispute, and doesn’t matter much anyway: directors and executives do not have an “enforceable legal duty” to maximize shareholder wealth. As a corporate law professor, we’d expect Prof. Stout to make this point well.
Her reading of economics and finance takes her to much less stable ground. She seeks to show that the standard corporate principal-agent model is “wrong”, in that it does not describe how public companies actually work. She also tries to marshall evidence that corporate emphasis on improving shareholder value has not in fact improved equity returns. She badly misses abundant scholarship that supports both points.
Notably, at no point does the book define “shareholder value”. Most economists that address this subject begin there.
If not shareholder value, then what?
From this shaky position, we advance to the danger zone. There, directors, executives, employees, vendors, and customers can do whatever they want with the company’s assets. Without a well-defined objective, who decides what’s important, and how?
Prof. Stout certainly does not provide that objective:
This book does not advance a theory of how, exactly, directors should mediate among different shareholders’ demands.
Earlier we highlighted how the absence of a system for setting objectives leads to chaos, in our critique of corporate social responsibility. Shareholder value (however defined) provides a proper system for mediating those demands.
Who stands for what?
Perhaps not having any theory about how to organize public company activity delivers ambiguity some people like. For example, we can’t figure out where Prof. Stout really sits on the spectrum from conservative corporate law professor to liberal corporate critic. While her legal writing suggests the former, in the book she states emphatically she is “highly sympathetic” to the view that corporations should “serve the public interest.”
Maybe that’s why the book earned the affection of observers from across that spectrum, too. They can make of it what they want, to support whichever position they adopt.
That’s ok for a manifesto, I suppose. Public companies spending shareholder money need something more rigorous, like shareholder value.
Tuesday, August 14, 2012