Lynn Stout The Shareholder Value Myth Explained

Lynn Stout, a renowned corporate law professor, challenges the long-held assumption that shareholder value is the primary goal of corporations. According to Stout, this myth has led to a focus on short-term profits over long-term sustainability.

Stout argues that the concept of shareholder value is based on a flawed assumption that corporations are owned by their shareholders, who are the primary beneficiaries of the company's profits. In reality, corporations are not owned by their shareholders, but rather are separate entities with their own interests.

This distinction is crucial, as it means that corporations have a fiduciary duty to their stakeholders, including employees, customers, and the environment, in addition to their shareholders. Stout's work highlights the need for a more nuanced understanding of corporate governance and the role of stakeholders in shaping business decisions.

Lynn Stout is a renowned expert who has spent nearly two decades investigating the question of corporate purpose. She was puzzled by the fact that U.S. corporate law does not require corporations to maximize either share price or shareholder wealth.

Stout's curiosity led her to become a guest scholar at the Brookings Institution in Washington, D.C. where she met economist Margaret Blair, who offered a novel answer to her question.

Blair's insight was that corporate law might be right and the experts were wrong, suggesting that there were good reasons why corporate directors were not required to maximize shareholder value. This conversation marked the beginning of Stout's extensive research into corporate purpose.

Stout's investigation was sparked by the Enron scandal in 2000, a company that was obsessed with raising its share price and touted as a model of good corporate governance, yet ultimately collapsed in fraud and scandal.

Stout has come to suspect that maximize shareholder value is an incoherent and counterproductive business objective, causing corporate managers to focus on short-term earnings reports at the expense of long-term performance.

The idea of maximizing shareholder value is a widely accepted notion in the business world, but it's a myth that's been debunked by renowned corporate expert Lynn Stout.

Lynn Stout shows how shareholder value thinking is not mandated by corporate law, but rather it's a misguided approach that prioritizes short-term gains over long-term sustainability.

Executives, investors, and the business press often chant the mantra that corporations must "maximize shareholder value", but this thinking has serious consequences for investors, employees, customers, and communities.

This myopic focus on short-term earnings discourages investment and innovation, leading to reckless and irresponsible behaviors in companies.

Lynn Stout offers a new vision of good corporate governance that serves investors, firms, and the American economy, one that prioritizes long-term value creation over short-term profits.

Lynn Stout's book, "The Shareholder Value Myth", challenges the conventional wisdom that a company's sole purpose is to maximize shareholder value.

In the book, Stout argues that the idea of shareholder value is a myth that has been perpetuated by academics and corporate lawyers.

She points out that the concept of shareholder value is based on a flawed assumption that a company's purpose is to create wealth for its shareholders.

Stout suggests that this assumption ignores the importance of other stakeholders, such as employees, customers, and the community.

A key argument made by Stout is that the focus on shareholder value can lead to a narrow and short-term focus on profits, at the expense of long-term sustainability and social responsibility.

The book explores how this focus on shareholder value has contributed to the decline of American corporations and the erosion of trust in business.

Lynn Stout's book, "The Shareholder Value Myth", is a comprehensive critique of the idea that corporations should prioritize shareholder value above all else. The book is divided into two parts: debunking the shareholder value myth and exploring what shareholders really value.

The author, Lynn Stout, is a renowned expert in the field of corporate law and economics. The book is a culmination of her research and expertise.

The book's preface sets the tone for the rest of the book, introducing the idea that prioritizing shareholder value is "the dumbest idea in the world". This bold statement sets the stage for the author's argument.

Part I of the book debunks the shareholder value myth by examining how it gets corporate law and economics wrong. The author argues that the shareholder value myth has been perpetuated by a flawed understanding of economics and corporate law.

One of the key chapters in Part I is Chapter Three, which explores how shareholder primacy gets corporate economics wrong. This chapter delves into the flaws in the economic theories that underpin the shareholder value myth.

In Part II of the book, the author shifts focus to exploring what shareholders really value. One of the most interesting chapters in this section is Chapter Five, which compares short-term speculators with long-term investors.

Shareholder primacy has its roots in the 1970s with the rise of the Chicago School of free-market economists.

Milton Friedman argued in a 1970 essay that the only social responsibility of business is to increase its profits, as shareholders are the owners of the corporation.

This idea was further developed by economists Michael Jensen and William Meckling in a 1976 paper, where they described shareholders as principals and corporate directors and executives as their agents.

Jensen and Meckling assumed that shareholders' interests were purely financial, and that corporate managers' only legitimate job was to maximize their wealth by every means possible short of violating the law.

According to their theory, corporate managers who pursued any other goal were wayward agents who reduced social wealth by imposing agency costs.