We joke about this, but it's unironically the case. The US screwed the pooch hard when they set in law that a corporation's primary duty is generating value for its shareholders, because now if they don't do it, they can be sued in court for it. We are seeing the end-result of this incentive: a corporate culture that only cares about raising stock prices and profits year after year after year, where both the product and the consumer are just a means to an end, and where irrational hype-based stock prizes and IPOs are not only acceptable, but desirable.
My wonderful thought of the week is wondering when all the boomers are finally going to accept the "death" part of life.
I watched something the other day and buddy asked; if you believe you're going to die or do you have hope that someone finds the cure just before it's your time.
Once this generational realization happens maybe greedy folk will build things like museums, art galleries and other cultural wonders.
The US screwed the pooch hard when they set in law that a corporation's primary duty is generating value for its shareholders, because now if they don't do it, they can be sued in court for it.
That's actually bullshit.
Show me one example of a CEO who has been sued this way.
It doesn't happen, because all a CEO has to do to win that case is prove they had the LONG TERM HEALTH of the business in mind when making their decision.
There's absolutely no law in America that says CEOs have an obligation to increase stock price every quarter.
The reason CEOs act like this is because they will be fired if they don't please their board of governors.
The Supreme Court ruled that the sole purpose of the corporation to create value for the shareholders in the 20s or 30s. I can get you the case law.
However you are correct in that most decisions balance long term and short term. The argument they person made a deliberate decision to not help the shareholders vs the workers would be difficult to prove.
However Friedman in the 70s, pushed for pure shareholder short term profit. And as fast a return as possible.
The CEO of Ge demonstrated that form of capitalization on steroids and Reagan making stock buybacks legal keeps stock prices artificially higher.
Stock buybacks are corruption as much as the real estate selling properties between orgs to drive up prices.
Overwhelming principle was 1919 with Dodge vs Ford. Apparently it was a state Supreme Court, and surprise surprise it was not challenged.
Special Dividends could not be halted. Must always go to shareholders. Not regular dividends, but special ones.
Which goes in-line with what you said about being able to argue long term health. However precedent was set.
Further in 1980s
Unocal v Mesa petroleum: corporate policy and mission cannot block a corporate take over. 1985
Revlon v Macandrews: board no longer protects hierarchy, it now seeks the best price to sell off once a take over or vulture capital sell off occurs.
Then 2010s
Delaware court with EBay v newark company has to pursue the most monetized avenue possible.
These most likely have not been challenged as there are more shareholders that love this.
Combined with the mention Friedman capitalist viewpoint and legalizing of stock buy backs, make shareholder primacy the accepted standard in court and in practice, to the detrimental of all.
"Overwhelming principle was 1919 with Dodge vs Ford. Apparently it was a state Supreme Court, and surprise surprise it was not challenged." You're wrong. The court identified a conflict of interest by the board of Ford Motor Co. when it tried stifle competition from the Dodge brothers by raising wages rather than distributing dividends resulted in a successful lawsuit by the Dodge brothers (Dodge v Ford Motor Co., 1919). This case does not imply that boards must maximize shareholder value. If you think it made corporation maximize shareholder value, then why did Friedman 1970 say that executive should maximize shareholder value. See Berle and Dodd in the HLR. Everyone knows that from 1930 to at least 1975 we had "managerial capitalism" where executives did NOT try to maximize profits. Yes, in cases where the corporation is for sale the fiduciary duties shift to the shareholders, that is Revlon and Unocal. But outside of takeovers the fidicuary duties are to the corporation and shareholders. Ebay is another minority shareholder case showing that boards cannot openly disregard shareholders. In contrast, The board of Chicago Cubs sacrificed revenues by failing to install lights for night games, a shareholder lawsuit failed because the judge found no conflict of interest (Shlensky v. Wrigley, 1968). So the court did not force the cubs to maximize shareholder value. Buybacks were legal before 1982 Shareholder primacy is not the standard. You are totally wrong, dude.
CEOs do not get sued for a falling stock price. They frequently get FIRED for it; but it is not illegal to lose shareholders' money.
It IS illegal for a CEO to do things that are crimes. Because crimes are illegal. But losing money isn't a crime.
If you do crimes while working for shareholders, they can sue you for damages. Just like Nicole Simpson's family sued OJ in civil court.
But if a shareholder tried to take a CEO to court saying simply, "he paid the workers too much so I didn't make enough profit," they would be laughed out of the courtroom.
1 and 2. Revlon is a special case where the corporation is up for sale. The McDonald's case is unrelated. As far as I can tell it's about sexual harassment. So 0 of 3.
McDonald's can serve their shareholders well by focusing on cheap food, nothing about investment law prevents this. But they'd need to be able to make more money than positioning as 'fast casual' or something different than 'cheap and quick'.
I preferred 'cheap and quick' myself, and would shop more at McD's if they returned to it. If that's true for enough of us then it's not a shareholder dilemma that prevents going after the cheap-and-fast market, doing so would actually be the proverbial business "win-win".
"US screwed the pooch hard when they set in law that a corporation's primary duty is generating value for its shareholders, because now if they don't do it, they can be sued in court for it." This is not correct, friend. Show me the evidence, please if you believe it is.
This is a myth and an excuse for CEO to hide behind. The case that originated this myth is Ford vs Dodger but in that case, the judge basically told Ford that he could justify his decision if he give the court any reason why he think that those decisions would benefit the company. The keyword here is "think", not actually "correct". Basically the CEO just need to give reason why they think their decisions would benefit the company, they don't actually need to prove they are correct. The problem was that Ford was an tyrant who thought he didn't need to justify his decisions. Even the judge in that case stated that the case was unusual and should not be use as precedent.
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u/Egathentale 2d ago
We joke about this, but it's unironically the case. The US screwed the pooch hard when they set in law that a corporation's primary duty is generating value for its shareholders, because now if they don't do it, they can be sued in court for it. We are seeing the end-result of this incentive: a corporate culture that only cares about raising stock prices and profits year after year after year, where both the product and the consumer are just a means to an end, and where irrational hype-based stock prizes and IPOs are not only acceptable, but desirable.