Are We Giving Shareholders Too Much Power?

It’s pretty much a given in modern capitalism that managers’ top priority is maximizing value for shareholders. So when we publish articles about how to create a sustainable, long-term business, we sometimes get pushback from executives of publicly listed companies. They say the goal is admirable, but real-world pressures require them to put shareholder returns first. Anything else is secondary. But what if the assumption underlying that thinking is wrong? What if it’s built on a debatable, perhaps even incorrect, interpretation of the law? These are some of the provocative questions put forth in this month’s lead Spotlight article by Harvard Business School professors Joseph Bower and Lynn Paine: “The Error at the Heart of Corporate Leadership.” The idea of shareholder primacy is relatively recent and is rooted in the agency theory laid out by academic economists in the 1970s in articles in HBR and elsewhere. Simply put, the notion is that shareholders own the corporation and, by virtue of that, have the ultimate authority over its business. Bower and Paine demonstrate the flaws in the theory, particularly its inability to deal with the “accountability vacuum” that arises because shareholders—many of whom are merely short-term investors—have no real responsibility to the companies whose stock they own. The authors argue that the current orthodoxy is an “extreme version of shareholder centricity” that is “confused” as a matter of law and harmful to society. It forces executives to focus excessively on the short term, weakening companies’ long-term prospects and damaging the overall economy. A better approach, they say, would have at its core the health of the company, not the near-term gains of shareholders. Corporations are independent entities endowed by law with the potential for indefinite life. With good leadership, they can serve markets and society over long periods of time. More than 40 years ago, academic writing changed how modern corporations are run. Perhaps Bower and Paine’s article can lead us down a new path.

Are We Giving Shareholders Too Much Power?

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