David G. Maximizing Shareholder Value | The Golden Calf That Has Trampled Everything
Introduction
In the United States, the notion of maximizing shareholder value (“MSV”) is not merely a concept, it is an entrenched ideology. MSV has become nothing less than a revered religion. CEOs and shareholders alike worship at its altar, making it the guiding force behind every corporate choice. Like high priests, CEOs make sacrifices to the market gods, even at the expense of employees, customers, the environment, and every other stakeholder that actually matters.
MSV has evolved into a movement that dominates corporate governance and has profoundly reshaped the landscape of everything! The pervasive influence of MSV in the United States is as fundamental as the air we breathe. Omnipresent and omnipotent, MSV is unquestionably deemed essential for our very economic well-being.
I contend however, and the data supports, that when we ask the “five whys of root cause analysis”, MSV appears as the root cause of many or even most of our most pressing societal issues. MSV ripple effects are more aptly thought of as tsunamis. When one delves into the core of our most urgent concerns, whichever they might be, one discovers that greed, fear, corruption, and the erosion of our real values – the things in life that actually matter – are all fueled and rationalized by the tyranny of maximizing shareholder value. (Please read: Here Lies David Gould. He helped maximize shareholder value. – The Root Cause (2b.org)
MSV has inflicted severe damage on our society. Its tentacles have played roles in declining wages, escalating income inequality, job losses, a deterioration in product and service quality, environmental degradation, violence, crime, world unrest, declining education, obesity, etc. The list goes on and on…. Most alarmingly to me however, is the erosion of our democracy and democratic principles. I have long contended that unregulated, MSV capitalism and democracy cannot coexist.
The Emergence of Shareholder Capitalism
It is hugely important to note that capitalism and MSV are distinct entities.
Again, It is vital to underscore this point: capitalism and MSV are not synonymous. The inception of capitalism is commonly attributed to Adam Smith, who penned his seminal work, “An Inquiry into the Nature and Causes of the Wealth of Nations,” in 1776. In this influential treatise, Smith expounded on the significance of the division of labor, asserting that the production of tradable goods through labor outweighed the importance of hoarding gold reserves. He introduced the concept of the “invisible hand,” suggesting that individuals pursuing their own self-interests could, paradoxically, contribute to the well-being of society as a whole. He contended that free markets fostered growth and advocated for limited government intervention.
It’s worth noting that Smith’s work, “The Wealth of Nations,” was not titled “The Wealth of Corporations.” Smith argued that the primary purpose of a corporation should be to produce goods and services that catered to consumer demand. He also advocated for corporations to be managed in ways that benefited all stakeholders, including employees, customers, and suppliers. Indeed, Smith harbored deep reservations about the emergence of “joint-stock companies”. He differentiated between those who derived wealth from rent (natural resources) and wages (work) versus those who gained it from profit (business endeavors). He held a grim view of corporations as:
- Inclined to retain profits rather than invest in innovation. Smith’s viewed shareholder-controlled corporations as vehicles for profit-taking at the expense of the greater good.
- Inclined to maintain monopolies by any means, even influencing legislation. He believed that businesses naturally tended to create monopolies or semi-monopolistic conditions to maximize profits and minimize risk. Further, Smith correctly believed monopolies diminished overall prosperity.
Smith’s perspective on shareholder dominated corporations, as distinct from partnership-based corporations with continuous and closely interlinked owner-manager relationships, was unequivocally negative. Not surprisingly, these aspects of Adam Smith’s beliefs rarely surface in contemporary debates about the merits and drawbacks of market capitalism. While Smith’s notion of the “invisible hand” enjoys near-divine status, his insights on the behaviors and consequences of joint-stock corporations remain overlooked. Go figure…
Friends, believe it or not, there was a time when many industrial titans used to share Smith’s actual sentiments.
- Henry Ford, founder of Ford Motor Company, questioned the supremacy of shareholders in comparison to other contributors to corporate wealth. Ford famously faced a lawsuit by two shareholders for suspending dividends in favor of plant expansion. When asked about the purpose of his corporation, he replied, “To do as much good as we can, everywhere, for everybody concerned … and incidentally to make money.” (Ford lost the case in a Michigan court. Sigh…).
- Owen D. Young, chairman of General Electric in the 1920s, pondered, “To whom do I owe my obligations?” His answer: “The company owes ‘a fair rate of return to shareholders’ while also serving the interests of employees, customers, and the public.”
- Katsuaki Watanabe, CEO of Toyota, the world’s most valuable and profitable carmaker at the time, expressed his vision in a July 2005 speech: “Sales volume and market share are not important… What’s more important is improving the quality of our cars and service. My dream is to build a car that cleans the air as you drive it and causes no accidents.”
- Tata Industries, one of India’s largest corporations, continues the Gandhian-influenced leadership philosophy of its founder, J.R.D. Tata, aligning the corporation with a larger sense of community and employee leadership. He once remarked, “To be a leader, you have to lead human beings with affection.”
Ford’s, Young’s, Watanabe’s, and Tata’s observations were early precursors to what we now identify as Corporate Social Responsibility (“CSR”). CSR posits the corporate mission as a long-term wealth creation vehicle that benefits a wide array of stakeholders, of which shareholders are just one. CSR, and the recognition that other rates of return beyond shareholder return actually matter, must be our future, or we will all perish in a bubbling, over-heating cauldron of greed and fear.
The Ascent of Shareholder Capitalism
The emergence of shareholder capitalism didn’t spring forth overnight, my dear readers. No, it’s a tale that finds its roots in the tumultuous 1970s and 1980s, a period marked by disgruntlement with the reigning corporate order. Profits were languishing, stock markets were yawns in pinstripes, and the United States was locked in the iron grip of stagflation, a rare economic conflation of concurrent inflation and recession. It was a moment when the populace started to wonder if corporate managers were putting their interests before the greater good of their companies and shareholders.
Amid all this unrest, a seismic movement began to stir, a chorus in corporate ears – the gospel of maximizing shareholder value. And who were the heralds of this newfound economic ideology? None other than two influential figures who have achieved almost mythical status within conservative circles: Milton Friedman and Lewis Powell. Friedman and Powell are the architects of the conservative renaissance during the ’70s, ‘80s, and beyond.
Milton Friedman was a self-identified Republican and libertarian economist who provided the academic and intellectual foundation for monetarism, Monetarism is an economic theory that posits that macroeconomic effects are best managed and maintained by zealously controlling the “supply of money” through the Federal Reserve System. On the heels of prolonged stagflation of the 1970s, Milton Friedman argued that excessive expansion of the money supply is inherently inflationary and that monetary authorities should focus solely on maintaining price stability i.e. combatting inflation. Friedman solidified his conservative bona-fides as:
- The economic advisor and speech writer for Barry Goldwater – the failed 1964 presidential candidate who once suggested that he wanted to ‘lob a nuke in the Kremlin’s bathroom and make sure it hits.”
- An advisor to California governor Ronald Reagan who allegedly never read a book, and
- Was active in Reagan’s presidential campaigns. He actively penned speeches for Reagan during his 1980 presidential run. And then,
- Served as a member of President Reagan’s Economic Policy Advisory Board which in 1981. was influential in firing 11,000 striking PATCO air traffic controllers in one day!
Reagan awarded Friedman the Presidential Medal of Freedom and the National Medal of Science. Sigh…
In 1962, Friedman, the legendary luminary, gave birth to his magnum opus, “Capitalism and Freedom.” He argued, with passion, that “economic freedom is the only guarantor of political liberty”. The obvious questions that arise in my mind are:
- Just what is “economic freedom”? Sure, economic freedom sounds great. I mean who wouldn’t want economic freedom? But what does economic freedom mean exactly? and,
- Whose economic freedom are we talking about? Friedman infamously acknowledged that his take on capitalism would of necessity, always result in significant income inequality. Now, when CEOs earn on average nearly 300 times the average worker earnings, was Friedman talking about the average worker’s economic freedom or the CEO’s?
In the crisp autumn of 1970, when the air crackled with the seeming triumph of progressive thinking of the 1960s, Friedman penned his infamous manifesto, published in the venerable New York Times Magazine. His missive bore the name “A Friedman Doctrine – The Social Responsibility Of Business Is to Increase Its Profits.” Friedman’s treatise celebrated a brazen, unapologetic philosophy, succinctly summarized in the article’s title: the social responsibility of business is to increase its profits. Period. The mass indoctrination of MSV had begun in earnest. Thank you, New York Times. So it goes…
In this sociopathic sermon, Friedman literally pilloried the “noble executives” who dared to embrace corporate social responsibilities. In his eyes, such endeavors were mere masks for anti-capitalism, a communist wolf in socialist sheep’s clothing. I can hear the tolls of McCarthyism, and it amazes me to this day, how powerfully effective the ‘communism’ or ‘socialism’ labels remain in riling up the masses, no matter how tired, inane, or ridiculous.
Regardless, Friedman’s thinking gave rise to the first notions of a “socio-political-economic system”, an idea that all three branches are intertwined as part of one big tree. On this one thing, Friedman and I wholeheartedly agree: sociological, economical, and political issues – and their resolutions – are hugely intertwined. Where I profoundly and ardently disagree is that of these three, the least important by far is satiating just one constituency’s (shareholders) lower brain impulses of greed and fear. Of all societal returns, shareholder returns are, by far, least important.
In my vision of a better world, the ideal, the goal, the vision statement if you will, is sociological: life, liberty, and the pursuit of happiness. The tool to achieve this end? A closely monitored capitalistic free market system that benefits a far broader swath of humanity at the expense of the outermost extremes of wealth and poverty. Finally, a monitoring and enforcement ecosystem comprised of government of the people, by the people and for the people which by the way, requires the removal of the corrupting influence of money on our elections! We can have a real democracy or Citizens United-sanctioned corporatocracy. We cannot have both.
The Math of MSV
Remember this simple equation people:
This simple equation literally, mathematically means that all other stakeholder returns are, by definition, diametrically opposed to maximizing shareholder profits (and Friedman’s line of thinking)!
- Want to raise employee wages so that can enjoy a ‘reasonable, dignified quality of life”? You can’t because that will come at the expense of shareholder profits.
- Want to donate to a community in need, the ones from which you extract profits? You can’t. Such expenditure minimizes shareholder profits.
- You want to invest in sustainability? Nope. That means lower shareholder profits.
- Great healthcare for your employees? Nope. By the way, the health care industrial complex bows to the gods of MSV too… which is why American health care is both the crappiest and most expensive system in the world. Argh…
The list goes on, and on, and on my friends. It’s a dystopian madness of greed and fear.
Not surprisingly, a cadre of wealthy CEOs and business titans rallied behind Friedman’s standard. Many managers of the day were fed up with the ceaseless critiques of “the liberal elites”. They saw in his words a defiant challenge, a clarion call to arms. And thus began the transformation that would reverberate through corporate boardrooms and American Main Streets alike.
The planks of the Republican platform: Friedman's key tenets
Friedman had no conception of any other stakeholder in major enterprise other than shareholders. He valued not any semblance of employee returns, customer returns, community and societal returns, environmental returns, etc. Between is his two opus works, Capitalism and Freedom and “A Friedman Doctrine – The Social Responsibility of Business Is to Increase its Profits”, Friedman espoused several doctrinal thoughts all of which became key planks in the current GOP platform (to the extent one exists at all):
- The Interdependence of economic and political freedom. Because economic and political freedom were in fact intertwined, a small, decentralized government was paramount. In other words, government of the people, by the people, and for the people was a bad thing.
- The belief that increasing government spending does not spur economic growth. This belief ran counter to the successfully policies of John Meynard Keynes and Franklin Roosevelt in defeating the scourge of depression.
- Advocacy for a restricted government role in monetary policy.
- Opposition to free college education after all college grads in California could never help neighborhoods in Mississippi.
- A belief in basic K-12 education, funded through vouchers, so parents would have ‘choice’.
- A contra Adam Smith belief – that government was actually the cause of unnecessary monopolies.
- Acceptance of income inequality as a necessary aspect of society.
Say hello to Lewis Powell
At 1:15PM on July 7, 1865, Lewis T. Powell was hanged, along with three other southern confederates who conspired to assassinate Abraham Lincoln. Lewis T. Powell is not the focus of this blog post. We are focused on the exploits of one Lewis F. Powell, a Supreme Court justice, lawyer, and influencer who achieved great notoriety during the 1960s, 70s, and 80s. Our Lewis Powell is best known for his now infamous “Powell Memorandum”. I find it oddly ironic that our Lewis Powell, another southerner, shared a namesake with a man who was executed for his role in plotting the assassination of Abraham Lincoln. I wonder which Powell damaged America more. Sign…
If Friedman provided the intellectual foundation for the neo-conservative movement, it was Lewis Powell who provided the firepower: Powell was the character who unleashed vast corporate treasuries to “make America safe for large enterprise”. Lewis Powell was an ardent conservative, an attorney who hailed from the heart of Virginia, and would be hard to hyperbolically exaggerate Powell’s conservative bona fides.
- He loathed the Supreme Court’s decision in Brown v Board of Education. He chaired Virgnia’s Board of Education in 1968 and 1969. Lucky for them…
- He loathed Ralph Nader. Nader’s efforts to force auto manufacturers to actually care about safety infuriated Powell. In accordance with Friedman’s key tenets,, Powell’s response makes complete sense. It makes even more sense when you learn that,
- He was Board member for Phillip Morris! Yes, that Phillip Morris, the world’s largest peddler of cigarette poison. Clearly, if Nader succeeded in forcing auto manufacturers to actually care about the safety of their products, then Phillip Morris would have been even deeper soot. And so…,
- Richard Nixon appointed Lewis Powell to the Supreme Court in 1971. While on the Court, in an ominous bit of foreshadowing, Powell penned the Court’s majority opinion First National Bank of Boston v Bellotti, a 1978 ruling which overturned a Massachusetts law that forbade corporate contributions to referendum campaigns not directly related to their business. This was the very first case that defined the free speech rights of corporations for the very first time.
Powell was, of course, deeply disturbed by the activism, anti-corporate fervor, and civil rights movements that swept through the tumultuous 1960s. Sharing his concerns was the biggest cabal of corporate conspirators, the U.S. Chamber of Commerce. On the heels of the 1960s, the Chamber harbored fears of an inhospitable climate for “major American enterprise”. In response, they retained Powell to dissect the landscape and chart a course of action. The result? Powell’s fabled “Powell Memorandum,” a document that he presented to the Chamber on August 23, 1971. His memorandum ultimately became the actual blueprint for the conservative movement that ultimately took shape during the Regan administrations.
Within its pages, Powell unveiled a master plan, a blueprint for countering a perceived left-wing insurgency. He proposed a concerted campaign to infiltrate and exert influence over academia, media, politics, and the legal apparatus. His clarion call? The economic right needed to unchain corporate coffers on an unprecedented magnitude, and to use the booty contained therein, in order to advance their MSV agendas and make America great again. Corporations, keen on safeguarding their interests from the encroachments of liberal policies, were encouraged to open their treasuries to fund think tanks, scholars, and media voices sympathetic to the tenets of right-wing economic ideology. The fact that since the early 1900s, federal law prohibited the use of corporate funds to influence federal elections mattered not. After all, laws are made to be broken. And, as a member of the Supreme Court in 1978, Powell did just that when he penned the majority opinion in First National Bank of Boston v. Bellotti that broke these very laws.
My dear readers, do you notice the obvious hypocrisy here: Friedman argued the only social responsibility of corporations was to increase profits, but Powell said that corporations must unleash the power of their treasuries so as to influence everything and everyone about conservative values. How does expending corporate treasury on influencing societal, political and electoral outcomes not equate to investing in a (perverse) social responsibility? Things that make you hmmm? I guess this was the one expense Friedman countenanced. It may well be the last long term investment decision ever made that was sanctioned by the MSV gestapo. Still, this juncture marked a pivotal moment for the political right, inaugurating an era of well-funded lobbying, electioneering, campaign expenditures that would go on to dictate the course of American politics ever since.
The Tyranny of Maximizing Shareholder Value - Part 1 Conclusion
Taking a deep dive into a comprehensive deconstruction of Friedman’s and Powell’s convictions lie beyond the bounds of this current discourse. Just know that Friedman and Powell both provided the foundation and backbone of the modern conservative movement. And one thing is abundantly clear: their lines of reasoning have wreaked havoc on everything. The repercussions of their thoughts and actions cannot be exaggerated. Friedman and Powell each etched indelible skid marks on the canvas of the new right and deep scars on American society. With a long history of judicial activism that first resulted in the defining of corporations as persons, and then with First National Bank of Boston vs Belloti, Citizens United, and then McCutcheon vs The FEC, the conservative right, through the “Supreme Court” legalized the unleashing of corporate coffers that in turn, has corrupted our democracy thus assuring the ascension of MSV to the detriment of everything else we care about. The singular acknowledged duty of a corporation became the maximization of profits for its shareholders and they were free to use all their resources and monopolistic tendencies to buy our votes and governments. This perspective found fertile ground in shareholders, of course. And once unleashed, these mega corporate resources and perspectives corrupted and destroyed our media and our government ‘of the people’. No longer does the maxim “One person. One vote” hold sway. These seismic shifts within the conservative movement liberated the Republican party from democracy. They no longer needed a majority of the popular vote. They need only to rely on corporate coffers alongside mass media messaging to the rubes, and the electoral college, to corral just enough minority votes to render our government neutered, thus preventing all progress and change.
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