"No, the shareholders don’t own the corporation."
The excellent Justin Fox makes the excellent point that I have made many times: that nobody in the ecosystem of publicly traded companies — including shareholders – is anything like a business owner.
And no, the shareholders don’t own the corporation — they own securities that give them a not very well-defined stake in its earnings, and the freedom to flee with no responsibility for the corporation’s liabilities if things go pear-shaped.
Justin’s post — and the discussion with Felix Salmon — is well worth reading. I also especially liked the paper by Lynn Stout that Justin links to: “Bad and Not-So-Bad Arguments For Shareholder Primacy.”
Restating Justin somewhat, the key difference affecting incentives, from my perspective: The difficulty of exit for real business owners, and the time required to achieve it, is huge. Having sold quite a few businesses myself, I can assure you that it requires months or years of hard work. There’s real risk to the business associated with the process (revealing company secrets to other players, freaking out employees, suppliers, and customers). And the expected results, when you start the process, are deucedly uncertain.
By contrast, shareholders can exit with a few mouse clicks.
Because they can’t just walk away with their “share” of the business, instantly and effortlessly converted into cash, business owners have every incentive to keep all the stakeholders in the business — suppliers, creditors, employees, managers, customers — happy and working together. In short, maintaining and building a “going [and growing] concern.” For shareholders, those incentives are diluted to the point of nonexistence.
The notion that the ecosystem of modern business bears any relationship to Adam Smith’s village of butchers and bakers is profoundly deluded.
Cross-posted at Asymptosis.
as I like to say, the idea that owners of stock are owners of the business is like believing that the chips you paid for at the roulette table make you an owner of the casino.
but people love their semantic confusions. it has enabled them to maintain for years that if the casino pays taxes on its profits, it is double taxation for the government to charge you taxes on your winnings.
I generally put it this way:
If you own a slave who steals Farmer John’s pig, you are liable. If you own a dog that breaks your neighbor’s window, you are liable. Ownership brings along with it the baggage of liability. So no liability for corporations’ actions means no ownership.
Corporations are people, my friend, … and you cannot own people…at least not anymore.
Another query is why returns to shareholders shouldn’t be seen as a cost of capital to be minimised rather than, as the current rhetoric has it (e.g. Milton Friedman) an objective to be maxised. The surplus could go to any stakeholder – customers, workers, shareholders and managent. Why only shareholders?
i think the truth of that is that some shareholders are not equal to others.
when you own lots and lots and lots of shares, you might effectively own the company, and then of course you’d understand why the business of a corp is to maximize earnings for the shareholders.
on the other hand if you owned a voting share in, say, the government, you might understand the danger in the power of the corporation and insist upon charters that returned value to the citizens.
Actually we are beginning to see this with the Fideleties and Vanguards, pushing back against the investment banks for paying their workers so much. If you run a fortune 500 fund you don’t have the option of bailing out on a stock unless the S&P committee cuts the stock out. Index funds may hold up to 10% of the stock in companies, Vanguard alone tends to have 4% of the value of companies on the index between its various funds. With the mutual funds having to publish their votes on shareholder issues, they tend to look more critically at issues. (I think it was the institutions that defeated the pay vote for Pandit at Citi, leading to him leaving)
Adam Smith was not at all keen on modern public corporations:
The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own..Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
The Wealth of Nations, Book V, Part 3, Article 1