> The whole meme that companies exist to maximize shareholder value is just that: a meme, and a recent one at that. Boeing is the natural outcome of believing it like a zealot.
Admittedly I've only been in the workforce for a couple decades, but isn't this precisely what large, or at a minimum publicly traded, companies operate on?
I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.
Yes and no. If you take shareholder money, you are required to operate in the interests of the shareholders. However, what exactly that means can vary. For example, Amazon is famously "customer obsessed" — not shareholder obsessed — with the idea that focusing on creating customer value creates a better business (which in turn benefits the shareholder).
Meanwhile Costco views employee culture as not only the most important thing, but "the only thing" [1] that creates a strong business, and has a strong track record of growing employees internally: the current CEO started out as a forklift operator at the company, and the previous CEO started as a warehouse manager. This culture of strong employee growth and retention, in Costco's theory, creates a better business and is thus justifiable (and desirable) for shareholders as well.
“Customer obsessed” must be lip service. Is there anything they made that is customer focused compared to their competitors? Seems very focused on margins instead.
Not to mention that like half the Internet runs on AWS, and it's not because the cloud is cheap... It's convenient, and the core services work really well.
There's definitely a lot of leeway in how any one leader will define "best interests," but in the long run I'd argue its always going to end up in the hands of someone chasing the money above all else.
Or, at the very least, you have to ask which shareholders:
> Serving shareholders’ “best interests” is not the same thing as either maximizing profits, or maximizing shareholder value. "Shareholder value," for one thing, is a vague objective: No single “shareholder value” can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators.
The focus on shareholders mostly took hold in the 1970s (coïncidentally when folks like Milton Friedman became more popular, and the 1980s (Reagan, Thatcher)):
I think we're all in agreement here. The comment you're replying to, and mine along the chain, are only making the point that corporate leadership is required to act in the best interest of shareholders but that this can be interpreted more broadly than just profits.
Yeah, this is exactly the point I was making. You do have a fiduciary duty to your shareholders, but you have fairly broad latitude in how that's interpreted.
I'm too old to think market forces can solve everything, but I don't understand why shareholders are ok with such things. I don't want my Boeing stock to go up for one quarter or one year so I can sell it and repeat with the next stupid company, I want my great grandchild to get good income on a stock I purchase today. I can see why leadership gets shortsighted, but not shareholders in general. If we take the scotus' view of a corporation as a person, these corporate persons need to figure out how to incentivise their cells not to go cancerous and shorten their lives.
Someone might be in the cusp of retirement and looking to cash in.
Someone might not have any children so passing on an inheritance could be moot.
At least in this specific company’s case though, if I were a Boeing shareholder, I’d want them to make good planes because I plain and simple fly a lot, and don’t want to end up a casualty.
> Someone might be in the cusp of retirement and looking to cash in.
If you're on the cusp of retirement (e.g. 65) you probably have another couple of decades to live, so you want companies to keep running things 'properly' for the long(ish)-term.
It's not like you retire and you convert your portfolio into a pile of cash: you still need some kind of returns if you want to not run out of money:
I actually can understand why some shareholders see it this way. The stock market today is very much a Ponzi scheme in all but the very specific legal sense. There are more shares owned than actually offered by a company, and investors are taught to treat shares more as a commodity than as an investment of a company, value-based investment, or really anything beyond a gamble that prices go up.
> Legally they're even required to do what is best for shareholders
Been googling and it looks like that is not true.
At the very least, it should be obvious that "best for shareholders" can mean almost anything. Boeing's latest problems, Volkswagen's lying on emissions ... long term these have been decidedly bad for shareholders but probably some bean-counter though they would maximize profits at the time.
"Fiduciary duty" is the term you'll be looking for. Its a legal requirement for the fiduciary (an executive in this case) to act in the best interest of the beneficiary (the shareholder in this case).
If I'm not mistaken, case law covers the basics like acting in good faith, trust, candor, etc but one of the biggest requirements is acting in the best financial interest of shareholders.
>The long-running debate over whether the purpose of the corporation is to maximize short-term profits for shareholders or, alternatively, to operate in the interest of all stakeholders to promote long-term value, dates back to the 1932 law review exchange between Merrick Dodd (here) and Adolf Berle (here). Milton Friedman’s 1970 essay, The Social Responsibility Of Business Is to Increase Its Profits, epitomizes the former view, known as shareholder primacy, which posits that the sole role of the corporation is to maximize shareholder profits. In Friedman’s words, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” We have long advocated for a broader view of corporate purpose than Friedman’s and the shareholder primacy theory: first, as described in 1979 in Takeover Bids in the Target’s Boardroom, to empower boards to consider the interests of all stakeholders, including the communities in which corporations operate, in repudiating takeover bids by opportunistic raiders; and later, to encourage directors to resist short-term pressures and allow boards to exercise their business judgment to evaluate the variety of stakeholder interests that are essential to promoting sustainable success and growth in long-term corporate value.
Yeah, it's not hard to find knowledgeable commentary to the effect that the duty of directors to act in the interests of the shareholders does not mean a simple-minded duty to maximize profits. The interests of shareholders are complicated, and boards can make nuanced decisions about short-term vs long-term profits, risks, reputation, and such things that are difficult to capture using financial reports.
"There is a common belief that corporate directors have a legal duty to maximize corporate profits and 'shareholder value' — even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. To quote the U.S. Supreme Court opinion in the recent Hobby Lobby case: 'Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.'"
"Serving shareholders’ 'best interests' is not the same thing as either maximizing profits, or maximizing shareholder value. 'Shareholder value,' for one thing, is a vague objective: No single 'shareholder value' can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators."
"More to the point, corporate directors are protected from most interference when it comes to running their business by a doctrine known as the business judgment rule. It says, in brief, that so long as a board of directors is not tainted by personal conflicts of interest and makes a reasonable effort to stay informed, courts will not second-guess the board’s decisions about what is best for the company — even when those decisions predictably reduce profits or share price."
The debate may be over whether short-term or long-term goals are a higher priority, but both sides are based on the understanding that company leadership has a fiduciary duty to shareholders.
The nuance is that fiduciary duty does not mean sacrificing your future as a business for short term profits. This Milton Friedman definition needs to stop. What Milton Friedman was advocating was the law of the jungle where corporations have the fiduciary duty to cheat lie and steal from their customers employees and vendors. By this definition the Sackler’s Purdue Pharma should be lauded for foisting the opioid epidemic on the American public.
> Serving shareholders’ “best interests” is not the same thing as either maximizing profits, or maximizing shareholder value. "Shareholder value," for one thing, is a vague objective: No single “shareholder value” can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators.
I think we're in agreement here. I wasn't trying to say that corporate leadership is bound to a specific interpretation of what "best interests" means.
That was actually my point in the GP comment, though I may not have phrased it clearly enough. The article and quotes linked earlier are just calling out that there's a debate as to how "best interests" is interpreted. Some may see that and consider short term profits, others may use it to justify focusing on long term profits and company health.
The debate is there for sure and the law is vague enough to allow many interpretations, but all interpretations still have to be based on the idea that leadership is doing what they believe is in the shareholders' best interests in one way or another.
>> Admittedly I've only been in the workforce for a couple decades, but isn't this precisely what large, or at a minimum publicly traded, companies operate on?
>> I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.
Yes, in the long term. Not in the short term. The problem becomes when corporate Managers go from being long term greedy to short term greedy.
I'll share a, perhaps, controversial opinion. Google and Facebook and OpenAI share and give away enormous excess value. Their give-aways help grow these companies in the long term and the strategy has been super-successful. Google and Meta and OpenAI are examples of good long-term shareholder value creation.
- Example look at the vast array of things Google gives away freely. Colab. Open source projects. Chrome. Transformer research. All of it eventually benefits Google but plenty is excess value given away and creates much downstream value.
- Look at the vast amount of software and AI research Meta gives away. My entire startup was based on their software. If I had relied on Matlab, I would have been fleeced of all my operating cash.
- Example, look at OpenAI giving away ChatGPT 3.5 for free. Yes, it is an act of long-term greed, but in the short term they are giving away huge value. Imagine how Oracle would have done this -- you would have started the login screen with a credit card entry.
The problem happens when you get short-term finalcial-engineering focused managers running a company. They try to juice remaining value, load up with debt, press on customers, squeeze workers, and eventually kill the company.
I'd argue that eventually the short-term focused people will always take over and ruin the company. When times get tough long-term goals are hard to stick to. Investors, ownership, etc get spooked and look for a way to try to solve problems now, losing sight of why the company was moving on a path that only pays off in the long term.
In the case of tech companies, I fully expect to see them shift heavily towards the short-term whenever the tides turn. VCs did it last year, as soon as money dried up and economic concerns rose VCs shifted from investing with a goal of say 1 in 20 companies succeeding to only investing money in companies that appeared to be a sure bet.
It is, like many an intellectual technological innovation, currently the Churchillian "worst, except for all the other options."
Once a company is traded publicly, the market, over a long time horizon [1], usually gives a good value estimate to the company. In the short-run you have to contend with the different ways to juke the price, such as share buybacks just before the CEO is to get a bonus etc. Heck, even in Boeing's case, the market corrected for the stock price (especially if you consider inflation) once planes started falling out of the sky, and the company started to change. Now only doors are falling out of the sky! It's still a price we shouldn't be willing to pay for a market correction - and that's where efficient regulation comes into play, itself a very fraught tool to get right. All in all, we suck at forecasting, understanding, and learning from outlier events. Maybe it's an inherent problem.
[1] with the usual caveat that the market can remain irrational longer than the plane can remain airborne
Market valuations for tech companies have been irrational for years. At least in view, there are enough examples in the last couple decades of companies being consistently valued at such high multiples of profit and revenue that it can't really be waved off as short term market corrections.
> Market valuations for tech companies have been irrational for years
No they weren't, unless by "years" you men 2-3. Google, Facebook etc were expected to grow and they did grow to match those valuations, they weren't overvalued. When you know a market will grow then you price that in.
Some companies don't grow as expected, but most do, the market is usually pretty good at estimating.
Admittedly I've only been in the workforce for a couple decades, but isn't this precisely what large, or at a minimum publicly traded, companies operate on?
I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.