"Shareholder capitalism is the doctrine that companies exist solely to make money for their shareholders. It is frequently contrasted with stakeholder capitalism, which holds that companies exist for the benefit of their customers, workers and communities, not just for ever-fluctuating number of mostly remote and unengaged passive investors who just happen to own stock in them, often without even being aware that they do.
"The rise of shareholder capitalism in the U.S. is often dated to an influential article in the Journal of Financial Economics in 1976, titled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” by Michael C. Jensen and William H. Meckling. They argued that shareholders should demand higher returns from complacent corporate managers. The idea of shareholder value was publicized by a 1981 speech in New York by Jack Welch, who had just taken over General Electric, and by Aflred Rappaport’s 1986 book “Creating Shareholder Value.”
"The shareholder value movement sought to persuade corporate managers to ignore the interests of all stakeholders like workers, customers and the home country, other than shareholders. Granting CEOs stock options, in addition to salaries, was supposed to align their interests with those of the shareholders.
"The theory had an obvious problem: Who are the shareholders and what are their interests? Most publicly traded companies have shares that are bought and sold constantly on behalf of millions of passive investors by mutual funds and other intermediates. Some shareholders invest in a company for the long term; many others allow their shares to be bought and sold quickly by computer software programs.
"Unable to identify what particular shareholders want, CEOs with the encouragement of Wall Street have treated short-term earnings as a reliable proxy for shareholder value. (...)
"Shareholder value capitalism in the U.S. since the 1980s has even failed in its primary purpose — maximizing the growth in shareholder value. As Roger Martin, dean of the Rotman Business School at the University of Toronto points out in a recent Harvard Business Review article, between 1933 and 1976 shareholders of American companies earned higher returns — 7.6 percent — than they have done in the age of shareholder value from 1977 to 2008 — 5.9 percent a year.
"For his part, Jack Welch has renounced the idea with which he was long associated. In a March 2009 interview with the Financial Times, the former head of GE said: “Strictly speaking, shareholder value is the dumbest idea in the world.”
"In the aftermath of the failed 40-year experiment in shareholder capitalism, Americans need not look solely to other democratic nations for models of successful stakeholder capitalism. The U.S. economy between the New Deal and the 1970s was a version of stakeholder capitalism, in which the gains from superior growth were shared with workers, CEOs were moderately paid and the rich engrossed far less of the economy. In reconnecting with America’s native tradition of stakeholder capitalism, American companies can learn from the example of Johnson & Johnson, whose credo was written by Robert Wood Johnson in 1943:
"We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services.We are responsible to our employees, the men and women who work with us throughout the world.We are responsible to the countries in which we live and work and to the world community as wellWe must be good citizens.and bear our fair share of taxes.We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.Our final responsibility is to our shareholders.When we operate according to these principles, the shareholders should realize a fair return."
The failure of shareholder capitalism, Salon, Mar 29, 2011