Talk is cheap — David F. Ruccio

The same day I wrote that capitalism was coming apart at the seams, indicated by the shocking disparity between the compensation of corporate CEOs and workers, the Business Roundtable published its new statement of purpose of a corporation.* The 180 or so corporate executives who signed the statement declared that all their stakeholders, not just owners of equity shares, were important to their mission.

Many business pundits, such as Andrew Ross Sorkin, greeted the new statement as a sign that the era of shareholder democracy (what he refers to as “shareholder primacy”) had finally come to an end and that a “significant shift” in corporate responsibility to society would be ushered in. Readers, however, had their doubts, most of them echoing JDK’s response to Sorkin’s piece: “Talk is cheap.”

As long as stock price and CEO compensation linked to stock price are the chief criteria, "shareholder value" will be the primary objective of corporations. This is a feature/bug of "free market capitalism" as a mindset. Changing mindsets is not simple. So talk about such change is likely cheap.

Occasional Links & Commentary
Talk is cheap
David F. Ruccio | Professor of Economics, University of Notre Dame

Yves Smith — Why the “Maximizing Shareholder Value” Theory of Corporate Governance is Bogus

Yves debunks the myth of the obligation of corporate management to maximize shareholder value. Legally, "equity is residual" and sits at the bottom of the scale of corporate obligation.

This myth lies at foundation of short-term managerialism aka managing to the quarterly report that is distorting incentives. As Yves points out, it was dreamed up by an economist with no legal expertise and no deep expertise in management science other than theoretical.

It doesn't hold water legally, and management gurus like Peter F. Drucker have denounced it as short sighted, designed to enrich corporate top management based on performance bonuses, equity compensation, and equity prices at the expense of developing long-term strategy.

Naked Capitalism
Why the “Maximizing Shareholder Value” Theory of Corporate Governance is Bogus
Yves Smith