New York Times Reporters Perpetuate Popular Corporate Governance Myths
See, the road to hell is paved with good intentions/
Can’t you tell the way they have to mention/How they helped you out…
Two recent stories in the New York Times had all the best intentions.
Nelson Schwartz’s December 6 piece, “How Wall Street Bent Steel: Timken Bows to Activist Investors, and Splits in Two” describes the crying shame in Ohio of “activist investors” that demand the breakup of a 112-year old company run by the 47-year old fifth generation Mr. Timken of Canton. Schwartz finds a villain in corporate law for his tear-stained portrayal of the betrayal of a “community-minded version of corporate capitalism that is fading in the United States”.
“As in all publicly traded companies, TimkenSteel’s board and top executives have a fiduciary duty to shareholders to maximize both profits and investor returns.”
Later in the month, Pulitzer Prize winning reporter Gretchen Morgenson opened up her sad story of investors shut out of an active role in running corporations with a seemingly clear-cut, reasonable argument for more shareholder influence:
“Shareholders own the companies they invest in, but they have long been largely shut out of any role in naming the people who are supposed to represent them: corporate directors.”
As the original saying goes, “L’enfer est plein de bonnes volontés et désirs” (hell is full of good wishes and desires). These journalists aim to tell a sympathetic story of corporate greed and indifference but throw in the myth of shareholder primacy and a value maximization mandate to make the result seem inevitable. The shareholder value maximization slogans show up when journalists need a rationale, or a bogeyman, for corporate activities that ignore other stakeholders and legitimate alternative corporate purposes. That’s despite the fact these myths have been decisively debunked over the last twenty years by numerous experts and in various forums.
Professor Lynn Stout of Cornell University School of Law, in her book “The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public,” explains the origins of the shareholder primacy ideology. This ideology — and the latest canard of a legal duty for corporate officers to minimize taxes — lacks any solid foundation in corporate law, corporate economics, or the empirical evidence. Stout summarized the central thesis of her book in a post in 2012 at the Harvard Law School corporate governance forum blog:
Contrary to what many believe, U.S. corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price. The economic case for shareholder-value maximization similarly rests on incorrect factual claims about the structure of corporations, including the mistaken claims that shareholders “own” corporations, that they have the only residual claim on the firm’s profits, and that they are principals who hire and control directors to act as their agents.
A survey by Stout could not find one corporate charter that listed maximizing shareholder value as the company’s business purpose. But New York Times reporters and other journalists don’t have to take Lynn Stout’s word for it. According to Professor Lyman Johnson of the Washington and Lee University School of Law, Stout is not the only one who’s argued against the shareholder value myth. David Millon, also of Washington and Lee, and many others have tried to raise awareness of these mistaken beliefs over the years.
But as Millon and I have argued since the mid-1980s—along with other long-timers like Professors Stout, Greenfield, Bratton, Dallas, O’Connor, Mitchell, and younger scholars like Professors Bruner and Bodie and others—corporate profit or shareholder wealth maximization is not legally mandated under any state law, with a few (ultimately minor) caveats for Delaware.
And now we have the Supreme Court reinforcing this view in its ruling in the Hobby Lobby/Conestoga Wood Specialties cases. According to Johnson many may have focused in this ruling on the issue of corporation “personhood” and its exercise of religious rights. The Hobby Lobby decision emphasized that under state corporate law, for-profit corporations may be formed for “any lawful purpose,” and that there was “no apparent reason” why they could not pursue both financial and religious purposes. The devout owners of a closely-held corporation like Hobby Lobby are “free to adopt an additional, religious corporate purpose”.
The Supreme Court rejected the government’s view that “the purpose of such [for-profit] corporations is simply to make money,” stating that this position “flies in the face of modern corporate law.”
Justice Alito, writing the opinion for the Court:
While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits.
Johnson writes that the proof this pudding provides of the fallacy of the shareholder value ideology may be bittersweet:
[T]hose in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. or eBay: i.e., the U.S. Supreme Court. Time to change the syllabus on corporate purpose… To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note: you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose.
Some journalists, like The New Yorker’s James Surowiecki, try harder to add balance on this issue. However, they’re making a false equivalency when the facts say the myth is false and journalists continue to pay homage to the academic titans who created it and whose protégés continue to push it.
Since the nineteen-seventies, the dominant ideology in corporate America has been that a company’s fundamental purpose is to boost investor returns: as Milton Friedman put it, increased profits are the “only social responsibility of business.” Law professors still debate whether or not this is legally true, but most C.E.O.s feel huge pressure to maximize shareholder value.
The idea that corporations exist to reward their shareholders arose not in a body of law but from the work of ideologically driven economists. In 1970, Milton Friedman wrote that business properly had but one goal: to maximize profits. The same year, Friedman’s University of Chicago colleague [and 2013 economics Nobel laureate] Eugene Fama argued that a corporation’s share price was always the accurate reflection of the enterprise’s worth, an idea that trickled down into the belief that the proper goal of a corporation was to boost its share value — particularly after most CEO salaries and bonuses became linked to that value.
So I asked Professor Lynn Stout why these myths persist, why journalists perpetuate them despite all facts to the contrary:
First, these slogans give journalists an appealingly simple narrative that suggests a clear villain. Second, there may be the secret hope that no expert will try to correct them.
In fact, their stories would be stronger if journalists lamenting corporate greed at least acknowledged that the shareholder value myth is a trick corporate officers and directors use to excuse subordinating the interests of other stakeholders, especially employees and taxpayers. It’s a self-interested move by officers and directors to position a model shareholder strawman to distract from their goals as stock option holders and incentive compensation recipients.
When I asked Nelson Schwartz on Twitter why he persisted in publishing the false fact of a “fiduciary duty to maximize profits and investor returns” he gave me a simplistic answer:
In the real world I live in, journalists don’t take semantic shortcuts. They resist the temptation to sacrifice facts just to make the story easier for readers to understand. Some journalists may be confident only a few people will know the actual law and even fewer will take the time to send the journalist a correction.
They would be wrong again.