Who owns a corporation?
According to elementary students of economics and Wall Street financiers alike, the answer to this question is as simple as it is intuitive: the shareholders. The standard narrative goes like this: a share is a “piece of a company.” Accordingly, the holders of those shares are the company’s collective owners. Shareholder ownership explains why an army of retail investors coordinating trades on Reddit could claim they “owned a piece” of the struggling video game retailer GameStop and why Warren Buffet is as certain he “owns” companies as varied as GEICO and Dairy Queen as less wealthy Americans are certain they own the gadgets in their kitchen.
More importantly, the idea of shareholder ownership is the foundation of another idea, shareholder primacy, or the notion that corporations should please shareholders at all costs. Shareholder primacy is the justification that very large institutional shareholders–particularly hedge funds and investment banks–cite when they demand companies take measures to boost their share price, even if it means screwing employees, customers, or the long-term viability of the company itself. After all, if shareholders own a corporation, why shouldn’t they expect it to push its share price to the highest possible value, not in ten or twenty years, but this quarter, today, or, preferably, now?
But there’s a big problem with this narrative. It has no basis in fact.
Neither shareholder ownership nor shareholder primacy have any basis in American law. In fact, the only basis for either notion is the collective and repeated insistence by America’s business executives and scholars, management consultants, financiers, and politicians—a group that has developed a common interest in keeping both of these fallacies alive through years of share-based compensation, campaign financing, and regulatory capture.
The late legal scholar Lynn Stout devoted much of her career dispelling the notion of shareholder ownership, and her point, repeated in her 2012 book, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public and a series of papers and lectures, is worth consideration. As Stout explained, shareholders’ rights have been clearly defined in more than 200 years of corporate law, and the right of ownership is not, and never was, one of them.
In a sense, she said, the relationship between shareholders and companies is like the relationship between companies and their employees and creditors: their rights and obligations are spelled out in contracts. For a shareholder, these rights usually include a cut of the company’s profits, an invitation to an occasional meeting, and a say in who gets to manage the enterprise. Beyond that agreement, shareholders do not have any special rights vis–a–vis the company.
So what about shareholder primacy, or the idea that appeasing shareholders should be a corporation’s leading priority? That idea is also legally baseless, Stout tells us, and not just because it’s premised on shareholder ownership. When shareholder primacy enthusiasts need ammunition, they often invoke a line from a 1919 Michigan Supreme Court ruling that seems to make exactly their point: “a business corporation is organized and carried on primarily for the profit of the stockholders.”
The line is an Obiter Dicta, or a legal term meaning a side note in a judgment, from the case Dodge vs. Ford Motor Company. In that case, two minority shareholders–brothers John Francis and Horace Elgin Dodge–sued Ford Motor Company for a dividend, and the Court ruled they were entitled to one, adding the line about a corporation’s purpose to persuade future readers of the wisdom of their decision.1 But as Stout points out, a comment made in passing—even in a judicial ruling—is not precedent, and a century-old case which has been rarely cited since is hardly a solid legal foundation for anything.2
Like any myth, shareholder primacy has thrived because its proponents claim it represents an eternal truth. For as long as we’ve had corporations, they tell us, shareholders have owned them.
But corporations were once considered a part of society, not the property of its largest investors.
“Up until the late 1970s and early 1980s, people had a very different idea of what corporations were and what they were supposed to do,” Stout explained in a 2018 lecture. “Corporations were viewed as great social and economic institutions that were supposed to serve many different constituencies, including not only their shareholders but also their customers, their employees, their creditors, and their local communities. Maybe even society as a whole.”
The shift to a new way of thinking began in the popular press. In 1970, famed University of Chicago economist Milton Friedman, a popularizer of the emergent neoliberal doctrine, published a 3,000-word essay for The New York Times Magazine on the “social responsibility of corporations.”
Friedman defined that responsibility as maximizing generating wealth. But to bolster his thesis, he described an entirely new reading of the power structures upholding a corporate enterprise. “In a free-enterprise, private property system,” he wrote, “a corporate executive is an employee of the owners of the business.” Accordingly, the sole, overriding responsibility of that executive was to run the company as its “owners” wanted, which typically meant using it “to make as much money as possible.” (An executive who ran the company with any other purpose in mind–by hiring people because they needed a job and not because they were the most qualified for a given position, in Friedman’s example—was almost certainly misusing the “owners’” money.)
And since they elected the corporation’s management and provided (some) of the capital to launch the business and keep it running, Friedman explained, these “owners” were the shareholders.
In his essay, Friedman only implied his idea of shareholder ownership.3 It was as if the notion that shareholders owned corporations was a truth so fundamental it barely needed to be said at all. In fact, shareholder ownership was a radical new idea. But he posed it as the common sense of economists, simplified and made compelling for readers of The New York Times. Shareholder primacy, in Friedman’s telling, was only a logical consequence of that well-established truth.
Whether or not he sincerely believed what he said about corporations, it’s important to recognize that Friedman wasn’t just an economist. He was also one of the leading political philosophers of his day. That we remember him as the former and not the latter is due to another neoliberal deception that has gone mainstream: the idea that economics is a science—a study of natural phenomena—and not a contest of values. By bringing shareholder primacy into the world, Friedman wasn’t just describing his peculiar understanding of corporate power dynamics. He was advancing a political agenda—an agenda which included moving the center of American business from the companies themselves, where executive leaders might answer to a number of different constituencies, to Wall Street, where money was the only master.
Friedman’s idea reduced the complex, sometimes competing interests of a business to one extraordinarily simple purpose: maximizing shareholder value. A variety of influential people with stakes in the business world quickly got to work turning it into a doctrine of its own.
At the university level, business school professors and economists could now publish reams of papers matching any number of different management tactics to share price. An exploding industry of management consultants, staffed with fresh business school grads, went from one office park to the next to preach the gospel. Whether its business was forging steel, selling toys, insuring cars, or shipping boxes, every corporation in America needed to hear the Good News: maximizing the share price—whether by cutting benefits, shirking the research department, replacing union employees with contractors, or just shrinking the labor force in its entirety and telling whoever was left to work harder—was a company’s only legitimate pursuit.
Business journalists were equally enamored with the new doctrine. By weighing everything a company did against its share price, they could frame otherwise complicated stories of a company’s rise or fall within a context that any layperson could understand. Why was I.B.M. cutting thousands of longstanding employees or General Electric forsaking technological innovation and manufacturing to become a mortgage lender?4 The shareholders, of course! Their will was the only will that mattered, and it could be discerned through a single number—the share price.
Most importantly, the doctrine of maximizing shareholder value appealed to corporate executives. If a corporation’s shareholders were its owners, it only made sense that its top-level managers should be as well. Companies just paid them with share packages which grew larger with each decade in the name of “incentivizing” executives into raising the share price further still. Corporate executives allied themselves more closely with shareholders–the most important of whom were large, institutional investors like hedge funds and investment banks—typically at the expense of their employees, customers, the environment, and society at large.
By the end of the 1990s—a time when the business press hailed dumpster fires like Enron and Pets.com as masterworks of American enterprise—the debate over what a corporation was for and who it served was settled to the point that a new generation was never aware there had once been a debate at all. “Shareholder primacy had become dogma,” Stout says in The Shareholder Value Myth,
… a belief system that was rarely questioned, seldom explicitly justified, and had become so pervasive that many of its followers could not even recall where or how they had first learned of it. A small minority of dissenters concerned with the welfare of stakeholders like employees and customers, or about corporate social and environmental responsibility, continued to argue valiantly for broader visions of corporate purpose. But they were largely ignored and dismissed as sentimental, anti-capitalist leftists whose hearts outweighed their heads.
So if shareholders don’t own corporations, who does?
The answer is: no one. American law is remarkably clear on this fact, Stout says, citing more than a century of judicial rulings. Corporations are sovereigns, just like people. Within the law and their contractual obligations, they are free to make their own decisions without taking into account the particular desires of any other party, shareholders included. And if you think about it, this idea computes with another well-established tenant of American law: corporate personhood. If corporations are people, owning a corporation would be legally akin to slavery. And unlike shareholder ownership, corporate sovereignty has been upheld in generations of cases at the Delaware Supreme Court, America’s high temple of corporate law.
I can already hear the compromise being whittled out of the old model. Alright, shares are not actually pieces of a company, but their distribution represents ownership. The question of what holding shares actually means is a legalistic one with no bearing on reality, so why bother dwelling on the distinction?
It’s true that even if shareholders are not a corporation’s owners, they typically wield the powers of ownership. Well before Friedman, holding a majority of shares gave an investor de facto control of a company’s affairs. The largest investors could choose who sat on the board, the body which hires a company’s leadership and to whom the leadership ultimately reports.
As baseless though the shareholder doctrine may be, Congress has also acted to reinforce it, adjusting the tax code in 1993 to cap the amount of executive pay that isn’t “performance-based” that a company can write off its taxes—a deliberate attempt to encourage companies to tie executive pay to share price. Consensus has made its own reality.
In the decades since Friedman’s influential essay, corporate power has risen to an unprecedented level. Corporations now have the power to donate unlimited sums of money to political campaigns, further corrupting an already sclerotic democracy. The harms powerful corporations inflict continue, whether one looks to environmental disasters or labor abuses.
But what critiques of unrestrained corporate power often miss is that an invisible hand is behind many of these corporate harms—not “the market” of Adam Smith, but the Wall Street investors who treat companies as their property and the corporate executives who have made it their mission to appease them.
Opinions are changing. With several stock market crashes and many corporate implosions still lingering in recent memory, Americans have cooled on the idea of shareholder primacy. In one 2018 poll, 52 percent of voters said they supported giving employees (and not just shareholders) representation on corporate boards. Wanting to be on the right side of public opinion (or perhaps just taking advantage of the shifting political winds to reclaim some power from shareholders), some leading corporate executives, including Jeff Bezos, Tim Cook, and others, have even aligned themselves with a more old-fashioned definition of corporate purpose.
But for now, the doctrine of shareholder primacy prevails. To refute it entirely and make corporations accountable not to shareholders but to society at large, we need to reject the lie at its foundation.
All together now: shareholders are not owners.
Apart from being investors, the Dodge brothers were themselves entrepreneurs. Henry Ford had denied them a dividend because he believed, correctly, that they were using the money to invest in the rival car company they had founded a few years before the Michigan Supreme Court’s ruling. Dodge Brothers Motor Company later became a subsidiary of Chrysler Incorporated. ↩
Alas, it’s not just defenders of shareholder primacy who get Dodge wrong. In her book Makers and Takers: How Wall Street Destroyed Main Street, Rana Foroohar says Dodge “enshrined in law the idea that companies had a legal obligation to maximize profits for investors, and that their interests trumped those of anyone else.” Makers and Takers is a good primer on the financialization of the U.S. economy, but on that point, it happens to be wrong. ↩
The closest Friedman came in that essay to describing the new cosmology of corporate power explicitly was to say “The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal.” It was six years before two economists, Michael Jensen and William Meckling, made Friedman’s implication explicit in a paper in which they called shareholders a corporation’s “principals” and executives the shareholders’ “agents.” ↩
The story of G.E.’s longtime C.E.O., Jack Welch, encapsulates both how the shareholder primacy doctrine infected American business and how the business press lauded the transformation. Under Welch’s tenure, the technology company which traced its roots to Thomas Edison closed U.S. factories and moved into the mortgage business and media in the name of boosting the share price. In 1986, G.E. bought N.B.C., and the network’s business channel, C.N.B.C., became a reliable home for Welch sycophants. Other media followed. In 1999, Fortune anointed Welch the “manager of the century.” During the financial crisis less than a decade later, G.E. teetered on the verge of collapse as its mortgage business circled the drain alongside the Wall Street banks Welch had tied the company’s fate to long before. ↩