Something to Mull Over the Holidays (Besides Wine)

By Cydney Posner

Following is a link to a blog post from the Brookings Institution reporting on a December 13 forum held as part of a three-year Brookings project designed to reexamine the basic purpose of the corporation. The essential question raised is whether the current focus of corporate boards and managements has shifted too much in favor of maximizing short-term shareholder profits, without regard to broader constituencies such as employees, the community, the nation and the world.

One executive participating in the forum argued that too "many leaders…focus on short-termism and worry only about meeting the next quarterly financial target." Instead, he advocated pursuit of a "virtuous cycle" in which "business is granted a charter, given protection from liabilities in order to encourage it to take risks, offer employment, develop and distribute new offerings, and contribute to an improved quality of life and standard of living in society, for all its members."

Several academics on the panel argued that corporations focus too narrowly on maximizing shareholder value. One contended that "many business schools have a tendency to focus on maximizing shareholder value and that we need a broader conception that includes shareholders, bondholders, and the community at large. She indicated we need better corporate disclosure rules so that companies disclose material circumstances that affect a variety of constituencies. Getting information out would help us deal with the ‘massive problem of externalities' that we currently face." [is that a euphemism for the 99%?] Another academic put the blame on law schools that "teach only about maximizing shareholder value and ignore broader conceptions of corporate purpose. She said this is driven by ideology coming from the University of Chicago and reflects a ‘mistaken view' of the law. [hmmm… what cases has she been reading?] She noted that congressional tax code changes have led companies to tie compensation to stock price performance and encouraged many business leaders to focus only on shareholders. She pointed out that we have a ‘hyperactive market' in which the average stock holding period is four months, compared to what was eight years during the 1960s." Another professor offered the example of the Norwegian sovereign wealth fund, which "emphasizes societal values and socially responsible investment based on transparent principles."

Although, as reported, there appears to have been uniformity of perspective on the need to expand the corporation's purpose, there was more division on the panel with regard to whether regulation could provide an effective solution. One panelist advocated a "portfolio churn tax" designed to encourage "patient capital" and avoid churning. In addition, she supported incentives for management to hold stocks for at least six months. Another panelist was more dubious of governmental efforts to regulate; he argued that regulations are always a "couple of steps behind innovation." [a euphemism for circumvention?] Similarly, another panelist contended that there "was no silver bullet to deal with executive compensation issues, and that it was a mistake when the stock transfer tax was eliminated. She complained that many tax rules ‘favor Carl Icahn over diversified Moms and Pops.'"