Talk to any business leader, rating agency, or economist and they’ll tell you the same thing: A company’s goal is to maximize shareholder value. Conveniently, shareholders have the same expectation. As a CEO you should be careful not too stray away too much from that guidance: Invest in ESG at the expense of short-term gains and you might be outsed out of office.
“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.” Milton Friedman
Even so, does ‘shareholder value’ (or its more trendy ‘value creation’ equivalent) even make sense as a guiding principle? My contention is that (1) this is not an actionable concept, and (2) that its pursuit is typically done at the expenses of workers, consumers, and the environment.
On the first point, it doesn’t take long to realize that you can essentially justify any action through a value maximization argument. Spend on marketing? More customers in the future. Do not spend on marketing? Careful use of resources and responsible stewardship.
More problematic is the fact that shareholder value is increasingly pursued regardless of its consequences.
Plenty of examples abound. Take Amazon workers forced to pee in bottles to meet their targets. Or Apple’s batterygate throttling its customers’ iPhones. Or Volkswagen’s DieselGate, endangering all of humanity by implementing emissions cheating software.
Financiers, consultants, and investors all contribute to reinforcing this narrow focus of profit maximization, and few companies and executives manage to escape it.
Even B-Corps, which are for-profit companies that are certified for their social and environemental performance, are not immune. When Etsy became public in 2015, it quickly abandoned its B-corp status to ‘maintain its corporate structure’ (which presumably includes its tax haven in Ireland).
Japanese companies constitue some of the notable exceptions. The Japanese culture has historically been more concerned with serving customers than extracting profits. Not surprisingly, from a capitalist point of view many Japanese are considered highly non-efficient (as evidenced, e.g., by their comparatively lower valuations).
As an occidental colleague recounted during my time living there: “I showed to my [Japanese] client that they could extract more value by adapting their pricing strategy. They answered that this would be unfair to their customers”. You could see the incomprehension on my colleague’s face when confronted with such an alien notion: Who in their right mind would choose not to extract additional profit from its customers?
Sadly, as Japan opens up to strategic consultancies some of their iconic companies are increasingly launching restructuration programs, including layoffs, divestments, and loss of employee benefits, as dictated by consultants looking to improve shareholder value (typical metrics include Earnings per Share, Enterprise Value, Return on Equity and the likes).1
There is even the deeper misconception that maximizing shareholder value is a fiduciary duty, even tough that is not the case.
“Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.” U.S. Supreme Court
That doesn’t prevent some executives to use this fictitious fiduciary duty as an excuse to commit slavery.
Take IG Farben, a German chemical and pharmaceutical conglomerate. During World War II, Farben built Monowitz, its own private concentration camp to man its rubber factory. IG Farben purchased 25,000 slaves from the Reich, among them as many children as possible (the Reich charged less for child slaves). Even by the standards of Nazi death camps, Monowitz conditions were inhuman. Monowitz’s prisoners life expectancy was three months, and just one month for those working in the mines. The conditions were so brutal that the SS guards sent official complaints to Berlin.2
When 24 Farben executives were tried at Nuremberg, they argued that they had no choice but to pursue slave labor – it was their duty to their shareholders.
Even tough the Nuremberg trials did not recognise the fiduciary duty to maximise profit as a defence, 19 of these executives were nonetheless found non-guilty of slavery charges (but some were still charged on accounts of plundering or conspiracy).
Now this example is not yet another instance of Godwin’s law. Our current economy still runs on sweat-shops and child labor to supply our cheap goods and maintain companies’ margins.
I suspect that, 50+ years from now, we will be judged harshly by our descendants. Because, contrary to previous generations, we don’t have the excuse of not knowing that we are standing on the shoulders of millions of exploited laborers.
Of course, when the same consultancies get the same treatment, these restructurations are met with a sense of incredultity and indignation. ↩︎
This also ran contrary to the historical orthodoxy about slavery: until Monowitz, historians widely believed that enslavers would – at the very least – seek to maintain their slaves alive and able to work, simply as a matter of economic efficiency. But the Reich’s abundance of cheap labor made slaves a disposable commodity, and profit could be maximized by working them to death. ↩︎
