Shareholder Value Myth How Putting Shareholders First Harms Investors Corporations & the Public

Executives, investors, and the business press routinely chant the mantra that corporations are “owned by shareholders” and managers are obliged to “maximize shareholder value.” The results have been disastrous. “Shareholder primacy” thinking causes corporate managers to focus myopically on short-term earnings reports at the expense of long-term performance; discourages investment and innovation; harms employees, customers, and communities; and causes companies to indulge in reckless, sociopathic, and socially irresponsible behaviors.

In this powerful new book, distinguished legal scholar Lynn Stout proves that there is in fact absolutely no legal obligation for corporations to maximize shareholder value—people just assumed there was. Nor, she demonstrates, is it the optimal economic model—that’s just another unproven assumption. And in fact, it is not the best model: Stout presents empirical evidence which shows that companies that put share value first do not outperform companies that emphasize it less. Shareholder primacy actually hurts individual investors by obscuring their specific, diverse interests in the name of serving a hypothetical, homogeneous, abstract shareholder. Stout looks at new theories that not only better serve the needs of real human beings who invest, but of corporations and society as well.

“A must-read for managers, directors, and policymakers interested in getting America back in the business of creating real value for the long term.”

—Constance E. Bagley, Professor, Yale School of Management; President, Academy of Legal Studies in Business; and author of Managers and the Legal Environment and Winning Legally

“A compelling call for radically changing the way business is done…, The Shareholder Value Myth powerfully demonstrates both the dangers of the shareholder value rule and the falseness of its alleged legal necessity.”

—Joel Bakan, Professor, The University of British Columbia, and author of the book and film The Corporation

“Lynn Stout has a keen mind, a sharp pen, and an unbending sense of fearlessness. Her book is a must-read for anyone interested in understanding the root causes of the current financial calamity.”

—Jack Willoughby, Senior Editor, Barron’s

“Lynn Stout offers a new vision of good corporate governance that serves investors, firms, and the American economy.”

—Judy Samuelson, Executive Director, Business and Society Program, The Aspen Institute

Executives, investors, and the business press routinely chant the mantra that corporations are required to “maximize shareholder value.” In this pathbreaking book, renowned corporate expert Lynn Stout debunks the myth that corporate law mandates shareholder primacy. Stout shows how shareholder value thinking endangers not only investors but the rest of us as well, leading managers to focus myopically on short-term earnings; discouraging investment and innovation; harming employees, customers, and communities; and causing companies to indulge in reckless, sociopathic, and irresponsible behaviors. And she looks at new models of corporate purpose that better serve the needs of investors, corporations, and society.

Lynn A. Stout is the Paul Hastings Professor of Corporate and Securities Law at the UCLA School of Law. She has also served as the Principal Investigator for the UCLA-Sloan Program on Business Organizations; as a Guest Scholar at the Brookings Institution in Washington, DC; and as Professor or Visiting Professor at the Georgetown, Harvard, NYU, and George Washington University law schools. She has published more than thirty law review articles on corporations and corporate law, and was recently cited in Justice Steven’s dissent in the January 2010 Supreme Court decision (Citizens United v. FEC).

PART ONE: INTRODUCTION

1. The Dumbest Idea in the World PART II: DEBUNKING THE SHAREHOLDER VALUE MYTH

2. The Rise of Shareholder Value Thinking

3. Exorcising the Ghost of Dodge v. Ford: How Shareholder Primacy Gets the Law Wrong

4. Neither Owners Nor Principals Nor Sole Residual Claimants: How Shareholder Primacy Gets the Economics Wrong

5. Fishing With Dynamite: How Shareholder Primacy Gets the Evidence Wrong PART III: WHO IS THE SHAREHOLDER?

6. Shareholder Value and Corporate Myopia

7. Shareholder Value, Specific Investment, and the Shareholder As Ulysses

8. Shareholder Value and the Universal Owner

9. Shareholder Value and the Prosocial Investor PART IV: CONCLUSION

10. “Slaves of Some Defunct Economist”