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Friday, October 25, 2019

It’s Through the Pursuit of Shareholder Value That Corporations Enrich Stakeholders

Does pursuing maximum shareholder value preclude “investing in our employees?” Hint: It doesn’t!

Photo by Campaign Creators on Unsplash

Buyers and sellers have opposing objectives. Buyers want low prices. Sellers want high prices. Nevertheless, buyers and sellers must act “as if they care” about their counterparts. Buyers must offer sellers prices that benefit sellers. Otherwise, sellers don’t sell. Sellers must offer buyers a consumption package, including prices, which benefit buyers. If not, buyers don’t buy. The marketplace is an arena where buyers and sellers both win.

Do buyers and sellers really care about each other? No, but not because they’re hypocrites or heartless. Really caring is impossible in modern economies marked by widespread specialization in production and exchange among millions of people. That buyers and sellers could personally identify those with whom they deal is ludicrous.

Incidentally, I sure am grateful that I don’t have to depend on the good-heartedness of Florida orange producers to send oranges to Indiana. It’s not that the orange producers and I aren’t well-meaning, just that oranges would not find their way to Indiana if good-heartedness were the motivation for commerce.

Stakeholders

The “as if they cared” proposition is an antidote against the notion that corporations’ single-minded pursuits of shareholder value shortchange so-called stakeholders. This notion received considerable publicity, most of it positive, following the recent August meeting of the Business Roundtable where close to 200 corporate CEOs gathered. Included among the CEOs were executives from Coca Cola, Amazon, Caterpillar, Exxon, Boeing, Bank of America, Wal-Mart, Apple, and Verizon—in other words, corporate “big hitters” from across the US economy.

The Roundtable’s closing statement committed its members to: 1) “delivering value to our customers…”; 2) “investing in our employees…”; 3) “dealing fairly and ethically with our suppliers…”; 4) “supporting the communities in which we work…,” and 5) “generating long-term value for shareholders…” (For a list of the participating CEOs along with the Roundtable’s complete statement, see here.)

Does pursuing maximum shareholder value preclude “investing in our employees?” Hint: It doesn’t!

Left unnoted in the subsequent discussion of the Roundtable’s statement is that the first four items emerge as unintended consequences of corporate pursuits of shareholder value. Indeed, as noted at the outset, sellers must offer customers goods and services at prices that benefit customers. Otherwise, customers become non-customers. Likewise, sellers must offer suppliers wage and benefit packages that benefit suppliers if they are to retain suppliers’ services. Dealing unfairly and unethically with suppliers turns them into non-suppliers.

This is similar to “supporting the communities in which we work.” Corporate good citizenship makes it easier to recruit workers. Who hasn’t heard of families preferring to locate in communities where the public schools are superior? The same holds for community safety and amenities like public parks.

Does pursuing maximum shareholder value preclude “investing in our employees?” Hint: It doesn’t! Just like technological change, more skilled workers translate into lower corporate costs. They also translate into higher pay for employees.

What About Microsoft?

Interestingly, Microsoft is not a member of the Business Roundtable, even though the dollar value of Microsoft stock (its capitalization) is the largest, if not among the largest, in the world. This is why its CEO’s signature is missing from the Roundtable’s statement.

But regardless of whether Microsoft’s CEO would or would not have signed the Roundtable’s statement, Microsoft provides a wonderful example of my comments above. As noted at the outset, sellers must offer customers goods and services at prices that benefit customers. Microsoft’s stakeholders have been enriched immeasurably by its pursuit of maximum shareholder value.Microsoft’s customers, and all who buy computer services from its customers, have benefitted tremendously. Indeed, the shareholder value of Microsoft, as large as it is, surely pales in comparison to what its customers around the world gain. These customer gains, in fact, have been transformational for people’s lives.

Moreover, gains accrue to people other than Microsoft’s customers. Remember that when Microsoft buys resources, it must offer owners of these resources prices that benefit owners.

The bottom line is that Microsoft has achieved its immense shareholder value not because its customers, workers, suppliers, and communities are poorer. Indeed, nothing could be further from the truth. Its stakeholders have been enriched immeasurably by its pursuit of maximum shareholder value.


  • T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott's current research is the economics of constitutions.