The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public

The high-water mark for shareholder value thinking was set in 2001, when professors Reinier Kraakman and Henry Hansmann—leading corporate scholars from Harvard and Yale law schools, respectively—published an essay in The Georgetown Law Journal entitled “The End of History for Corporate Law.”

Long-term shareholders fear corporate myopia. Short-term shareholders embrace it—and many powerful shareholders today are short-term shareholders.

Black and Scholes proved that once a corporation issues debt, one can just as correctly say the debtholder has purchased the right to the corporation’s future profits from the corporation while also selling a call option (the right to any increase in the company’s value above a certain point) to the shareholders, as say the shareholders purchased t

Consider first shareholders’ voting rights. As a matter of law these are severely limited in scope, primarily to the right to elect and remove directors.

Corporations own themselves, and enter contracts with shareholders exactly as they contract with debtholders, employees, and suppliers.

This book argues, however, that many and perhaps most of our corporate problems can be traced not to flawed individuals but to a flawed idea—the idea that corporations are managed well when they are managed to maximize share price.

What, then, do shareholders own? The labels “shareholder” and “stockholder” give the answer. Shareholders own shares of stock. A share of stock, in turn, is simply a contract between the shareholder and the corporation, a contract that gives the shareholder very limited rights under limited circumstances. (Owning shares in Apple doesn’t entitle you

Laypersons and journalists, and even the occasional economist like Milton Friedman, often casually assert that shareholders “own” corporations. Sometimes even law professors—who know better—find themselves reflexively repeating the phrase. But from a legal perspective, shareholders do not, and cannot, own corporations. Corporations are independent

As far as the law is concerned, maximizing shareholder value is not a requirement; it is just one possible corporate objective out of many.