How Corporations Are Subverting Attempts to Rein in Their Power

By Thomas Mc Donagh AlterNetMay 23, 2013

In 2009, when the government of El Salvador refused to issue an environmental permit to a Canadian mining corporation, community activists in Las Cabañas rejoiced. For years they had been fighting a pitched battle [3] against the efforts of the company, Pacific Rim, to mine for gold in their region – plans that included the dumping of toxic arsenic in their rivers. It was not a campaign without risk. Four Salvadoran anti-mining activists have been assassinated in the course of their courageous efforts. That victory, however, may well prove to carry a high cost for the people of El Salvador. In a legal assault filed in a World Bank trade court, Pacific Rim is now demanding $315 million in compensation payments from the Salvadoran government, an amount equal to one third of the country’s annual education budget.

That is just one example among many where citizens have fought for and won an important policy victory only to find that victory undermined by corporations using the growing web of international investment rules and arbitration courts. There are many others. Public health campaigners in Uruguay won a huge victory in 2010 when the national government passed new health laws to discourage tobacco consumption. Even though those new laws (including aggressive new warnings on cigarette packages) directly mirrored the guidelines of the World Health Organization, the U.S. corporate tobacco giant Philip Morris retaliated with a $2 billion legal action [4] against the government.

Nowhere is this muscle-flexing by multinational corporations a greater threat than on issues related to sustainable development. The result is a little known but enormous legal obstacle planted directly in the policy path toward a sustainable future. The Democracy Center has just documented that threat in an important new report released this week: Unfair, Unsustainable and Under the Radar:  How Corporations Use Global Investment Rules to Undermine a Sustainable Future. [5]

For many this system of corporate-driven investment rules and “dispute resolution” burst into public view a decade ago when Bechtel, the San Francisco-based engineering conglomerate, sued the people of Bolivia for $50 million following the now-famous Cochabamba Water Revolt [6], after investing just $1 million in the country. A global citizen campaign [7] aimed at the corporation ultimately forced Bechtel to drop that case for a token payment of 30 cents [8]. Yet in the years since, the pile of corporate cases has only grown ever higher.

Another typical current case features dangerous exposure to lead in Peru. When the national government there revoked the operating license for a smelter plant in La Oroyo (operated by Doe Run Peru) in July 2010, the health of the local population and the surrounding environment got some badly needed respite [9]. The village, located high in the Peruvian Andes, has been declared one of the most polluted sites on earth [10], and in 2007 99% of the children [11] under seven in the neighborhood closest to the town’s smelter had dangerously high levels of lead in their blood. The government deemed that Doe Run Peru’s failure to meet environmental cleanup commitments at the site constituted a breach of the country’s environmental legal standards. However Doe Run’s parent company, the Renco group, has other ideas. The corporation, owned by US billionaire Ira Rennert, has hit back with an $800 million damages claim, enough money to pay the yearly salaries of almost 15,000 Peruvian school teachers (or nearly 6,000 Peruvian health workers).

The world today is covered by an expanding web of over three thousand bilateral and multilateral trade and investment agreements. These agreements grant rights to corporations and allow them to sue governments for policy initiatives that they claim interfere with their profits. The resulting legal cases, despite their far-reaching local consequences, are settled far away and behind closed doors by a small group of unaccountable private lawyers in international dispute arbitration tribunals. Flying in the face of democratic principles and judicial independence, these tribunals operate with little or no public scrutiny and where the communities directly affected are denied a voice. 

The number of these investment cases has exploded in recent years, with 2012 breaking all records. By far the most popular tribunal system used by global corporations is the World Banks’ infamous International Center for the Settlement of Investment Disputes (ICISID).  Corporations can use this and other tribunal systems to demand hundreds of millions of dollars in compensation from governments – not just for what they have actually invested in a country, but also vast amounts more for the profits they expected to earn into the future. The lawyers at these tribunals move seamlessly from the role of ‘independent’ arbiter to that of corporate attorney.  Some have strong ties to multinational corporations and serious questions have been raised [12] about their independence in an unaccountable system in which they have such a huge vested interest. Although previously used as a court of last resort by aggrieved investors, these tribunals have become the weapon of choice for corporations in their attempts to clear the path for profiting at the expense of public health and the environment.

The proliferation of these investor-state cases has three major impacts. First, in cases where the corporations win (as they often do) the result is a massive transfer of scarce public resources to wealthy private corporations. Second, even if governments are successful in mounting a legal defense, doing that comes at a cost of potentially millions of dollars in legal fees paid to one of the handful of high-priced law firms that specialise in such cases. Third, the net impact is a dangerous chilling effect on the willingness of policy makers to implement policies in the public interest for fear of costly international arbitration cases.

The international investment rules/tribunals system has been used to attack anti-nuclear efforts in Germany, public control of water in Argentina and Bolivia, anti-mining efforts across a host of nations, and today has new targets in its sights.

One new likely battleground is citizen and community efforts against oil and gas extraction by hydraulic fracturing or ‘fracking’. The proposed investment chapter of the Canada-EU free trade agreement, if approved, may give corporations the legal fire-power [13] to challenge government regulation of this highly controversial practice. Efforts to curb the dumping of climate-changing carbon into the atmosphere are also at risk. The South Korean government has shelved a plan to introduce a low-carbon incentive system for the auto industry because of fears that the law would breach a provision in the US-South Korea free trade agreement. If the government were to move ahead with the measure it would risk landing itself before these international trade and investment courts.

Today, just as communities in El Salvador and Peru have taken up the battle to protect their natural resources, a whole global movement is emerging to rethink the relationship between economic development and social and environmental well-being, and is pushing governments to take policy action in that urgent direction. This important shift, however, is in direct conflict with the interests of transnational corporations hard-wired to maximize short-term profit and pass on the environmental and social costs of their operations to others. The Democracy Center’s report [5] puts a spotlight on how global corporations are using the investment rules system to undermine the policies essential to sustainable development and the democratic process essential to such policies.

Long an obscure interest of trade and investment lawyers, the system of international investment rules and tribunals has remained off the radar for most of the groups and communities that it affects. This is slowly beginning to change. As the number of controversial cases rises, the injustice of the current system is becoming increasingly clear. 

Much as the deregulation of financial markets encouraged by the banking sector helped lead to economic collapse, the system of international investment rules works pushed by multinational corporations is leading us toward environmental collapse. As we hurtle towards a number of ominous tipping points in terms of many of the earth’s natural systems, there has never been a more urgent time for activists, academics, development workers and others to understand the legal and political barriers that block us from changing course. This de facto privatized justice system for big business is a massive such barrier that urgently needs to be brought down.  

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Consumerism and Its Discontents

By Charles Derber, Truthout | Op-Ed, 27 May 2013

A quiet revolutionary struggle is brewing in the minds of the US “millennial” generation, those 80 million Americans between ages 16 and 34. They are wrestling with the fundamental edict of capitalism: Buy and you shall be happy. The millennials have not rejected consumerism, but they have also not embraced it fully. They experience its very real downsides – that also afflict millions of older Americans and go to the heart of capitalist sustainability and morality.

Recent polls by marketing firms and the respected Pew Research Center show strong environmental concerns among millennials, but hint at a broader issue: whether consumerism itself makes for a good life and society. Americans, especially the young, love their computers and sleep with their iPhones next to their pillows, but still worry about the negative sides of consumerism.

Technology itself may be contributing to what commentators have called the “death of ownership” culture, since the issue is not owning a book or television set, but having access through the web. Technology is changing the very idea of ownership. But broader factors – including the very availability of so much “stuff” – are contributing to making consumerism less new, exciting and “cool.”

In a recent informal study of Boston-area college students, I asked them how they felt about American consumerism. Almost all said they would prefer to be in a society that was less consumer-oriented, because consumer culture gives them these headaches:

* It creates fierce competitive pressure to have more and newer “stuff.”

* It complicates their lives, always worrying about how to maintain, pay for and use all the things they buy.

* It distracts from a quality life with their family and friends.

* It creates a “dirty” lifestyle that makes them and the planet sick.

* It leads to more inequality, with people seeking more at the expense of others.

* It distracts from political engagement – President Bush told them to go shopping as he was gearing up for war with Iraq after 9/11.

* It imprisons them in a life full of products and empty of meaning.
These negative feelings are reflected in changing purchasing patterns, with recent polls indicating that a growing percentage do not want to buy a house or car. About 25 percent of Millennials do not want a car, compared with 10 percent of their parents at their age. In 1978, sixty-seven percent of 17-year-old Americans had drivers’ licenses, compared with just 45 percent in 2010. Of course, these differences may reflect reduced income, credit or safety issues as well as changes in consumer attitudes.

These attitudes may seem like the self-indulgent whims of affluent, high-consuming young Americans. Or they may seem a reaction to the Great Recession, as they can no longer afford to buy so much. They could also reflect a phase of life since young idealists too often turn to traditional consumerism as they assume the responsibilities of adult life. They certainly do not suggest that young Americans are decisively rejecting consumerism.

But a quick history of American consumerism suggests something very important: that the growing awareness of its real and serious downsides can largely be explained by problems of sustainability and freedom at the core of US capitalism.

Up until the 1920s, most Americans made their own clothes, grew their own food and bought very little. They were producers and not consumers. This changed in the 1920s, when the growth of capitalism had created large corporations that could no longer prosper simply from World War I production. They needed Americans to become consumers.

The corporations hired public relations experts and launched the modern advertising industry. Retailers such as the giant Sears Roebuck sent out millions of catalogs with alluring pictures of clothes, furniture and other commodities. This was the beginning of “coerced consumption.” In the 1950s and 1960s, the new advertising culture mushroomed and became massive and irresistible, with corporations redefining American freedom as the freedom to buy.

Since profits require ever-expanding consumer markets, capitalism has always coerced consumption, typically by seductive advertising but also by harsher means. In the 1920s, Los Angeles had a huge electric trolley system that allowed people to move around the city without cars. General Motors responded by buying the trolley system and tearing up the tracks. By the 1950s, the automakers succeeded in getting the US government to underwrite highways and cars. People began to buy cars because other transportation choices had been ripped away from them, a perfect example of coerced consumption and a form of “un-freedom.”

What is the solution for Americans unhappy with consumerism? Many are beginning to make changes in their personal lives. Students are starting to grow food in gardens at their universities. Many Americans are living closer to work, so they can walk or bike to the job. Some are looking for companies offering the choice of shorter work hours, which liberates them from the work-and-spend treadmill. Some are joining the “share economy,” where they share things – Zip cars and bikes – with others. Many are “downshifting” to a simpler life.

But constraining consumerism requires far larger changes in US capitalism: severely limiting corporate power and rewriting corporate charters and international trade agreements to emphasize worker rights and environmental health. Quality must replace quantity as the measure of economic and cultural success. Government tax and regulatory policy must end extreme inequality and reduce production and consumption of dirty energy, unhealthy food and luxury goods. Large investment in public transit, community-owned enterprises, national parks and other public goods must substantially reduce private consumption.

Such system-wide changes are politically difficult – and they may not limit consumerism fast enough to avert climate catastrophe or reverse dangerous inequality. But in the most optimistic scenario, they could put society on a new path toward a more sustainable, cooperative way of life.

These changes will be on the agenda of people around the world in the 21st century. Europe is already a far less consumerist society than the United States. China, India and Brazil are struggling with environmental justice and inequality that inevitably highlight the issue of global consumerism. It will take a new social economy that rejects American-style consumerism to solve these problems and help save the world.

A Chinese translation of this article was originally published in the People’s Daily News, Beijing, China, on April 25, 2013.

Copyright, Truthout. May not be reprinted without permission.

Beware Capitalist Tools

by Robert Reich, Huffington Post, 5/27/2013

Forbes magazine likes to call itself a “capitalist tool,” and routinely offers tool-like justifications for whatever it is that profit-seeking corporations want to do. Recently it has deployed its small army of corporate defenders and apologists in the multi-billion dollar fight to keep the effective tax rates of global corporations low.

One of its contributors, Tim Worstall, recently took me to task for suggesting that a way for citizens to gain some countervailing power over large global corporations is for governments to threaten denial of market access unless corporations act responsibly.

He argues that the benefits to consumers of global corporations are so large that denial of market access would hurt citizens more than it would help them. The “value to U.S. consumers of Apple is they can buy Apple products,” Worstall writes. “Why would you want to punish U.S. consumers, by banning them from buying Apple products, just because Apple obeys the current tax laws?”

Wortstall thereby begs the central question. If global corporations obeyed all national laws — the spirit of the laws as well as the letter of them — and didn’t use their inordinate power to dictate the laws in the first place by otherwise threatening to take their jobs and investments elsewhere, there’d be no issue.

It’s the fact of their power to manipulate laws by playing nations off against one another — determining how much they pay in taxes, as well as how much they get in corporate welfare subsidies, how much regulation they’re subject to, and so on — that raises the question of how citizens can countermand this power.

Consumer benefits may sometimes exceed such costs. But, as we’ve painfully learned over the years (the Wall Street meltdown, the BP oil spill in the Gulf, consumer injuries and deaths from unsafe products, worker injuries and deaths from unsafe working conditions, climate change brought on by carbon dioxide emissions, and, yes, manipulation of the tax laws — need I go on?), the social costs may also exceed consumer benefits.

Why would an economics writer for a seemingly sophisticated national publication such as Forbes deny the existence of corporate power to circumvent or create favorable laws, or dismiss the social costs that corporations bent solely on maximizing profits routinely disregard? I’ll get back to this in a moment.

Worstall then goes on to criticize me for suggesting that governments also condition market access on receiving some of the social benefits that corporations now wield to play countries off against one another, such as good jobs or investments in research and development. In his eyes, I’m committing the mortal sin of denying the economics of comparative advantage.

On what planet have Forbes‘ capitalist tools been living? Many of the world’s most successful economies — among them, China and Singapore — owe their successes in part to their conditioning market access on certain kinds of jobs and investments, including research and development. That’s the way they have come to use global corporations, rather than be used by them. It’s the same approach Alexander Hamilton advocated more than two centuries ago in proposing how the United States develop its manufacturing industries.

Comparative advantage is nice in theory, but in a world where powerful global corporations are using every strategy imaginable to maximize their profits and powerful governments are strategically employing market access to develop their economies, it’s just theory.

Economics writers like those affiliated with Forbes magazine surely are sophisticated enough to know this as well. So why are they so eager to trot out such economic nonsense?

Perhaps because so much profit is at stake that those who pay their salaries — and who have also put many academic economists on retainers — prefer that they mislead the public with simplistic economic theory that appears to justify these profits rather than to tell the truth.

My modest suggestion that governments become the agents of their citizens in bargaining with global capital should hardly raise an eyebrow. But the capitalist tools at Forbes, and elsewhere, must be worried that average citizens may be starting to see what’s really going on, and might therefore take such a suggestion seriously.

ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers “Aftershock” and “The Work of Nations.” His latest is an e-book, “Beyond Outrage,” now available in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.


The Twinkie Manifesto

By PAUL KRUGMAN, New York Times, November 18, 2012

The Twinkie, it turns out, was introduced way back in 1930. In our memories, however, the iconic snack will forever be identified with the 1950s, when Hostess popularized the brand by sponsoring “The Howdy Doody Show.” And the demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.

Needless to say, it wasn’t really innocent. But the ’50s — the Twinkie Era — do offer lessons that remain relevant in the 21st century. Above all, the success of the postwar American economy demonstrates that, contrary to today’s conservative orthodoxy, you can have prosperity without demeaning workers and coddling the rich.

Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing “lower tax rates” as a “guiding principle.”

Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals, so much so that it was common to talk about corporations serving an array of “stakeholders” as opposed to merely serving stockholders.

Squeezed between high taxes and empowered workers, executives were relatively impoverished by the standards of either earlier or later generations. In 1955 Fortune magazine published an essay, “How top executives live,” which emphasized how modest their lifestyles had become compared with days of yore. The vast mansions, armies of servants, and huge yachts of the 1920s were no more; by 1955 the typical executive, Fortune claimed, lived in a smallish suburban house, relied on part-time help and skippered his own relatively small boat.

The data confirm Fortune’s impressions. Between the 1920s and the 1950s real incomes for the richest Americans fell sharply, not just compared with the middle class but in absolute terms. According to estimates by the economists Thomas Piketty and Emmanuel Saez, in 1955 the real incomes of the top 0.01 percent of Americans were less than half what they had been in the late 1920s, and their share of total income was down by three-quarters.

Today, of course, the mansions, armies of servants and yachts are back, bigger than ever — and any hint of policies that might crimp plutocrats’ style is met with cries of “socialism.” Indeed, the whole Romney campaign was based on the premise that President Obama’s threat to modestly raise taxes on top incomes, plus his temerity in suggesting that some bankers had behaved badly, were crippling the economy. Surely, then, the far less plutocrat-friendly environment of the 1950s must have been an economic disaster, right?

Actually, some people thought so at the time. Paul Ryan and many other modern conservatives are devotees of Ayn Rand. Well, the collapsing, moocher-infested nation she portrayed in “Atlas Shrugged,” published in 1957, was basically Dwight Eisenhower’s America.

Strange to say, however, the oppressed executives Fortune portrayed in 1955 didn’t go Galt and deprive the nation of their talents. On the contrary, if Fortune is to be believed, they were working harder than ever. And the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth: nothing before or since has matched the doubling of median family income between 1947 and 1973.

Which brings us back to the nostalgia thing.

There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, “Are you now or have you ever been?” The rest of us, however, are very glad those days are gone. We are, morally, a much better nation than we were. Oh, and the food has improved a lot, too.

Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.

“The Dumbest Idea in the World”: Corporate America’s False – and Dangerous – Ideology of Shareholder Value

by Lynn Stout, Berrett-Koehler Publishers, Published on Alternet, August 29, 2012


For at least the past two decades, Americans have been duped into believing that the sole purpose of a corporation is to maximize value for its shareholders. That belief, first promoted in business schools, has been absorbed in the media, in academic circles, and in the political realm….But in reality, it has no basis in the law or American precedent. The maniacal quest to raise share price is bad for eveyone — even shareholders themselves. This is why scholars, journalists (most recently, Joe Nocera of the New York Times [2]) and even corporate leaders are coming to the realization that the American corporation has made a wrong turn based on a false ideology. No less than Jack Welch, the former CEO of General Electric and a former enthusiast for shareholder value ideology, has done an about-face, calling it “the dumbest idea in the world.” Fortunately, there’s new movement aimed at challenging the destructive ideology shareholder value…

Full text

For at least the past two decades, Americans have been duped into believing that the sole purpose of a corporation is to maximize value for its shareholders. That belief, first promoted in business schools, has been absorbed in the media, in academic circles, and in the political realm — even progressives like Al Franken have repeated it as if it were indisputable fact. But in reality, it has no basis in the law or American precedent. The maniacal quest to raise share price is bad for eveyone — even shareholders themselves. This is why scholars, journalists (most recently, Joe Nocera of the New York Times [2]) and even corporate leaders are coming to the realization that the American corporation has made a wrong turn based on a false ideology. No less than Jack Welch, the former CEO of General Electric and a former enthusiast for shareholder value ideology, has done an about-face, calling it “the dumbest idea in the world.”

Fortunately, there’s new movement aimed at challenging the destructive ideology shareholder value. AlterNet has been on the forefront of this movement, publishing a series of articles, “Corporations for the 99% [3]” in partnership with William Lazonick, one of America’s top authorities on the American business corporation, who, along with AtlerNet’s Lynn Parramore and jouranlist Ken Jacobson, set about debunking this dangerous myth. Cornell University law professor Lynn Stout’s new book [4], “The Shareholder Value Myth,” is a welcome contribution to this movement — a must-read for anyone who seeks to understand the relationship between corporations and the public and to learn how to overturn a myth that has done incalculable damage to our society and economy. Below is an excerpt from the Introduction to Stout’s book. ~Editor

The Dumbest Idea in the World

The Deepwater Horizon was an oil drilling rig, a massive floating structure that cost more than a third of a billion dollars to build and measured the length of a football field from bottom to top. On the night of April 20, 2010, the Deepwater Horizon was working in the Gulf of Mexico, finishing an exploratory well named Macondo for the corporation BP. Suddenly the rig was rocked by a loud explosion. Within minutes the Deepwater Horizon was transformed into a column of fire that burned for nearly  two days before collapsing into the depths of theGulf of Mexico. Meanwhile, the Macondo well began vomiting tens of thousands of barrels of oil daily from beneath the sea floor into the Gulf waters. By the time the well was capped in September 2010, the Macondo well blowout was estimated to have caused the largest offshore oil spill in history.1

The  Deepwater  Horizon disaster was tragedy on an epic scale, not only for the rig and the eleven people who died on it, but also for the corporation BP. By June of 2010,  BP had suspended paying  its regular  dividends, and  BP common stock (trading around $60  before the spill) had plunged to less than $30 per share. The result  was a decline in BP’s total stock market value amounting to nearly $100 billion. BP’s shareholders were not the only ones to suffer. The value of BP bonds  tanked as BP’s credit rating was cut from a prestigious AA to the near-junk status BBB. Other oil companies working in the Gulf were idled, along with BP, due to a government-imposed moratorium  on further deepwater drilling in the Gulf. Business  owners and workers in the Gulf fishing  and tourism industries struggled to make a living. Finally, the Gulf ecosystem itself suffered  enormous damage, the full extent of which remains unknown today.

After  months of investigation, the  National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling concluded the Macondo blowout could be traced  to multiple decisions by BP employees and contractors to ignore standard safety procedures in the attempt to cut costs. (At the time  of the  blowout,  the Macondo project was more than a month behind schedule and almost $60  million over budget, with each day of delay costing an estimated $1 million.)2  Nor was this the first time  BP had sacrificed  safety to save time  and money. The Commission concluded, “BP’s safety lapses  have been chronic.”3

The Ideology of Shareholder Value

Why would a sophisticated international corporation make such an enormous and costly mistake? In trying to save $1 million a day by skimping on safety procedures at the Macondo well, BP cost its shareholders alone a hundred thousand times more, nearly $100  billion.  Even if following proper safety procedures had delayed the development of the Macondo well for a full year, BP would have done much better. The gamble was foolish, even from BP’s perspective.

This  book  argues  that the Deepwater Horizon disaster is only one example of a larger problem that  afflicts many public corporations today. That problem might  be called shareholder value thinking. According to the doctrine of shareholder value, public corporations “belong” to their shareholders, and they exist for one purpose only, to maximize  shareholders’ wealth.  Shareholder wealth, in turn, is typically measured by share  price—meaning share price today, not share  price next year or next decade.

Shareholder value  thinking is  endemic in the business world today.  Fifty years ago, if you had asked the directors or CEO of a large public  company what the  company’s purpose was, you might have been told the corporation had many purposes: to provide  equity investors with solid returns, but also to build great products, to provide decent  livelihoods  for employees, and to contribute to the community and the nation. Today, you are likely to be told the company has but one purpose, to maximize its shareholders’ wealth.  This  sort of thinking drives directors and executives to run public  firms like BP with  a relentless focus on raising stock price.  In the quest  to “unlock shareholder value” they sell key assets,  fire loyal employees, and ruthlessly squeeze the workforce  that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, out- moded,  and unsafe equipment; shower CEOs with stock options and expensive pay packages  to “incentivize” them; drain cash reserves to pay large dividends and repurchase company shares,  leveraging  firms until they teeter  on the brink  of insolvency;  and lobby regulators and Congress to change  the law so they can chase short-term profits speculating in credit default  swaps and other high-risk financial  derivatives. They do these  things even though many individual directors and executives  feel uneasy about such strategies, intuiting that  a single-minded focus on share  price may not  serve the interests of society, the company, or shareholders themselves.

This book examines and challenges the doctrine of shareholder value.  It argues that shareholder value ideology is just that—an ideology, not a legal requirement or a practical necessity  of modern business life.United States corporate law does not, and never has, required directors of public corporations to maximize either share  price or shareholder wealth.  To the contrary, as long as boards do not use their power to enrich themselves, the law gives them a wide range of discretion to run  public  corporations with other goals in mind, including growing  the firm, creating quality  products, protecting employees,  and serving the public interest. Chasing  shareholder value is a managerial choice, not a legal requirement.

Nevertheless, by the  1990s,  the idea  that  corporations should  serve only shareholder wealth as reflected in stock price came to dominate other  theories of corporate purpose. Executives, journalists, and business school professors alike embraced  the  need  to maximize  shareholder value with near-religious fervor. Legal scholars argued  that corporate managers ought to focus only on maximizing the shareholders’ interest in the firm, an approach they somewhat misleadingly called “shareholder primacy.” (“Shareholder absolutism” or “shareholder dictatorship” would be more accurate.)

It  should  be noted that  a handful of scholars  and  activists continued to argue  for “stakeholder” visions of corporate purpose that gave corporate managers breathing room to consider the  interests of employees, creditors, and  customers. A small number of others  advocated for “corporate  social responsibility” to ensure that public companies indeed served the public  interest writ large. But by the turn  of the millennium,  such alternative views of good corporate governance had been reduced to the status of easily ignored minority reports. Business and  policy elites  in the  United States and much of the rest of the world as well accepted as a truth that should not be questioned that  corporations exist to maximize shareholder value.4

Time for Some Questions

Today, questions seem called for. It should be apparent to anyone who reads the newspapers that Corporate America’s mass embrace of shareholder value thinking has not translated into better corporate or economic  performance. The  past  dozen years  have  seen  a daisy  chain  of costly  corporate disasters, from  massive  frauds  at Enron, HealthSouth, and  Worldcom in the early 2000s, to the near-failure and subsequent costly taxpayer  bailout  of many  of our largest  financial  institutions in 2008, to the BP oil spill in 2010. Stock market returns have been miserable, raising the question of how aging baby boom- ers who trusted in stocks for their  retirement will be able to support  themselves in  their   golden  years.  The population of publicly  held  U.S. companies is shrinking rapidly  as for- merly public  companies like Dunkin’ Donuts and  Toys“R”Us “go private”  to escape  the  pressures of shareholder-primacy thinking, and  new  enterprises decide not to sell  shares to outside investors at all. (Between 1997 and 2008, the  number of companies listed  on  U.S. exchanges declined from 8,823 to only 5,401.)5  Some experts worry America’s public corporations are losing their  innovative edge.6  The National Commission found that an underlying cause of the Deepwater Horizon disaster was the fact that the oil and gas industry has cut back significantly  on research in recent  decades,  with the result  that  “knowledge  and  experience within  the  industry may be decreasing.”7

Even former champions of shareholder primacy are beginning to rethink the wisdom of chasing shareholder value. Iconic  CEO Jack Welch,  who ran GE with an iron fist from 1981 until his retirement in 2001, was one of the earliest, most vocal, and most influential adopters of the shareholder value mantra. During his  first five years at GE’s helm, “Neutron Jack” cut the number of GE employees by more than a third. He also eliminated most of GE’s basic research programs. But several years after retiring from GE with more than $700 million in estimated personal wealth, Welch observed in a Financial Times interview about the 2008 financial crisis that “strictly speaking, shareholder value is the dumbest idea in the world.”8

Revisiting the Idea of “Shareholder Value”

Although shareholder-primacy ideology still dominates business and academic circles today, for as long as there have been public corporations there have been those who argue they should serve the public interest, not shareholders’ alone. I am highly sympathetic to this view. I also believe, however, that one does not need  to embrace either a stakeholder-oriented model of the firm, or a form of corporate social responsibility theory,  to conclude that shareholder value thinking is destructive. The gap between shareholder-primacy ideology as it is practiced today, and stakeholders’ and the public interest, is not only vast but much wider than it either must or should be. If we stop to examine the reality of who “the shareholder” really  is—not an abstract creature obsessed with the single goal of raising the share  price of a single firm today, but real human beings  with the capacity to think for the future and to make binding commitments, with a wide range  of investments and interests beyond the shares they happen to hold in any single  firm, and  with consciences that make most of them concerned, at least a bit, about the fates of others, future generations, and  the planet—it soon becomes  apparent that conventional shareholder primacy harms not only stakeholders and the public, but most shareholders as well. If we really want corporations to serve the interests of the diverse human beings  who ultimately own their  shares  either directly or through institutions like pension and mutual funds, we need to seriously reexamine our ideas about  who shareholders are and what they truly value.

This  book  shows how the  project of reexamining shareholder value thinking is already underway. While the notion that managers should  seek to maximize  share  price  remains conventional  wisdom in many  business circles  and in the press,  corporate  theorists  increasingly  challenge  conventional  wisdom.  New scholarly articles  questioning the effects of shareholder-primacy thinking and  the wisdom  of chasing shareholder value seem to appear daily. Even more important, influential economic  and  legal experts  are proposing alternative theories of the  legal structure and  economic  purpose of public corporations that show how a relentless focus on raising the share price of individual firms may be not only misguided, but harmful to investors.

These  new theories promise to advance our understanding of corporate purpose far beyond  the  old, stale  “shareholders- versus-stakeholders” and “shareholders-versus-society” debates. By revealing how a singled-minded focus on share price endangers many shareholders themselves, they also demonstrate how the perceived gap between the interests of shareholders as a class and those of stakeholders and the broader society in fact may be far narrower than  commonly  understood. In the process,  they also offer better, more  sophisticated, and  more  useful  understandings of the role of public corporations and of good corpo- rate governance that  can help business leaders,  lawmakers, and investors  alike ensure  that  public  corporations reach  their  full economic potential.

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Corporate Social Responsibility

Millennials to business: Social responsibility isn’t optional By Michelle Nunn, Washington Post, December 20, 2011 – ….As consumers, employees and entrepreneurs, Millennials are shifting the norms of corporate America’s conduct, ethical imperatives and purpose. In his book, “The Way We’ll Be,” pollster John Zogby documents how these “First Globals” are more conscientious consumers than their predecessors, demanding greater honesty and accountability from businesses. Millennials are bringing their values into the career equation by placing a premium on employers’ reputation for social responsibility and the opportunities those companies and organizations provide their employees to make a positive impact on society. .. Millennials, as consumers, are pushing companies to change the ways of doing business to align with the values of civic and global responsibility largely held by Millennials…While Millennials are transforming established businesses, they are also starting a new breed of businesses with built-in social missions that are resonating with the marketplace and revolutionizing their sectors…The values behind Occupy Wall Street are manifesting themselves in the marketplace and companies that are failing to take notice should start…A new generation of employees, consumers and entrepreneurs is stepping forward with a better way of doing business — putting its bets on the goodness of people rather than loading the dice in its own favor.

Ethical Businesses With a Better Bottom Line by Tina Rosenberg, New York Times Opinionator Blog, April 14, 2011

What Money Can’t Buy: The Moral Limits of Markets by Michael Sandel, polit­i­cal phi­los­o­phy pro­fes­sor - excerpt from a book review by Decca Aitken­head,, May 27, 2012 …We need to rea­son about how to value our bod­ies, human dig­nity, teach­ing and learning…

“The Dumbest Idea in the World”: Corporate America’s False — and Dangerous — Ideology of Shareholder Value by Lynn Stout, Alternet, August 29, 2012 For at least the past two decades, Americans have been duped into believing that the sole purpose of a corporation is to maximize value for its shareholders. That belief, first promoted in business schools, has been absorbed in the media, in academic circles, and in the political realm.…But in reality, it has no basis in the law or American precedent. The maniacal quest to raise share price is bad for eveyone — even shareholders themselves. This is why scholars, journalists (most recently, Joe Nocera of the New York Times [2]) and even corporate leaders are coming to the realization that the American corporation has made a wrong turn based on a false ideology. No less than Jack Welch, the former CEO of General Electric and a former enthusiast for shareholder value ideology, has done an about-face, calling it “the dumbest idea in the world.” Fortunately, there’s new movement aimed at challenging the destructive ideology shareholder value…