...[S]ystems theory warns against always defining and measuring a corporate enterprise solely in terms of shareholder-centric goals and metrics, as this allows the goals of the shareholding subsystem to eclipse the goals of the corporate system as a whole. For the most part, states have managed to resist the pressure to change their laws to support shareholder value theory. However, it has stealthily crept into federal law, especially tax code rules that tie executive pay to objective performance metrics, and SEC rules that empower short-term investors and measure corporate performance by shareholder near-term returns. Activist investors have used the rhetoric of shareholder value as a cudgel to browbeat boards into selling assets, repurchasing shares, and cutting payroll and research and development to achieve short-term share price increases. Finally, shareholder value theory has been taught as gospel to a generation of policymakers and business leaders.
Author: Tamara Belinfanti and Lynn Stout
Source: UNIVERSITY of PENNSYLVANIA LAW REVIEW, VOL. 166, FEBRUARY 2018, NO. 3
Despite the dominant role corporations play in our economy, culture, and politics, the nature and purpose of corporations remain hotly contested. This conflict was brought to the fore in the recent Supreme Court opinions in Citizens United and Hobby Lobby. The prevailing narrative for the past quarter century has been that corporations “belong” to shareholders and should pursue “shareholder value,” but support for that approach, which has long been justified as essential for managerial accountability, is eroding. Its proponents have retreated to the position that corporations should seek “long-term” shareholder value. Yet, as this Article shows, when shareholder value is interpreted to mean “long-term” shareholder value, it no longer offers the sought-after managerial accountability.
What can? This Article argues that systems theory offers an answer. Systems theory is a well-developed design and performance measuring methodology routinely applied in fields such as engineering, biology, computer science, and environmental science. It provides an approach to understanding the nature and purpose of corporate entities that is not only consistent with elements of the many otherwise-conflicting visions of the corporation that have been developed, but also with important and otherwise difficult-to-explain features of corporate law and practice. It recognizes, and explains, the possibility and desirability of corporations pursuing multiple goals. It also offers proven methods for measuring and improving corporate performance— methods that highlight the critical role of corporate sustainability, and specific strategies to promote it. Finally, it cautions that, by ignoring the lessons of systems theory, shareholder value thinking may have encouraged regulatory and policy interventions into corporate governance that are not only ineffective, but destructive.