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Shareholder Primacy

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by

Al Daniel

on 10 April 2017

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Transcript of Shareholder Primacy

Shareholder Primacy
the primary reason a corporation exists...
"
there is one and only one social responsibility of business
–to use it resources and engage in activities designed
to increase its profits
so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
Milton Friedman
so what is a shareholder?
DEFINITION of 'Shareholder'
Any person, company or other institution that owns at least one share of a company’s stock. Shareholders are a company's owners. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly. A shareholder may also be referred to as a "stockholder".

Any person, company or other institution that owns at least one share of a company’s stock. Shareholders are a company's owners. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly. A shareholder may also be referred to as a "stockholder".
but do they "own" the company they are invested in?
NO!!!
so who does "own" a corporation?
no one. It owns itself.
so who runs a corporation?
STAKEHOLDER
A party that has an interest in an enterprise or project. The primary stakeholders in a typical corporation are its
investors
,
employees,

customers
and
suppliers
. However, modern theory goes beyond this conventional notion to embrace additional stakeholders such as the community, government and trade associations.


so what is the problem with shareholder primacy?
it shows undue deference to desires of shareholders
because the motivation for an increase in shareholder value
oftentimes comes at the expense of the other
stakeholders
Shareholder primacy
is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate stakeholders. A shareholder primacy approach often gives shareholders power to intercede directly and frequently in corporate decision-making, through such means as unilateral shareholder power to amend corporate charters, shareholder referenda on business decisions and regular corporate board election contests.
whatever it takes to boost the stock price the corporate management will do
the corporate executives hired by the board of directors
who appointed the board of directors?
the shareholders
so shareholder primacy theory is just looking out for their best interests?
yes, but corporate executives are biased towards the shareholders because of the following;
1. they can be fired for poor performance by the board of directors
2. their compensation is typically tied to the stock price of the corporation
3. their compensation typically includes stock options
when facebook went public who was "given" the majority of the new shares?
mark zuckerberg and the early investors in facebook
as soon as facebook went public the value of those shares made them all billionaires
then buyers of facebook stock bought the other shares not allocated to the "investors" which drove the stock up even higher
after a set amount of time the original investors could then sell their stock or shares at the current rate and make a killing
case in point; Last year Mark Zuckerberg sold 41.35 million shares of facebook stock @ $55 each for a total of 2.274 billion dollars
he now owns only 426.3 million shares worth an estimated 25.7 billion dollars
so what do other shareholders in facebook want to happen?
HAVE THE STOCK PRICE GO UP!!!
if you are an employee of facebook what do you want to happen?
for facebook to continue to employee you
if laying off employees will boost the stock price, what will corporate management typically do?
LAY OFF EMPLOYEES!!
this is the byproduct of the philosophy of shareholder primacy which is a byproduct of the social Darwinism of capitalism.
as opposed to a corporation doing business in a socially conscious manner it will cannibalize itself for the sake of short term profits.
one new form of corporate governance is called the Team Production Model
The Team Production Model requires team members to give up important rights (including property rights over the team's joint output and over team inputs such as financial capital and firm-specific human capital) to a legal entity created by the act of incorporation.
In other words, corporate assets belong not to shareholders but to the corporation itself:
Within the corporation, control over those assets is exercised by an internal hierarchy whose job is to coordinate the activities of the team members, allocate the resulting production, and mediate disputes among team members over that allocation. At the peak of this hierarchy sits a board of directors whose authority over the use of corporate assets is virtually absolute and whose independence from individual team members is protected by law

Shareholder value cannot continue to be the law of the land. Stakeholders who are looking for corporations to be profitable, successful and sustainable have a right for their hard work which helps create the value to not have it taken in the pursuit of short term gains by shareholders who should be considered more as
extractors
of wealth than as
investors

this is what shareholder primacy looks like;
combined wealth of 144.7 billion dollars
what do the employees of Walmart want?
Walmart heirs
created by Albert L. Daniel
all rights reserved 2015
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