STOCK MARKET WATCH -- Tuesday, 4 September 2012

[Demeter]

27. Dumbest Idea in the World: Corp. America's False - and Dangerous - Ideology of Shareholder Value

http://www.alternet.org/economy/dumbest-idea-world-corporate-americas-false-and-dangerous-ideology-shareholder-value?akid=9298.227380.9PBxL4&rd=1&src=newsletter701550&t=9&paging=off

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 everyone -- even shareholders themselves. This is why scholars, journalists (most recently, Joe Nocera of the New York Times ) 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%" in partnership with William Lazonick, one of America's top authorities on the American business corporation, who, along with AtlerNet's Lynn Parramore and journalist Ken Jacobson, set about debunking this dangerous myth. Cornell University law professor Lynn Stout's new book, “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

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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 the Gulf 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.) 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.”

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.