tag:blogger.com,1999:blog-19727420.post5794575780589265285..comments2024-03-23T12:05:13.464-07:00Comments on Ideas: Controlling Corporations: Stockholders vs StakeholdersDavid Friedmanhttp://www.blogger.com/profile/06543763515095867595noreply@blogger.comBlogger25125tag:blogger.com,1999:blog-19727420.post-62176295110247507472011-05-31T11:08:47.544-07:002011-05-31T11:08:47.544-07:00As a novice economist, I like the term stakeholder...As a novice economist, I like the term stakeholders as an expanded view of who is affected by the decisions of a corporation. Part of the whole equation of corporate leadership is that CEOs need to be capable, innovative and decisive. Not everyone is like that. The people you refer to as stakeholders, like myself, someone at the customer or employee level, do not have the desire or skills to be a corporate leader. I am at the mercy of these people. But I am not in a position to get on a corporate board or stage a takeover. There are many other people and entities in this position, there are the people in the community where the corporation is based, there are the people working for businesses that supply the corporation, there are people in those communities. In many ways, many many people are affected by the decisions made in corporate offices. I think that there should be more weight put in decision making on the scores of stakeholders even beyond the employees and customers. Everyone involved would be motivated then, most likely, to make sure that the corporation is recognized and valued for its responsible decision making. I think this is a nice thought.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-47671578300944675072009-11-14T14:15:27.464-08:002009-11-14T14:15:27.464-08:00Dr. Friedman says:
'The stockholder's vie...Dr. Friedman says:<br /><br />'The stockholder's view of the value of the stock directly affects the firm only if the firm wishes to raise capital by selling a new issue of stock.<br /><br />But if the directors are remunerated in shares (say, through at-the-money options), doesn't a fall in the share price hurt them?<br /><br />Dr. Friedman, you may be interested to know that in the UK directors' fiduciary duties have been codified (Companies Act 2006). S172 provides that the directors, in exercising their fidiciary duties, take account of a wider range of 'stakeholders'. It remaains to be seen what effect this will have.Alexis Liberounoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-32772378548567802502009-11-10T13:22:12.747-08:002009-11-10T13:22:12.747-08:00David,
Have you ever read Roderick Long's Sta...David,<br /><br />Have you ever read Roderick Long's Stakeholder Theory for Libertarians? You can find it here: praxeology.net/stakeF04.docScotthttps://www.blogger.com/profile/02563179015787569536noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-73717314133545144222009-11-09T09:13:19.622-08:002009-11-09T09:13:19.622-08:00Oh, and as to the question of which group is more ...Oh, and as to the question of which group is more myopic -- existing shareholders or LBO managers -- remember what the L in LBO stands for -- other peoples' money.Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-25183224357614357672009-11-09T09:03:59.011-08:002009-11-09T09:03:59.011-08:00John Fast,
You've got it. All I will add is t...John Fast,<br /><br />You've got it. All I will add is that the specific idiocy I had in mind was of some managers serving the myopic shareholders by catering to analysts, e.g., who look for consistent quarterly gains at the expense of investment in long-term growth, which always requires a short-term hit. <br /><br />Some people would say these managers are not idiots; they are merely playing the game that analysts, instituional investors, and GAAP have set up. I see that. That's why accountig reform is the single most important effort to prevent another crisis. We can't leave accounting to accountants.Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-59420048607782138282009-11-09T08:13:23.697-08:002009-11-09T08:13:23.697-08:00If I understand him correctly, Michael F. Martin i...If I understand him correctly, Michael F. Martin is concerned that a company might be taken over and broken up and the various assets sold off.<br /><br />This could happen (again if I understand him correctly) if the short-term value of the company as a whole was less than that of the assets, either because the managers were idiots, or because they were doing some things which caused temporary short-run problems but were going to more than compensate it in the long run.<br /><br />I agree with him that liquidating a company in such a situation would be bad because it would be more productive in the long run to keep the company intact. This is obvious and well known, and followed in practice (at least when it's not prevented by law).<br /><br />If the directors are idiots, an LBO or other hostile takeover will be organized to take over the company and fire the idiots, to replace them with competent directors who will change the company's policies but still keep the company together, because that would be more profitable than liquidating it.<br /><br />Even if there were a takeover bid made by some other idiot who wanted to liquidate the firm, he would be outbid by the non-idiots who see how to run it properly, i.e. to produce more social benefit ("profit") from operating it than from liquidating it.<br /><br />If the current directors are *not* idiots, i.e. they are simply taking steps which cause a drop in short-term profits but will pay off handsomely in the long run, then the issue is merely short-term versus long-term gain. In other words (if I understand him correctly) Mr Martin is concerned that the stockholders are myopic; that they're not willing to accept short-term sacrifices even though it will be more than worth it.<br /><br />I'm skeptical of that, at least if it's clear (and reasonably certain) that the long-term benefits will be worth it. (After all, stockholders are smarter than voters, or rather people are smarter with their stocks than they are with their votes.) But if they are willing to give up their share of the long-term profits then let them; there will be an LBO -- possibly by the very executives who are running the company and who presumably believe in their plans -- to keep the company together for the long haul.John Fasthttps://www.blogger.com/profile/11770384424027460723noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-57097284436278657992009-11-06T09:56:54.461-08:002009-11-06T09:56:54.461-08:00Sorry - obviously I put the last comment on the wr...Sorry - obviously I put the last comment on the wrong thread. Feel free to delete.neil craighttps://www.blogger.com/profile/09157898238945726349noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-22529305446578422682009-11-06T09:49:19.633-08:002009-11-06T09:49:19.633-08:00I'm from Britain so I don't really know bu...I'm from Britain so I don't really know but would have thought that a Republican stronghold in New York would have been le4ss Republican than most parts of the country. So if the "leftist" Republicans, by going over to the Democrats, can only just throw the seat to them then in other areas they are going to prove a very small part of the Republican vote. There is also the fact that the timing of betrayal is vital (as indeed in Heinlein's book where the ultimate sign of nastiness is quitting a campaign in the middle, albeit not by its leader) & that if this does have repercussions discrediting some Republican leaders it will all be done & dusted before the next Congressional elections.neil craighttps://www.blogger.com/profile/09157898238945726349noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-67786268683535715262009-11-05T16:08:24.947-08:002009-11-05T16:08:24.947-08:00"...the fact that they are legally obliged to..."...the fact that they are legally obliged to run the firm in the interest of its stockholders."<br /><br />Consider the case where firm A profits at the expense of firm B. Shareholders in general own both firms, so there is no shareholder benefit. In theory, there might not even be a single shareholder who benefits, since it's possible for all shareholders to be diversified (though in practice some aren't).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-12957126374067066982009-11-05T08:15:24.227-08:002009-11-05T08:15:24.227-08:00David, you wrote: "A buyer emerges--but at wh...David, you wrote: "A buyer emerges--but at what price? If slacking by management means that the company isn't maximizing its profit and isn't going to, and other buyers can see that as well as you can, you will be able to sell the stock only at a price that has already capitalized the loss." <br /><br />But doesn't that mean that the threat of slacking, or slacking itself, was already impounded into the price that I paid for the stock? Also, pace Henry Manne, the very threat of the market for control restrains managerial slacking.David Yosifonnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-89509407364182440882009-11-05T00:28:50.235-08:002009-11-05T00:28:50.235-08:00"given the market for control, why should I a..."given the market for control, why should I as a shareholder be worried about having to find a buyer before I can exit? As soon as it becomes profitable, a buyer emerges, and I can get out. So my stock won't fall much below what I paid for it, not as a consequence of slacking anyway."<br /><br />A buyer emerges--but at what price? If slacking by management means that the company isn't maximizing its profit and isn't going to, and other buyers can see that as well as you can, you will be able to sell the stock only at a price that has already capitalized the loss.David Friedmanhttps://www.blogger.com/profile/06543763515095867595noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-65905585331098170552009-11-04T22:20:28.123-08:002009-11-04T22:20:28.123-08:00Thanks for your insightful and challenging post, D...Thanks for your insightful and challenging post, David. But riddle me this -- given the market for control, why should I as a shareholder be worried about having to find a buyer before I can exit? As soon as it becomes profitable, a buyer emerges, and I can get out. So my stock won't fall much below what I paid for it, not as a consequence of slacking anyway. On the other hand, once I'm addicted to some consumption, or have sunk costs as you describe, I'm stuck.David Yosifonnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-23524387012424210462009-11-04T19:57:28.543-08:002009-11-04T19:57:28.543-08:00Easy takeover only leads to heavily discounting th...<em>Easy takeover only leads to heavily discounting the future if the future isn't sufficiently predictable to be capitalized into the value of the stock.</em><br /><br />I'm not sure that's true, for two reasons. First, many "takeover specialists" have no interest in running a company for very long; they want to take it over, shuffle some assets around so it looks better to potential buyers, and sell it for a profit as quickly as possible. In other words, <em>they</em> heavily discount the future, even if some other investor might not, because they have different personal priorities. <br /><br />Second, the "takeover specialist" by definition is <em>changing</em> the company's future from whatever somebody might have predicted before the takeover. Discounting the future can become a self-fulfilling prophecy (like short-selling), if the takeover specialist sells off things the company would have needed for its long-term health.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-61173863086611659632009-11-03T20:48:52.648-08:002009-11-03T20:48:52.648-08:00Easy takeover only leads to heavily discounting th...Easy takeover only leads to heavily discounting the future if the future isn't sufficiently predictable to be capitalized into the value of the stock. <br /><br />And, of course, the less predictable the future is, the less sense it makes to bear short term costs in exchange for (what you hope will be) long term benefits.David Friedmanhttps://www.blogger.com/profile/06543763515095867595noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-83209695469171981192009-11-03T17:36:30.099-08:002009-11-03T17:36:30.099-08:00The market-based solution is slow capital, which t...The market-based solution is slow capital, which tends to produce better-than-market returns. Berkshire-Hathaway is a good example. Read Buffett's letters to his shareholders. Most of them are partly advertisements to family-owned businesses to trust him not to break up the company.Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-77254211368052015912009-11-03T17:31:10.757-08:002009-11-03T17:31:10.757-08:00Michael makes an interesting point: easy takeovers...Michael makes an interesting point: easy takeovers tend to encourage corporations to discount the future heavily -- to make decisions in favor of short-term over long-term profitability. There's probably a market-based solution to this: some kind of "long-term shares"?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-57296354116015297032009-11-03T17:26:10.595-08:002009-11-03T17:26:10.595-08:00Corporations are constrained in at least three dif...<em>Corporations are constrained in at least three different ways. Two of them are the legal obligations of the directors and the mechanisms for electing them. The third constraint is the market on which a corporation sells its outputs and buys its inputs. A customer ... can simply stop buying what the corporation is selling. An employee ... can quit.</em><br /><br />Another group of stakeholders in a corporation's behavior is "the public", even those who neither work for nor buy from the corporation. How can one effectively constrain a corporation from doing things that benefit its managers, stockholders, employees, and perhaps even customers, but externalize their costs to everyone in the world?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-34064087881835150732009-11-03T15:52:45.829-08:002009-11-03T15:52:45.829-08:00As to alternative forms of organizations and their...As to alternative forms of organizations and their relative advantages, you might be interested in Henry Hansmann's The Ownership of Enterprise.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-21945996758991075252009-11-03T14:11:43.866-08:002009-11-03T14:11:43.866-08:00"Why don't we see alternative organizatio..."Why don't we see alternative organizations where customers and employees share seats in the board room? "<br /><br />We do. I'm a member of two consumer coops, one a bookstore and one a supermarket, both in the Hyde Park area of Chicago. I haven't lived there for fifteen years or so, and when I did made no attempt to use my membership to influence the organization--which suggests one reason why that form of organization doesn't have any significant advantage.<br /><br />Law firms are typically structured as workers' coops, although only a small fraction of the workers are included.<br /><br />All of which I was planning for my next post on the topic.David Friedmanhttps://www.blogger.com/profile/06543763515095867595noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-86068869294392616752009-11-03T14:02:00.422-08:002009-11-03T14:02:00.422-08:00Interesting, well expressed, and highly comprehens...Interesting, well expressed, and highly comprehensible even to non-economists like me. Thank you.Jonathanhttps://www.blogger.com/profile/15661031964537092605noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-52244941593816344632009-11-03T11:09:26.268-08:002009-11-03T11:09:26.268-08:00BlackSheep,
I think you mean if the company's...BlackSheep,<br /><br />I think you mean if the company's net present value in profit is less than its asset value, then why shouldn't it be liquidated.<br /><br />The answer is that sometimes the profits are low because the managers are idiots. Look for studies on how companies run by their founders tend to outperform.Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-76348755395672898072009-11-03T11:03:40.895-08:002009-11-03T11:03:40.895-08:00BlackSheep,
The short answer is that government r...BlackSheep,<br /><br />The short answer is that government regulations impose large transactions costs that are not easily borne by dispersed stakeholders. The longer answer is that we do:<br /><br />http://venturebeat.com/2009/06/11/trying-to-sell-shares-in-a-private-startup-join-the-club/Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.comtag:blogger.com,1999:blog-19727420.post-7638007440101998562009-11-03T11:02:32.865-08:002009-11-03T11:02:32.865-08:00Michael, if the company is priced over its net pre...Michael, if the company is priced over its net present value, why should it not be stripped of its assets?<br />Please expand that part of your post because it seems interesting.BlackSheepnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-31926308664212017532009-11-03T10:55:51.799-08:002009-11-03T10:55:51.799-08:00An interesting question is why don't we see al...An interesting question is why don't we see alternative systems emerging if indeed better alternatives exist. Why don't we see alternative stock markets where take-over bids are facilitated? Why don't we see alternative organizations where customers and employees share seats in the board room? If indeed changes to those schemes produce a positive net value, transactions ought to exist to get to that point, so what's precluding them?BlackSheepnoreply@blogger.comtag:blogger.com,1999:blog-19727420.post-26606369229695973602009-11-03T10:13:08.554-08:002009-11-03T10:13:08.554-08:00Takeover bids generally get a bad press,
Especial...<i>Takeover bids generally get a bad press,</i><br /><br />Especially after the bond market freed up in the 1980s, it became very cheap to borrow cash to buy shares. That meant that managers' time horizons had to shorten because LBO funds could come in and break up the company for its asset value if they didn't consistent post higher profits, and hence get higher P/E multiples. The bad reputation is earned despite the salutary effect that takeover threat might have on some managers. The easy availability of leverage here is something Austrians would tsk, tsk at, while Chicago school folks would merely shrug. Worth noting.<br /><br /><i> A customer who finds that the corporation is not serving his interests, that its products are more expensive or less desirable than those offered by competitors, does not have to intervene in the internal affairs of the corporation in order to solve the problem. He can simply stop buying what the corporation is selling. An employee who finds that the corporation is offering less money for a less attractive job than alternative employers can quit. Since the corporation requires customers to provide the money with which it pays dividends to its stockholders and salaries and bonuses to its management, and requires employees to produce the goods and services that it sells to those customers, it has a direct and immediate incentive to produce what customers want to buy and provide employment terms that employees are willing to accept.</i><br /><br />This is an EMH-type argument. It assumes that customers and employees preferences are fixed, and that the firm or market is mereley discovering these preferences through allocation and reallocation over time. If preferences are mutable, and especially if the firm can influence how those preferences evolve, then this argument is fatally flawed.<br /><br />Are preferences fixed? By some approximation, yes. But it's where that approximation fails that there is lots of action right now.<br /><br />Consider how economics might look if we merely optimized the flow of input and output from various groups within the economy, remaining agnostic as to how the input and output might be modeled in utility functions. Frequency and phase-matching input to output requires optimization over some spatial and temporal horizon.<br /><br />Is there a principled reason why that optimization should be constrained to maximize benefits for shareholders? Perhaps when capital was the most important constraint on production. That is no longer the case in many places.Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.com