Predatory Value Extraction chronicles how agency theory and ‘maximizing shareholder value’ (MSV) led to looting of publicly traded companies. As many of us sit home waiting out the COVID-19 pandemic, it is a good time to rethink the purpose of the corporation. Corporate governance needs revamped if we are to move from a model of value extraction, which accelerates wealth inequality, to one of value creation.
Efficient markets, they argue, are the result, not the cause of a highly productive economy. “The foundation of economic development is the ‘investment triad’: household families, government agencies and business enterprises.” There are no free markets. Rules, set by citizens and our representatives, are necessary for the trust and trade necessary for a dynamic economy. This is a “must read” book for anyone asking fundamental questions about how to build a future we can all feel proud to live in.
Maximizing shareholder value (MSV) is rooted in the false notion that shareholders invest in productive assets when they buy on secondary markets (not at IPO). That error is compounded by the assumption that shareholders take the primary risk and, therefore, have an incentive to monitor. Taxpayers also take a risk, as do employees, neither of which are so easily disposed of through liquid securities.
At the conclusion of their book, Lazonick and Shin boil down their most substantive recommendations to the following five:
1. Rescind and Rewrite SEC Rule 10b-18, which facilitates the use of share buybacks for predatory value extraction, primarly by company executives, Wall Street bankers and hedge funds
2. Redesign Executive Pay. We should get rid of US-style stock-based pay, which rewards speculation and manipulation more than innovation. Senior executives should, instead, be incentivized around metrics related to innovation. (love this idea)
3. Reconstitute Corporate Boards. Workers and taxpayers take more fundamental risks than shareholders, so would have board seats. (I can see laws facilitating workers on boards; much tougher to get taxpayers... since companies do business in multiple jurisdictions)
4. Reform the Corporate Tax System.
5. Redeploy Corporate Profits and Productive Capabilities.
I would add that we also need to focus on mobilizing the masses, increasing their education and participation in corporate governance. Such a mobilization will be required to win the reforms the authors seek.
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