QUESTIONABLE VALUE

Shareholders are overrated

Shareholders provide less value than most people think, writes Susan Holmberg.
Shareholders provide less value than most people think, writes Susan Holmberg.
Image: REUTERS/Andrew Boyers
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For over four decades, corporations have shifted their strategy to one singular goal: maximizing payouts for shareholders. While corporate America once invested in their companies for the long term—by paying their workers well, by making capital investments, and by spending on research and development—the focus is now a next-quarter bump in share price.

But what do shareholders really contribute to the public corporations that are bending over backward to satisfy them?

As I write in a new report, many Americans assume that shareholders are owners of corporations. But all that shareholders own are a company’s shares, which essentially function as contracts between the shareholders and the corporations, giving these stakeholders very limited rights.

While 51% of Americans households hold shares in a public corporation, most can’t do anything that a true owner would do. They can’t walk into a company, pick out an office, and put their feet on the desk. They can’t sell the business, and they can’t prevent other people from accessing the company or what it sells. The only thing they can sell are their shares.

Shareholder-first capitalism is also based on the myth that a fundamental purpose of shareholders is to provide funds to corporations. But it is not that simple. Public corporations need funds to invest in growth, but they typically don’t rely on shareholders for this financing. The sale of new stock for “non-financial” companies (meaning, companies that don’t make money from financial services—think Apple rather than Goldman Sachs) is historically low; between 2007 and 2016, it was negative at an average of minus $412 billion per year.

Once a private company has gone public, it is less shareholders than the stock market in general that indirectly serves a funding role. In other words, the markets are providing the space for shares to be easily bought and sold on the secondary market, which reassures actual corporate lenders. Their financing typically comes from borrowed money or retained earnings, not shareholders’ cash. According to economist William Lazonick, “Compared with other sources of funds, stock markets in advanced countries have been insignificant suppliers of capital for corporations.”

In fact, funding is arguably flowing in the reverse direction. Corporations, through the practice of stock buybacks, have increasingly become major fund suppliers to the stock market. These wasteful payouts to shareholders are occurring even to the point of borrowing money to do so. According to economist J.W. Mason: “Today, there is a strong correlation between shareholder payouts and borrowing, a relationship that did not exist before the mid-1980s.” Clearly, shareholder funds, in the aggregate, are not directly financing the growth of public corporations.

While shareholders’ contribution is much more limited than is widely understood, institutional shareholders—especially activist hedge funds—are garnering increasingly more power and influence to leverage their own interests within corporations at the expense of all other stakeholders, particularly workers. As just one example, before Trian Partners drove the recent Dow-Du Pont merger, itself likely a stock price maneuver, they were pressuring DuPont to cut its long-held tradition of investing in research and drastically reduce staff numbers by 1,700, despite its consistently good performance against the S&P 500.

The idea that shareholders hold a special value to public corporations is a myth that is hurting American workers and the economy more broadly. If we want American corporations to be the engines of innovation and job creation that they once were, we need to dismantle these myths about shareholders. Only then can we move beyond an economy in which a small handful of powerful people increasingly siphon the value out of American businesses, while the rest of us are left behind.

Susan Holmberg is a Fellow at the Roosevelt Institute.