Corporations come in many shades of shareholder value So say's Schumpeter of the Economist.
In a recent Economist editorial, Schumpeter outlines six different types of corporate tribes. His opening perspective starts from the view of the executive tasked with managing corporations. A growing body of people, shareholders, included, want corporations to do good, or as Schumpeter puts it: "citizens want corporations to be cuddlier, invest more at home, pay higher taxes and wages and employ more people."
But corporations are tasked by law to maximize profit. Naive executives, Schumpeter argues, have trouble reconciling these contradictory impulses. But wise executives know this not to be the case. Thus starts Schumpeter's taxonomy of shareholder values. But notice how he moves the perspective from the view of the executives as individual business practitioners to a more corporate, even communal or general view of shareholder practice, thus taking out the power dynamic faced by executives accountable to a board who represent their shareholders. (I'll circle back to why this is an important omission in a minute.) First to the taxonomy.
Corporate Fundamentalists: These are companies that want to maximize profits in the shortest amount of time, but still staying within the legal bounds of the law. Schumpeter mentions Valent and IBM as examples through pointing to current corporate behavior.
Corporate Toilers: These are companies that believe in maximizing shareholder profits but are patient: "At their best these firms are consistently successful—think of Shell or Intel investing on a ten-year time horizon."
Corporate Oracles: These are companies that want to maximize profit within the bounds of the law "but with a twist." They anticipate legal chances in regulation and thus voluntarily change their behavior to fit with the direction regulation might take in the future.
Corporate Kings: These are companies that are so successful at creating shareholder value that sometimes they can ignore the demands to maximize profit. Unilever apparently sees itself as: "the consumer-goods firm [that is] a non-governmental organization committed to cutting poverty."
Corporate Socialists: These are corporations found mostly outside the west are controlled by "states, families or dominant managers." These firms: "think that shareholder value is not as important as social objectives such as employment, high pay or cheap products. But they recognize that institutional investors have some legal powers." Goldman Sachs, Schumpeter says, is a Corporate Champagne Socialist. Read the article to find out why.
Corporate Apostates: These are corporations that do not care for shareholders at all. Apparently, they exist due to political dysfunction. Schumpeter namechecks Franny Mae and Fredy Mac as such companies because they are "state-owned American mortgage firms [that are] run to make cheap loans, not profits.
Complicating the taxonomy
The article is written from the perspective of somebody who seems to assume free market orthodoxy: The market will provide a mechanism to create the most efficient way of build a commodity and value that commodity according to direct financial gains to shareholders. In other words, money is the only way to measure efficiency and thus value. Moreover, money must be the only way we measure value. Money, as it happens, belongs only to individuals. So the value created by a business can only ever belong to individuals.
The recognition that shareholder values, as they relate to executive and board level decision making are complicated by the article. This is welcome. It shows at least that there is a recognition by the Economist that liberal economic orthodoxy is theoretical. Practice is messier, since we all value, to a greater or lesser degree, things which money cannot buy. What would be interesting is an analysis by the Economist on the executives who are part of the emerging B Corporation field, where more than a single bottom line is measured. B Corp shareholders value this. Here it seems executives are intent on working with shareholder agreement to create value that is more than shareholders financial return. Perhaps that requires less distance between the business and the shareholder. Enter impact investing. It's a further example of shareholder recognition that simple financial returns might not be the only thing valued by investors. Champagne socialism aside, the personal generosity of philanthropists as well as most of the American people, seem to indicate that generosity need not be divorced from business.
Shure, both B corporations and impact investing are relatively new. Of course, it is naive to assume that the power of the single bottom line measurement will ever go away. But where do more complex measures of shareholder return overlap with the long-run and healthy growth? Isn't that the sweet spot? Efficiency needs to be measured over a longer life cycle, but I am certainly not the first to say that.