Actually existing shareholder primacy

Shareholder primacy - the notion that investors have the top slot in corporate governance - has become an increasingly unpopular proposition in recent years. Attacked for allegedly forcing directors to cut costs, pause or scrap investment plans, and funnel cash to shareholders at the expense of customers, employees and the environment, even investors themselves take aim at it sometimes. Even Larry Fink thinks stakeholder capitalism is a better model it seems.

In the current environment of high inflation, corporate decisions relating to buybacks and dividends take on a different slant. How can a company claim to be only passing on costs increases to consumers through rising prices, critics ask, if it can afford to distribute cash to investors. A similar point is increasingly made by workers seeking pay rises in line with inflation.

And there is a decent point here. Companies ought only distribute capital to investors when they’ve settled everything else. It’s not an unreasonable point that pay settlements that keep employees satisfied need to get sorted first, for example.

But on closer inspection the spectre of shareholder primacy that is haunting corporate governance can seem as unreal as any Halloween story. The widening scope of windfall taxes on energy companies demonstrates that states will not sit back and watch the public endure rising costs if companies appear to be cash rich. Nor is the state’s desire to influence distribution decisions made by companies a new thing.

Back in the initial phase of the Covid-19 pandemic financial regulators in a number of countries either encouraged or instructed financial institutions to halt both dividends and buybacks, and many of the broader set of public companies voluntarily took similar steps. No doubt this was in large part simply prudent, but there was also an undercurrent of feeling that they should exercise restraint more generally.

During the pandemic companies often shouldered additional costs in the interests of employee and consumer welfare. Again, business imperatives were part of the story, but only part. Companies that are resolutely focused on value maximisation for investors would not have trodden the same path. The model of capitalism that investors actually grapple with in many parts of the world may on paper prioritise their interests, though even in the US the idea that shareholder value maximisation is legally encoded is highly contestable, as the late great Lynn Stout showed. In practice companies operate in a more complex environment where other factors repeatedly come into play. Even some old-school shareholder activists have applied a socially responsible veneer to their campaigns.

For a long time shareholder primacy was taken to be the future endpoint for governance regimes, being described as the ’end of history’ in corporate law by Henry Hansmann, one of the more influential governance-focused academics. But, as Yogi Berra put it, the future ain’t what it used to be. Clearly public companies will continue to treat investors as a critical stakeholder group with whom relations must be carefully managed, some will continue to articulate shareholder value as a guiding principle. However, increasingly companies’ own decisions, and those of others that affect them, push in a different direction. The experience of both the pandemic and the current inflationary environment demonstrate how quickly shareholders can be deprioritised.