This time, he wants to know why there’s all this fuss about shareholder value:
[I]n the Harvard Business Review, Jay W. Lorsch, a professor at Harvard Business School, and Justin Fox, the editorial director of the HBR Group (and a former colleague of mine at Fortune), published an article entitled, “What Good Are Shareholders?” Not much, is their answer. . . .
[T]he central idea that led us to elevate shareholders above all others is off-base. According to the reigning academic theory, shareholders are “principals” and management serves as their “agent.” Thus, it is the job of the principals to keep the agents in line. But, said Fox, “The more you treat executives that way, the more they are going to act like mercenaries, and the more they get away from seeing themselves as stewards of an organization with lasting value.”
“Look at almost any company that has lasted,” he continued. “It is inevitably because executives see themselves as trying to move the organization forward, and not because they are incented by their pay package to maximize the share price.”
Lorsch, for his part, says that he believes that “the function of business in a society is not just a return to investors, but to provide goods and services, provide employment, pay taxes, and so on.” A half-dozen other business school professors I spoke to held similar views. To the extent this new movement is taking root, it is in business schools. [Emph. added]
What’s that $100k in tuition buying, again? Contra to this fellow Lorsch, the sole function of a business is to provide a return to investors. Whether the business also happens to provide employment and pay taxes is incidental. Managers will in fact do their best to minimize both. I can’t believe I have to repeat this: the shareholders own the business. As owners, their interests come first. If business-school types are trying to come up with ways to justify how the rights of other of the business’s “stakeholders” might trump the interests of the owners, they are twisting the notion of private-property rights in a very fundamental way. . . . You’ll get no argument here that getting management to run the business in the long-term best interests of shareholders is a tricky undertaking. But tossing out the whole idea of shareholder value in the first place is downright evil, sort of like stealing. . . .