Back in 1976 Michael Jensen and William Meckling argued that the solution to the principal-agency problem — business leaders advance their own interests not those of shareowners — was to make the goal of the corporation the highest return to shareholders and to align shareholders and business leaders through granting stock options. Today this remains the prevalent model of organizing and motivating people within organizations in the western world.
I have long argued that this approach evokes extremely dangerous behaviours in companies – creating corporations that are run as if they are peopled by soulless automata.
The construction of reward systems that prioritize shareholder value as the sole objective of the corporation encourage risk taking, little focus on other concerns (such as social and environmental good), and poor treatment of human resources.
Dan Ariely has written about Better (and more) Social Bonuses – it is worth reading. Bonus scheme incentives encourage unhealthy competition and can drive unintended outcomes, such as ignoring due process (as in the various bank scandals such as the recent UBS rogue trader).
One characteristic of the shareholder value model in action is the objectification and monetization of things – people, environment, social good. This attitude has inherent problems for all stakeholders in a business, even for the shareholders. Shareholders are people too, they live within a society and an environment. Thus prioritizing shareholder value over social and environmental good is not necessarily good for shareholders.
As a senior manager in large corporations I often found myself referring to people as FTE (a.k.a. full time equivalents). This objectification of the people within the organization – treating them as if they are mere machines – is a characteristic of this shareholder primacy model.
Once the people who work in the business are successfully objectified it is much easier to treat them in ways that previously impossible. It is easier to implement inhumane or unsafe work practices. It is easier to fire people. It is easier to ask people to do things that are unethical.
The other part of this unhealthy equation is the large institutional shareholders in corporations. Because they represent interested parties at second or third hand again we see objectification of the process. They too seek only to maximize benefit for the shareholders that they represent. But because they represent those shareholders at arm’s length they do not understand the needs or wants of those shareholders. Thus the real people who are shareholders are assumed to only seek maximum value no matter how that is achieved.
The common thread in all of this that real people with real desires to create a good world for themselves and their grandchildren do not have their interests adequately represented. Instead we all suffer – people, planet, nature – because of this single-minded pursuit of maximal shareholder benefit.