The goal of a corporation should be to maximize shareholder wealth.
Why? Since shareholders have a residual claim, if they are happy,
everyone in line before them such as creditors and employees have been
financially rewarded. In a new book, Lynn Stout argues that increasing shareholder value
is not the goal of a corporation. In fact, her argument extends to the
notion that shareholders do not own a corporation, a strange argument
from a law professor. She states "No human being can own a
corporation-they are independent legal entities," which makes little
sense since ownership of stock confers a legal ownership of a
corporation. Our response is best summed up by Charles Elson: “What [Professor Stout] is saying is nothing new and is actually quite silly.”
Another
argument we disagree with is that corporations sacrifice long-term
goals for short-term profit. While we don't disagree that this happens,
sacrificing long-term shareholder wealth maximization does not fit
with the goal of maximizing shareholder wealth. Choosing short-term
results over long-term results is an agency problem that needs
correction if it occurs, but not at the expense of shareholder wealth
maximization.
Finally, we would like to address the
statement made by Professor Stout that companies "...drain out cash
through stock repurchases and dividends - all for the purpose of pumping
up the share price temporarily." The relevance of dividends and stock
repurchases is discussed in the text, but if the company has no positive
NPV investments, excess cash should be paid to shareholders.
Additionally, given that the S&P 500 companies (excluding
financials) have a near record level of cash,
we would argue that if anything, companies have not paid out enough to
shareholders in the form of dividends and share repurchases.
