The Emergence of the Shareholder Primacy Paradigm

As the ownership structure of corporate America has evolved, so too has the shareholder obtained greater centrality in common thinking about the role and purpose of the corporation. This chapter addresses how the shareholder has come to be conceived in mainstream business discourse, and the ways in which asset managers have helped shape that conception. The rise of the ideology of shareholder primacyshareholder primacy has its roots in the 1970s with the emergence of the Chicago SchoolChicago School of free-market economists, who argued that corporations should operate with only one goal in mind—making shareholders as wealthy as possible. Developments in academia and policy changes created an intellectual and regulatory environment receptive to the ideas of shareholder primacyshareholder primacy. The rise of asset managers as corporate shareholders ensured that those ideas acquired practical expression in how corporate managers operated their businesses. Furthermore, while asset managers employ a variety of investing strategies, their market activity is by and large short-term focused, as a result of which the model shareholder has come to signify a shareholder who looks to exit and earn a return from their investment over a short period, measured in months or at most a few years. Maximizing shareholder value has been interpreted to mean maximizing shareholder value in the short term, encouraging the implementation of measures that increase market value over a short period of time—such as cutting expenses and overhead or implementing financial engineering schemes like share repurchases and dividends or sales of business units—over more long-term strategies like increasing research and development or capital expenditure investments that may have a minimal or negative immediate stock price impact. Corporate executives who do not follow the line risk blowback from institutional investors who will not hesitate to replace management teams that fall short of expectations. The short-term-oriented model of the shareholder has also shaped the outlook of asset managers that employ investing strategies in which the corporate governance of an individual company has little or no relevance but that must adopt a workable framework within which to make proxy voting decisions in compliance with their fiduciary duties as investment advisors.