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The Case Against 'Maximizing Shareholder Value'


The management of American Airlines recently decided to give pilots and flight attendants a small raise to match salaries at other major carriers. The airline is profitable, but the price of American stock plunged with complaints on Wall Street that workers were getting rewarded, not stockholders.

Maximizing shareholder value is the phrase. Joe Nocera, our friend who writes for Bloomberg View, says that a valuable idea intended to make executives accountable to stockholders has now become destructive for consumers. He joins us from New York. Joe, thanks so much for being with us.

JOE NOCERA: Thanks for having me, Scott.

SIMON: And maximizing shareholder value means...

NOCERA: (Laughter) Get that stock price up at all costs, simple as that, whatever you have to do. It means everything about the company is built around the short-term price of the stock, even if it means putting off long-term projects that could create value down the line, even if it means - here's a really good example - raising drug prices sky high even though it hurts patients, insurance companies and the country, but it gets your stock price up.

SIMON: You're talking about a specific company now - aren't you? - or more than one probably.

NOCERA: Yeah, so there is more - it's a disease in the industry, so to speak. But the company I have in mind, of course, is Valeant. And Valeant is a company that was actually founded or built on the idea of maximizing shareholder returns. And the CEO, then Michael Pearson, made no bones about it. And he was ruthless about taking drugs that had cost maybe a thousand dollars a year and by the time he was done with them, they cost $300,000 a year. And this happened over and over and over again. Of course, eventually, they became the poster child for this and...

SIMON: Yeah.

NOCERA: ...It didn't work out so well. But while they were running up, the stock price was going up and up and up, and Wall Street loved the guy. And nobody really thought about the consequences to everybody else.

SIMON: Yeah. Maximizing shareholder value is an idea that dates back to the '70s and '80s.

NOCERA: Yeah - no, that's right. You'll remember the famed corporate raiders of the late '70s and early '80s, which included T. Boone Pickens, who I knew quite well and still do know quite well actually, and Carl Icahn and a handful of others. And they would take a stake in these companies, and they would argue that the companies were fat and slothful, and the CEO wasn't really paying attention, and the share price was stagnant. And there was no way to measure how successful or not successful a CEO was. And so the idea was if you link the CEO's performance to the stock price, you'll at least have some way to measure. CEOs quickly discovered that, especially in this era when the market was going up and up and up, that if they hitched their pay to the stock price, they were going to get really rich. And of course, that's very much what has happened.

SIMON: Yeah. I was struck by a quote - I think a lot of people were - from a Wall Street analyst. You put it in your column talking about American Airlines giving a raise to their employees. He says, quote, "this is frustrating. Labor is getting paid first again. Shareholders get leftovers."

NOCERA: (Laughter) Yeah, it's - to me, what that shows is how, on the one hand, blinded Wall Street has become by the phrase shareholder value and by the desire to maximize shareholder value but also how warped it's become that you basically view a raise to the employees as a terrible thing, even when the company's making a lot of money.

SIMON: But let me point this out - a lot of us who complain about what companies are doing might, through the magic of mutual funds and other things, actually own stock in those companies. And do you really want to invest your retirement income in a company that doesn't maximize its stock price?

NOCERA: Well, first of all, you're exactly right. I mean, we are all in the market in one way, shape or form. But the problem is - I'm not arguing that one should forget about the stock price. What I am arguing, and what others are arguing, is that the shareholders are an important constituency, but they aren't the only constituency.

And what companies really need to do and boards of directors really need to do is think about the entirety of the corporation, which includes customers and employees and even communities. I mean, back in the day, companies traditionally would support the symphony. They would support the art museum. They would support culture in the town. With rare exception, that doesn't really happen anymore.

SIMON: Joe Nocera, columnist with Bloomberg View, thanks so much for being with us.

NOCERA: Oh, thanks again, Scott. Transcript provided by NPR, Copyright NPR.

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