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The Legacy of Shareholder Value Capitalism

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Shareholder value capitalism transformed American society, impacting inequality and financialization. Neil Fligstein explores its continuing relevance in contemporary capitalism.

Image courtesy of interviewee. December 13, 2023

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This video video discusses the concept of shareholder value, which refers to the focus on maximizing profits and increasing the share price of publicly held corporations. It highlights how shareholder value influences management practices, corporate strategies, and financial market dynamics, particularly since the economic crises of the 1970s.

Several dimensions of shareholder value are outlined:
1. It describes the relationship between financial markets and corporations.
2. It acts as an ideology used by managers to justify corporate actions.
3. It encourages businesses to adopt strategies that improve financial performance.
4. It serves as a theoretical framework for discussions about increasing shareholder value.

This video video also examines the historical context, noting that the rise of shareholder value was influenced by economic struggles in the late 20th century, including inflation and slow growth. The emergence of institutional investors led to a focus on breaking up underperforming companies to maximize value, inspiring practices like mergers and strategic layoffs.

Furthermore, it addresses the implications of shareholder value capitalism on income inequality, job security, and corporate governance. It emphasizes that profits for shareholders often come at the expense of workers, leading to a pay disparity and a weakening of worker protections and union power over the decades.

This video video suggests that while there is potential for political and labor movements to challenge the shareholder value model, significant financial and political power still resides with those benefiting from it. Current trends show a potential shift away from traditional shareholder value structures, indicated by a decline in publicly traded companies and increased governmental interest in regulating corporate practices.

In conclusion, shareholder value has become a defining element of modern capitalism, but recent discussions about labor rights and income inequality indicate that change may be on the horizon, albeit with ongoing resistance from established financial interests.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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So shareholder value, as, as an idea means,

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actually has a very specific kind of, reference.

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Shareholder value is about maximizing profits,

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and the goal of shareholder value is

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to increase the share price of, of the firm.

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So, shareholder value applies to publicly held corporations,

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and, the basic goal of publicly held corporations is

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to raise that share price.

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And so profits are very elusive in some kind of way about

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how do you measure and how do you think about it,

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and how do you generate them.

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But raising the share price is very concrete

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because the idea is that that,

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what you wanna do is increase the, the value

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of the shares for the, for the shareholders.

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Um, shareholder value can be thought of in,

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four sort of different ways.

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Um, first of all, it's a description of the power

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of relationship between financial markets

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and publicly held corporations.

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And I think this is a kind

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of underappreciated dimension of it.

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If financial institutions are interested in their

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investments, they're interested in share prices going up,

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and they're interested in managers doing things

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that will make share prices go up,

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and that suggests

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that they have power influence over the direction which

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managers pay, corporations

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and managerial behavior will be oriented towards,

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fulfilling those, obligations.

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Um, certainly it's an ideology.

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Um, managers justi,

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and by that I mean, managers use shareholder

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value as a justification.

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One, there's a great study where someone has gone

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and looked at annual reports of corporations,

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and one of the things you can see is that,

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beginning in the mid, late 1980s

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and early 1990s, people start using this language and,

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and all corporate reports start out saying, we're out

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to maximize the share price for shareholder value.

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And they all, they all say that,

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and so all of their actions become justified.

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Um, third, it's a set of strategies,

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and I think this is the part that,

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is the most elusive for most people.

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And, businesses pursue a set of strategies to,

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make themselves look good to shareholders.

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I mean, how do you please a shareholder?

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And, shareholders are interested in things like,

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return on assets.

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So they're not just interested in profits,

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but profits relative to investments.

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And what managers do is they construct strategies

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to affect profits, if you think about that as the numerator

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and assets, which is what's in the denominator.

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And so, those set of strategies have evolved over time,

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and we have a whole bunch of them.

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They come into existence, managers use them,

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they impress shareholders show, say, yeah,

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let's go buy that stock.

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Um, then of course they get the gain,

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everybody else gets it.

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And you go, well, what's your next trick?

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How are you gonna keep keeping the price, stock price go up?

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So what what shareholder value does is it continuously puts

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pressure on managers to innovate new strategies

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to help increase the share price.

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And finally, what shareholder value is about is, I, I wanna

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Go out and call it a theoretical framework

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for both managers and financial, analysts.

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And how do you come to have this conversation about

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how do we increase shareholder value?

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And what you have to do is you have to have,

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ways in which you make sense of the world.

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And most of it is around financial analysis,

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financial engineering, the financial analysis

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of a balance sheet.

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And that is actually a relatively modern phenomena

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that if you go, you know,

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before, say 1985, business out there,

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but it's not out there in the sophisticated way.

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And we've now had two generations of managers who go

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to business school basically to learn how to do this.

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And so this language

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and this framework is how they approach looking at things.

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So they're not producing things or products.

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What they're doing is they're producing tactics

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that will affect the, the kind

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of financial characteristics that they're interested in,

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that they can then pitch to financial analysts

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and say, Hey, we're gonna raise the stock price.

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And this is, this is a really different way

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of looking at the way companies operate.

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Capitalism is, an incredibly dynamic system.

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And, what happens in capitalism, typically,

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if we look at long historical flaws of capitalism, is,

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we get massive amounts of innovation.

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Lots of stuff happens, people make a whole lot of money,

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and then it falls into some kind of crisis or problem.

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And then people start to question what they were doing,

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and they say, well, why isn't it working anymore?

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What should we do now? And usually then

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someone often outsiders come along

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and say, Hey, we're gonna do something completely different

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here, and we're gonna come in

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and we're gonna change the way everything works,

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and then we're off on a new round.

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And that's, that's kind of what capitalism is, right?

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And I, I think what you have to see

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with shareholder value is that share value is a response

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to the economic crisis of the 1970s,

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in the United States mostly.

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Um, but also around the world.

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The high inflation, slow economic growth

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of the 1970s into the early 1980s.

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It caused central banks to raise interest rates

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to really punishing levels.

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And this, created a lot of problems for corporations

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because imagine yourself, you're running,

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let's say US Steel, which,

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was a big corporation in those days.

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And now all of a sudden the economy's running slow.

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Um, your stock price is down.

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You can't borrow money because it's too expensive to do,

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and everybody's selling off your stock

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because interest rates are high.

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And if you go buy government bonds, you can make 10

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or 12% where, you know, US Steel, they can't sell anything.

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And so companies had to figure out ways to adjust to that.

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And in the short run, what they did is they held onto cash.

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They had lots of assets that were, became undervalued.

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And, and they just tried to stay the course.

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They kind of had this language

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of battening down the hatches,

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and we're gonna get through this

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and come out the other side.

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And what happened was, is there became a group of,

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institutional investors of different varieties from,

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insurance companies, investment banks,

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and what we now would call private equity companies like

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Bain and, KKR.

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And, and what they figured out was that you could go out

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and these companies, stock prices had become so depressed

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that you could buy the company

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and sell off the pieces and make money.

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And, and once people figured this out,

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and they started to do it, every, there were a whole bunch

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of other people said, Hey, let's do that too.

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And this created the shareholder value movement.

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And what, what happened was, is the critique, that,

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these analysts outside investors had was, look,

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you managers, you know, you're not,

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you're not maximizing shareholder value here.

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Your stock prices are languishing.

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You have all these assets that are undervalued, you know,

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let's buy you up, break you up and take the money.

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And, and this became an assault on American management.

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We had this large merger movement in the United States in

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the 1980s that reorganized the relationship

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between the financial markets and corporations.

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And at that point, managers had to make a decision.

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They had to decide, are we gonna go with,

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shareholder bank capitalism,

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these institutional investors, and please them?

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Or are we going to, you know, try to fight them?

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And actually both happened, we had conflict

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between city management teams and investors,

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but at the end, the management team said, okay,

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we're gonna go along with this,

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but you guys are gonna have to pay us.

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And this is when, CEO pay started to really rise.

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And the CEOs began to ask, was that they wanted,

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if we're gonna focus on the share price,

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then we want a piece of it, and we want a lot of shares,

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and we want you to reward us if we meet goals

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around the share price.

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And this begins in the early 1990s,

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and this kind of settles the whole thing that as soon

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as CEOs are being given really, really high pay,

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they're being given rewards to increase the share price,

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becoming multiple, multiple, multiple millionaires,

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that kind of seals the deal.

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And that's where shareholder value really finally kind of

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lodges into place and becomes institutionalized.

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You signal to the financial markets.

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Now all of a sudden, your audience, if you're the CEO,

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are the financial markets.

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Uh, another thing that happened is that, all

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of a sudden, chief financial officers

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and companies started to become very important people

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because they essentially became the ambassador

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of the corporation to Wall Street.

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And the, CFO, you know,

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was previously a corporate treasurer.

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And a corporate treasurer was somebody who took the bills

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and paid them, you know, kind of a low level accountant.

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Um, but then they became very important

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because they became the person who listened to

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what the financial markets wanted, talked their language,

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and, and gave them what they wanted.

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And over time, you know,

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the financial markets would come back

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and, you know, mostly stock market analysts and,

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And they'd say, well, look, we don't like this about

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what you're doing, or, we don't like that.

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And then managers had to respond to it.

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And so what we see is we see a set of different kinds

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of responses over, that kind of evolve and go out there.

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So the first one was,

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in America was this de-industrialization that occurred.

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So they closed down a lot of plant facilities.

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They sold off assets.

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Um, but you know, you do that and it's done right.

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You, you made the money right, you,

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you, whatcha gonna do next.

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So then the next thing they did is they decided

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to change the pension systems

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and they decided to change healthcare benefits.

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And, what happened in the United States is many people

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had what were called defined benefit, retirement,

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pensions, which meant that depending on

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how long you worked at the company

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and how much you made, at the end,

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you got a fixed a, a benefit.

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And those went out the window.

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They almost entirely disappeared, by the time we get

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to 1995.

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And that saved companies a lot of money,

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cut back on healthcare expenses,

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saved companies a lot of money.

09:58.105 --> 10:00.405
And, in the early 1990s,

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we had the downsizing of managers.

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Uh, one of the great, tactics that,

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stock markets began to love were layoff announcements.

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And what happened was, is if you go back to the 1960s

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and a corporation said they were gonna lay off 10,000

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workers, the stock price would get pummeled

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because everybody would assume your company must be

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about ready to go bankrupt.

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But in the 1990s, if you said you laid off 10,000 workers,

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it was like, let's buy that stock

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because that means there's gonna be a lot more money for us.

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And, that's exactly what happened.

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And, and then, we thought a whole bunch

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of different tactics that involved

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after that, the most important

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of which I think is the stock buyback.

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And I think that, that the, you know, in general,

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people don't understand why stock buybacks are, are,

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important in shareholder value capitalism.

10:47.185 --> 10:50.405
But what managers finally realized is, look, the best way

10:50.405 --> 10:52.445
to affect the stock price is to buy the stock.

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So rather than, take money that they might have

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and build a factory, they took money, they had

10:57.565 --> 10:59.165
and they bought their own stock saying, well,

10:59.165 --> 11:01.645
that's the best investment we can make your manager.

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We hear CEOs say that all the time.

11:04.305 --> 11:06.165
And, and then, you know,

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what it would do is it'd restrict a supply of stock

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and, the stock price would go up.

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And all companies do this.

11:12.745 --> 11:14.645
Um, you know, people think of Apple

11:14.705 --> 11:15.765
as a trillion dollar company.

11:15.765 --> 11:16.885
Apple has actually one

11:16.885 --> 11:18.685
of the biggest programs out there in terms

11:18.685 --> 11:19.965
of buying back their own stock.

11:20.005 --> 11:22.645
I don't know what impact it ultimately has on the stock

11:22.645 --> 11:24.525
price, but it, it's, it's certainly there.

11:24.545 --> 11:26.445
And so stock buybacks turn out

11:26.445 --> 11:28.365
to be a really popular and big thing.

11:28.625 --> 11:30.685
And so you announce you're gonna do $10 billion

11:30.745 --> 11:32.605
of stock buybacks, and all of a sudden, you know,

11:32.605 --> 11:33.645
those analysts go, okay,

11:33.645 --> 11:35.765
that means there's gonna be 10 billion less stock out there.

11:35.775 --> 11:37.605
Let's buy it. And that'll bid the price up too.

11:38.695 --> 11:42.715
So these tactics evolve, they disperse

11:42.715 --> 11:45.035
through the population of large corporations,

11:45.575 --> 11:49.475
and then what happens is, is, is you get their impact,

11:49.495 --> 11:50.875
but then you gotta do a new trick.

11:51.575 --> 11:52.795
And so there's this kind of

11:53.245 --> 11:54.405
Constant pressure if you're gonna keep

11:54.405 --> 11:56.965
that stock price going up, of figuring out

11:56.965 --> 11:58.125
what the next way is.

11:58.385 --> 12:00.965
And then once you do, then other people follow you.

12:01.555 --> 12:03.965
This is one of those funny things that, you know,

12:03.975 --> 12:05.725
economists, there are lots

12:05.725 --> 12:07.005
of different varieties of economists.

12:07.465 --> 12:08.685
Um, but,

12:08.945 --> 12:10.965
but I think at this point, the ones

12:11.165 --> 12:13.005
who study inequality have more

12:13.005 --> 12:14.365
or less agreed that,

12:14.365 --> 12:16.765
shareholder value capitalism is the main cause

12:16.825 --> 12:18.045
of the increase in wealth

12:18.065 --> 12:21.245
and income inequalities that we've observed in the last

12:21.775 --> 12:24.485
40 years, certainly in the United States.

12:25.265 --> 12:29.365
And, and you can basically everything that has,

12:29.895 --> 12:33.845
helps increase profits for shareholders, has been taken,

12:34.425 --> 12:36.005
from, workers.

12:36.705 --> 12:41.085
And, so the, attempts to destroy unions,

12:41.865 --> 12:45.125
which many economists think was the thing that caused a,

12:45.125 --> 12:46.285
something like a third

12:46.465 --> 12:48.445
or half of the increase in inequality.

12:49.145 --> 12:50.685
Um, the outsourcing

12:50.825 --> 12:55.445
and downsizing of corporations, the, offshoring

12:55.545 --> 12:57.365
of activities, all

12:57.365 --> 12:59.925
of these things had a big impact on inequality

12:59.925 --> 13:02.805
because what it meant was, is that labor was getting less

13:02.985 --> 13:04.365
and capital was getting more.

13:05.105 --> 13:08.405
And I think that, clearly, you know,

13:08.565 --> 13:10.685
CEO pay has a big impact as well.

13:10.825 --> 13:12.725
You know, if you create a group of people

13:12.785 --> 13:14.645
who are now making, instead of 40 times

13:14.795 --> 13:17.005
what their workers are making 300 times

13:17.035 --> 13:18.765
what their workers are making,

13:18.785 --> 13:20.485
that's the growth of the 1%.

13:20.825 --> 13:24.285
Um, a huge part of that, of the growth of income

13:24.385 --> 13:27.845
for the 1% it's been because of executive pay.

13:28.465 --> 13:31.645
Um, and you can, you can, you can just see the,

13:31.835 --> 13:36.445
that the, how the shareholder value really shifted,

13:36.465 --> 13:38.005
the balance, not just the balance of power

13:38.005 --> 13:40.245
to financial markets, but the balance of power to people

13:40.265 --> 13:42.285
who were living off of financial assets.

13:43.065 --> 13:46.725
And, and that has, you know, kind

13:46.725 --> 13:51.045
of continued without any, demotion in the last,

13:51.265 --> 13:52.445
30 or 40 years.

13:53.085 --> 13:57.125
I think that, political change is, could happen,

13:57.305 --> 14:01.245
but it would require governments to take actions, to

14:01.965 --> 14:05.245
mitigate, the way in which shareholder value operates.

14:05.825 --> 14:08.765
And so, for example, if, if we look at

14:08.765 --> 14:11.205
what governments have done pursuing the American government,

14:11.255 --> 14:13.165
we've cut taxes on capital gains,

14:13.215 --> 14:16.965
we've cut taxes on rich people, we gave a big tax cuts

14:16.965 --> 14:20.085
for corporations that, Donald Trump gave them in 2016.

14:20.705 --> 14:22.165
All of those things, of course,

14:22.265 --> 14:25.285
didn't make the situation worse for shareholder value.

14:25.305 --> 14:27.045
It made it better for shareholder value.

14:27.665 --> 14:30.685
And, and so we know that governments can do things

14:30.745 --> 14:33.605
to help, the well off

14:33.605 --> 14:35.725
and people who live off of financial assets,

14:36.225 --> 14:39.085
it obviously could go the opposite direction if governments

14:39.085 --> 14:42.725
decide to tax that, tax those returns.

14:42.825 --> 14:47.665
If governments decide to raise, the tax on,

14:47.845 --> 14:50.905
on, on shares and when people sell things on, on capital

14:51.135 --> 14:53.525
Gains that can have a, that could have a big impact.

14:53.815 --> 14:55.005
Right now we see a lot

14:55.005 --> 14:56.965
of interest in increasing the power of labor.

14:57.465 --> 15:00.885
And, and I think, we've got a resurgence

15:00.885 --> 15:02.605
of labor unions in the United States.

15:03.025 --> 15:04.925
Um, I think a lot of people think that that's going

15:04.925 --> 15:07.405
to have a big impact because if people are organized,

15:07.405 --> 15:08.685
they're gonna have higher wages

15:08.685 --> 15:10.085
that's gonna close inequality.

15:10.665 --> 15:14.725
Um, we've had a a a a last year, we've had a whole bunch

15:14.725 --> 15:16.445
of labor organization that's occurred,

15:16.665 --> 15:18.125
and that right there is gonna help.

15:18.185 --> 15:22.005
And if the government, supports that as opposed to tries

15:22.025 --> 15:24.165
to oppose that, which it did do in the,

15:24.165 --> 15:26.605
earlier period in the eight 1980s

15:26.605 --> 15:30.285
and 1990s, that could have a big impact as well.

15:30.345 --> 15:33.245
So the, so the possibility for political action is there,

15:33.625 --> 15:37.965
but you have to remember that, the,

15:38.145 --> 15:40.725
the people who control, large amounts

15:40.725 --> 15:42.885
of financial assets also have a lot of political power too.

15:43.305 --> 15:47.085
And so far they've been very good at, at, at, at maintaining

15:47.085 --> 15:49.125
that and getting the things that they've wanted.

15:49.385 --> 15:53.165
Um, but for example, we're in this period where,

15:53.265 --> 15:56.285
in the United States again where, you know,

15:56.285 --> 15:58.445
people are interested in corporations reshoring

15:58.445 --> 16:00.485
and bringing industry back and all of that,

16:00.545 --> 16:01.885
and having an industrial policy

16:02.105 --> 16:05.805
and, making the energy transition by building all

16:05.805 --> 16:07.685
of those things in the United States cars

16:07.705 --> 16:09.285
and solar panels and batteries.

16:09.585 --> 16:10.645
And to the degree that happens,

16:10.675 --> 16:13.565
that will have an impact on inequality as well.

16:13.705 --> 16:15.885
And so, I think a lot

16:15.885 --> 16:17.285
of companies are gonna benefit from that

16:17.285 --> 16:18.645
and make a lot of money off of that.

16:19.025 --> 16:22.005
But, but that could have an impact as well.

16:22.005 --> 16:23.285
So governments can matter,

16:23.345 --> 16:26.205
but they have to kind of, you know, choose their moments

16:26.385 --> 16:27.725
and do things that might,

16:27.725 --> 16:29.805
might make a difference In many ways.

16:29.945 --> 16:32.725
Um, a lot of shareholder value has become baked in

16:32.945 --> 16:34.365
to the way capitalism works.

16:34.425 --> 16:36.725
And there's, we have a line in the paper where we say,

16:36.905 --> 16:38.045
it's not shareholder value,

16:38.045 --> 16:40.125
capitalism anymore is just capitalism.

16:40.985 --> 16:44.325
And I, I think that, what we've seen is that,

16:44.385 --> 16:47.925
you know, I think most people in the us my father

16:48.065 --> 16:51.285
for example, worked for the Boeing Corporation for 43 years,

16:51.905 --> 16:54.885
had a great pension,

16:55.585 --> 16:57.805
earned way more money than he ever thought he was going to,

16:58.385 --> 17:01.685
and had this kind of, you know, prize middle class life.

17:02.065 --> 17:03.965
Um, I don't think anybody expects that anymore.

17:03.965 --> 17:05.645
Nobody expects to work for the same company.

17:05.645 --> 17:07.525
Nobody expects the company to treat them well,

17:07.525 --> 17:09.605
nobody expects them to do anything,

17:09.625 --> 17:11.285
but what's in the interest of the company.

17:11.745 --> 17:14.125
And I think we're kind of at that kind of point.

17:14.125 --> 17:16.205
And that's one of the big legacies, the shareholder values.

17:16.325 --> 17:18.725
I think people have very low expectations of

17:18.825 --> 17:21.485
how they're gonna be treated, by corporations.

17:22.145 --> 17:24.245
But another one I think is that we're also,

17:24.475 --> 17:27.365
some people could argue that we're past shareholder value.

17:28.105 --> 17:30.525
And, and one of the reasons that is the case is

17:30.525 --> 17:32.525
that in the us, the number

17:32.525 --> 17:34.285
of publicly held corporations has dropped

17:34.285 --> 17:36.765
by about 50% in the last 20 years.

17:37.585 --> 17:39.805
And, there are a couple sources of that.

17:39.945 --> 17:43.325
One of the main ones is, is that there's been, a large,

17:43.625 --> 17:47.685
buyout set of buyouts, some by private equity, about 20%

17:47.705 --> 17:50.485
by private equity and, and a bunch by existing companies.

17:50.505 --> 17:53.165
And what we've seen in a really funny way is,

17:53.225 --> 17:56.085
is an increasing concentration of capital so

17:56.085 --> 17:57.765
that there's been a, a kind

17:57.765 --> 18:00.525
of new monopolization going on out there, monopolies,

18:00.585 --> 18:04.205
strong word, maybe oligo, going on out there.

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And many people see that.

18:05.585 --> 18:08.325
Um, a lot of resilience in the American economy has kind

18:08.325 --> 18:09.405
of gone down because of that.

18:10.025 --> 18:11.165
And again, here's a place

18:11.165 --> 18:13.485
where government policy has come roaring back.

18:13.625 --> 18:17.885
We, we've got, for the first time in, I don't know,

18:17.885 --> 18:19.605
it's been a long time since the 1960s.

18:19.705 --> 18:21.805
We have a really active antitrust policy.

18:22.425 --> 18:24.765
And I think, this is, this is the place

18:24.765 --> 18:26.325
where we're gonna see things change.

18:26.865 --> 18:29.485
But I think we've also seen how shareholder value has kind

18:29.485 --> 18:32.165
of found its way into the leading parts

18:32.165 --> 18:33.205
of the American economy.

18:33.525 --> 18:36.925
I mean, the tech sector is a great example that,

18:36.925 --> 18:38.645
people look at tech and they go, well, you know,

18:38.645 --> 18:39.885
you have all these tech bosses

18:40.105 --> 18:42.805
who told the financial markets to go to hell,

18:43.345 --> 18:45.525
and, we're just gonna do what we want.

18:45.745 --> 18:48.525
And, but you know, in the, in the long run, all

18:48.525 --> 18:50.845
of those people are very concerned about shareholder value

18:51.065 --> 18:53.605
and the whole, venture capitalist framework,

18:53.625 --> 18:55.885
the whole point of it is, is you invest in something

18:55.885 --> 18:57.125
and if it works, you,

18:57.305 --> 18:59.405
you sell it into the public markets, right?

18:59.405 --> 19:01.285
You make a lot of money at that, at that,

19:01.715 --> 19:03.085
when you take it public,

19:03.545 --> 19:05.445
or alternatively, if it's not working, you sell it

19:05.445 --> 19:07.045
to somebody else and you get your money back.

19:07.665 --> 19:09.045
And, and I think,

19:09.245 --> 19:11.685
I think those shareholder value ideas are still out

19:11.685 --> 19:12.725
there and they're percolating.

19:12.755 --> 19:14.725
They've just kind of morphed as, as.

00:00 - So shareholder value, as, as an idea means, actually has a very specific kind of, reference. Shareholder value is about maximizing profits, and the goal of shareholder value is to increase the share price of, of the firm. So, shareholder value applies to publicly held corporations,

00:18 - and, the basic goal of publicly held corporations is to raise that share price. And so profits are very elusive in some kind of way about how do you measure and how do you think about it, and how do you generate them. But raising the share price is very concrete because the idea is that that, what you wanna do is increase the, the value of the shares for the, for the shareholders. shareholder value can be thought of in,

00:45 - four sort of different ways. first of all, it's a description of the power of relationship between financial markets and publicly held corporations. And I think this is a kind of underappreciated dimension of it. If financial institutions are interested in their investments, they're interested in share prices going up, and they're interested in managers doing things that will make share prices go up,

01:08 - and that suggests that they have power influence over the direction which managers pay, corporations and managerial behavior will be oriented towards, fulfilling those, obligations. certainly it's an ideology. managers justi, and by that I mean, managers use shareholder value as a justification. One, there's a great study where someone has gone

01:30 - and looked at annual reports of corporations, and one of the things you can see is that, beginning in the mid, late 1980s and early 1990s, people start using this language and, and all corporate reports start out saying, we're out to maximize the share price for shareholder value. And they all, they all say that, and so all of their actions become justified. third, it's a set of strategies, and I think this is the part that,

01:56 - is the most elusive for most people. And, businesses pursue a set of strategies to, make themselves look good to shareholders. I mean, how do you please a shareholder? And, shareholders are interested in things like, return on assets. So they're not just interested in profits, but profits relative to investments. And what managers do is they construct strategies to affect profits, if you think about that as the numerator

02:23 - and assets, which is what's in the denominator. And so, those set of strategies have evolved over time, and we have a whole bunch of them. They come into existence, managers use them, they impress shareholders show, say, yeah, let's go buy that stock. then of course they get the gain, everybody else gets it. And you go, well, what's your next trick? How are you gonna keep keeping the price, stock price go up?

02:44 - So what what shareholder value does is it continuously puts pressure on managers to innovate new strategies to help increase the share price. And finally, what shareholder value is about is, I, I wanna Go out and call it a theoretical framework for both managers and financial, analysts. And how do you come to have this conversation about how do we increase shareholder value? And what you have to do is you have to have, ways in which you make sense of the world.

03:15 - And most of it is around financial analysis, financial engineering, the financial analysis of a balance sheet. And that is actually a relatively modern phenomena that if you go, you know, before, say 1985, business out there, but it's not out there in the sophisticated way. And we've now had two generations of managers who go to business school basically to learn how to do this. And so this language

03:40 - and this framework is how they approach looking at things. So they're not producing things or products. What they're doing is they're producing tactics that will affect the, the kind of financial characteristics that they're interested in, that they can then pitch to financial analysts and say, Hey, we're gonna raise the stock price. And this is, this is a really different way of looking at the way companies operate. Capitalism is, an incredibly dynamic system.

04:08 - And, what happens in capitalism, typically, if we look at long historical flaws of capitalism, is, we get massive amounts of innovation. Lots of stuff happens, people make a whole lot of money, and then it falls into some kind of crisis or problem. And then people start to question what they were doing, and they say, well, why isn't it working anymore? What should we do now? And usually then someone often outsiders come along and say, Hey, we're gonna do something completely different

04:36 - here, and we're gonna come in and we're gonna change the way everything works, and then we're off on a new round. And that's, that's kind of what capitalism is, right? And I, I think what you have to see with shareholder value is that share value is a response to the economic crisis of the 1970s, in the United States mostly. but also around the world. The high inflation, slow economic growth

04:59 - of the 1970s into the early 1980s. It caused central banks to raise interest rates to really punishing levels. And this, created a lot of problems for corporations because imagine yourself, you're running, let's say US Steel, which, was a big corporation in those days. And now all of a sudden the economy's running slow. your stock price is down. You can't borrow money because it's too expensive to do,

05:25 - and everybody's selling off your stock because interest rates are high. And if you go buy government bonds, you can make 10 or 12% where, you know, US Steel, they can't sell anything. And so companies had to figure out ways to adjust to that. And in the short run, what they did is they held onto cash. They had lots of assets that were, became undervalued. And, and they just tried to stay the course. They kind of had this language of battening down the hatches,

05:52 - and we're gonna get through this and come out the other side. And what happened was, is there became a group of, institutional investors of different varieties from, insurance companies, investment banks, and what we now would call private equity companies like Bain and, KKR. And, and what they figured out was that you could go out and these companies, stock prices had become so depressed that you could buy the company

06:17 - and sell off the pieces and make money. And, and once people figured this out, and they started to do it, every, there were a whole bunch of other people said, Hey, let's do that too. And this created the shareholder value movement. And what, what happened was, is the critique, that, these analysts outside investors had was, look, you managers, you know, you're not, you're not maximizing shareholder value here. Your stock prices are languishing.

06:44 - You have all these assets that are undervalued, you know, let's buy you up, break you up and take the money. And, and this became an assault on American management. We had this large merger movement in the United States in the 1980s that reorganized the relationship between the financial markets and corporations. And at that point, managers had to make a decision. They had to decide, are we gonna go with, shareholder bank capitalism, these institutional investors, and please them?

07:12 - Or are we going to, you know, try to fight them? And actually both happened, we had conflict between city management teams and investors, but at the end, the management team said, okay, we're gonna go along with this, but you guys are gonna have to pay us. And this is when, CEO pay started to really rise. And the CEOs began to ask, was that they wanted, if we're gonna focus on the share price, then we want a piece of it, and we want a lot of shares,

07:43 - and we want you to reward us if we meet goals around the share price. And this begins in the early 1990s, and this kind of settles the whole thing that as soon as CEOs are being given really, really high pay, they're being given rewards to increase the share price, becoming multiple, multiple, multiple millionaires, that kind of seals the deal. And that's where shareholder value really finally kind of lodges into place and becomes institutionalized.

08:11 - You signal to the financial markets. Now all of a sudden, your audience, if you're the CEO, are the financial markets. another thing that happened is that, all of a sudden, chief financial officers and companies started to become very important people because they essentially became the ambassador of the corporation to Wall Street. And the, CFO, you know, was previously a corporate treasurer.

08:34 - And a corporate treasurer was somebody who took the bills and paid them, you know, kind of a low level accountant. but then they became very important because they became the person who listened to what the financial markets wanted, talked their language, and, and gave them what they wanted. And over time, you know, the financial markets would come back and, you know, mostly stock market analysts and, And they'd say, well, look, we don't like this about

08:56 - what you're doing, or, we don't like that. And then managers had to respond to it. And so what we see is we see a set of different kinds of responses over, that kind of evolve and go out there. So the first one was, in America was this de-industrialization that occurred. So they closed down a lot of plant facilities. They sold off assets. but you know, you do that and it's done right. You, you made the money right, you,

09:21 - you, whatcha gonna do next. So then the next thing they did is they decided to change the pension systems and they decided to change healthcare benefits. And, what happened in the United States is many people had what were called defined benefit, retirement, pensions, which meant that depending on how long you worked at the company and how much you made, at the end, you got a fixed a, a benefit.

09:45 - And those went out the window. They almost entirely disappeared, by the time we get to 1995. And that saved companies a lot of money, cut back on healthcare expenses, saved companies a lot of money. And, in the early 1990s, we had the downsizing of managers. one of the great, tactics that, stock markets began to love were layoff announcements.

10:09 - And what happened was, is if you go back to the 1960s and a corporation said they were gonna lay off 10,000 workers, the stock price would get pummeled because everybody would assume your company must be about ready to go bankrupt. But in the 1990s, if you said you laid off 10,000 workers, it was like, let's buy that stock because that means there's gonna be a lot more money for us. And, that's exactly what happened. And, and then, we thought a whole bunch

10:34 - of different tactics that involved after that, the most important of which I think is the stock buyback. And I think that, that the, you know, in general, people don't understand why stock buybacks are, are, important in shareholder value capitalism. But what managers finally realized is, look, the best way to affect the stock price is to buy the stock. So rather than, take money that they might have and build a factory, they took money, they had

10:57 - and they bought their own stock saying, well, that's the best investment we can make your manager. We hear CEOs say that all the time. And, and then, you know, what it would do is it'd restrict a supply of stock and, the stock price would go up. And all companies do this. you know, people think of Apple as a trillion dollar company. Apple has actually one

11:16 - of the biggest programs out there in terms of buying back their own stock. I don't know what impact it ultimately has on the stock price, but it, it's, it's certainly there. And so stock buybacks turn out to be a really popular and big thing. And so you announce you're gonna do $10 billion of stock buybacks, and all of a sudden, you know, those analysts go, okay, that means there's gonna be 10 billion less stock out there.

11:35 - Let's buy it. And that'll bid the price up too. So these tactics evolve, they disperse through the population of large corporations, and then what happens is, is, is you get their impact, but then you gotta do a new trick. And so there's this kind of Constant pressure if you're gonna keep that stock price going up, of figuring out what the next way is. And then once you do, then other people follow you.

12:01 - This is one of those funny things that, you know, economists, there are lots of different varieties of economists. but, but I think at this point, the ones who study inequality have more or less agreed that, shareholder value capitalism is the main cause of the increase in wealth and income inequalities that we've observed in the last

12:21 - 40 years, certainly in the United States. And, and you can basically everything that has, helps increase profits for shareholders, has been taken, from, workers. And, so the, attempts to destroy unions, which many economists think was the thing that caused a, something like a third or half of the increase in inequality. the outsourcing and downsizing of corporations, the, offshoring

12:55 - of activities, all of these things had a big impact on inequality because what it meant was, is that labor was getting less and capital was getting more. And I think that, clearly, you know, CEO pay has a big impact as well. You know, if you create a group of people who are now making, instead of 40 times what their workers are making 300 times what their workers are making,

13:18 - that's the growth of the 1%. a huge part of that, of the growth of income for the 1% it's been because of executive pay. and you can, you can, you can just see the, that the, how the shareholder value really shifted, the balance, not just the balance of power to financial markets, but the balance of power to people who were living off of financial assets. And, and that has, you know, kind of continued without any, demotion in the last,

13:51 - 30 or 40 years. I think that, political change is, could happen, but it would require governments to take actions, to mitigate, the way in which shareholder value operates. And so, for example, if, if we look at what governments have done pursuing the American government, we've cut taxes on capital gains, we've cut taxes on rich people, we gave a big tax cuts for corporations that, Donald Trump gave them in 2016. All of those things, of course,

14:22 - didn't make the situation worse for shareholder value. It made it better for shareholder value. And, and so we know that governments can do things to help, the well off and people who live off of financial assets, it obviously could go the opposite direction if governments decide to tax that, tax those returns. If governments decide to raise, the tax on, on, on shares and when people sell things on, on capital Gains that can have a, that could have a big impact.

14:53 - Right now we see a lot of interest in increasing the power of labor. And, and I think, we've got a resurgence of labor unions in the United States. I think a lot of people think that that's going to have a big impact because if people are organized, they're gonna have higher wages that's gonna close inequality. we've had a a a a last year, we've had a whole bunch of labor organization that's occurred,

15:16 - and that right there is gonna help. And if the government, supports that as opposed to tries to oppose that, which it did do in the, earlier period in the eight 1980s and 1990s, that could have a big impact as well. So the, so the possibility for political action is there, but you have to remember that, the, the people who control, large amounts of financial assets also have a lot of political power too. And so far they've been very good at, at, at, at maintaining

15:47 - that and getting the things that they've wanted. but for example, we're in this period where, in the United States again where, you know, people are interested in corporations reshoring and bringing industry back and all of that, and having an industrial policy and, making the energy transition by building all of those things in the United States cars and solar panels and batteries. And to the degree that happens,

16:10 - that will have an impact on inequality as well. And so, I think a lot of companies are gonna benefit from that and make a lot of money off of that. But, but that could have an impact as well. So governments can matter, but they have to kind of, you know, choose their moments and do things that might, might make a difference In many ways. a lot of shareholder value has become baked in

16:32 - to the way capitalism works. And there's, we have a line in the paper where we say, it's not shareholder value, capitalism anymore is just capitalism. And I, I think that, what we've seen is that, you know, I think most people in the us my father for example, worked for the Boeing Corporation for 43 years, had a great pension, earned way more money than he ever thought he was going to, and had this kind of, you know, prize middle class life.

17:02 - I don't think anybody expects that anymore. Nobody expects to work for the same company. Nobody expects the company to treat them well, nobody expects them to do anything, but what's in the interest of the company. And I think we're kind of at that kind of point. And that's one of the big legacies, the shareholder values. I think people have very low expectations of how they're gonna be treated, by corporations. But another one I think is that we're also,

17:24 - some people could argue that we're past shareholder value. And, and one of the reasons that is the case is that in the us, the number of publicly held corporations has dropped by about 50% in the last 20 years. And, there are a couple sources of that. One of the main ones is, is that there's been, a large, buyout set of buyouts, some by private equity, about 20% by private equity and, and a bunch by existing companies. And what we've seen in a really funny way is,

17:53 - is an increasing concentration of capital so that there's been a, a kind of new monopolization going on out there, monopolies, strong word, maybe oligo, going on out there. And many people see that. a lot of resilience in the American economy has kind of gone down because of that. And again, here's a place where government policy has come roaring back. We, we've got, for the first time in, I don't know,

18:17 - it's been a long time since the 1960s. We have a really active antitrust policy. And I think, this is, this is the place where we're gonna see things change. But I think we've also seen how shareholder value has kind of found its way into the leading parts of the American economy. I mean, the tech sector is a great example that, people look at tech and they go, well, you know, you have all these tech bosses

18:40 - who told the financial markets to go to hell, and, we're just gonna do what we want. And, but you know, in the, in the long run, all of those people are very concerned about shareholder value and the whole, venture capitalist framework, the whole point of it is, is you invest in something and if it works, you, you sell it into the public markets, right? You make a lot of money at that, at that, when you take it public,

19:03 - or alternatively, if it's not working, you sell it to somebody else and you get your money back. And, and I think, I think those shareholder value ideas are still out there and they're percolating. They've just kind of morphed as, as.

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