How Wall Street Bent Steel
12/11/2014 11:19 AM
By Dan Sweeney
Director, Institute for Enterprise Ethics
On Sunday, December 7, the New York Times ran a lengthy article with the above mentioned title detailing how an activist investor forced a publicly traded but family dominated steel company to split up into two public companies and put an entire city at risk. The board said they had no choice because “If the number is big enough the board is going to have to look at it and say ‘Ugh, OK….’ We are a publicly traded company.”
Nelson Schwartz, the author of the article went on to say “As in all publicly traded companies Timken Steel’s board and top executives have a fiduciary duty to shareholders to maximize both profits and investor returns.”
But this is not so. According to Lynn Stout, the Distinguished Professor of Corporate and Busness Law at Cornell Law School in her book The Shareholder Value Myth. Neither Federal law, State codes and statutes or state case law contain any provisions mandating the primacy of shareholder value over any other goal of a corporation.
“The notion that corporate law requires directors, executives, and employees to maximize shareholder wealth simply isn’t true. The idea is a fable.” (p. 24)
“Judges may say different things about what the public corporation’s purpose may be, but they uniformly refuse to actually impose legal sanctions on directors or executives for failing to pursue one purpose over another. In particular, courts refuse to hold directors of public corporations legally accountable for failing to maximize shareholder wealth.” (P.29)
“As far as the law is concerned, maximizing shareholder value is not a requirement; it is just one possible corporate objective out of many. Maximizing shareholder value is not a managerial obligation, it is a managerial choice.”
So when presented with a choice between taking even a high price for the company’s shares or protecting the income and jobs of their employees, protecting the businesses of their local vendors and supplier, protecting the livelihood of many, many other local businesses that live off the spending generated by the company’s payrolls, investing in state of the art capital for long run sustainable economic performance, investing in the quality of life of the local citizenry in the form of education and cultural facilities, the board of directors should not have taken the excuse of law or regulation. They should have remembered that their responsibilities lie not to the wealth of their shareholders, but to the long run benefit of the corporation. They should have shown more steel themselves and struck a much, much better bargain for the corporation.