“The Dumbest Idea in the World”: Corporate America's False - and Dangerous - Ideology of Shareholder Value

By Lynn Stout

August 29, 2012  |  For at least the past two decades, Americans have been duped into believing that the sole purpose of a corporation is to maximize value for its shareholders. That belief, first promoted in business schools, has been absorbed in the media, in academic circles, and in the political realm -- even progressives like Al Franken have repeated it as if it were indisputable fact. But in reality, it has no basis in the law or American precedent. The maniacal quest to raise share price is bad for eveyone -- even shareholders themselves. This is why scholars, journalists (most recently, Joe Nocera of the New York Times [2]) and even corporate leaders are coming to the realization that the American corporation has made a wrong turn based on a false ideology. No less than Jack Welch, the former CEO of General Electric and a former enthusiast for shareholder value ideology, has done an about-face, calling it "the dumbest idea in the world."

Fortunately, there's new movement aimed at challenging the destructive ideology shareholder value. AlterNet has been on the forefront of this movement, publishing a series of articles, "Corporations for the 99% [3]" in partnership with William Lazonick, one of America's top authorities on the American business corporation, who, along with AtlerNet's Lynn Parramore and jouranlist Ken Jacobson, set about debunking this dangerous myth. Cornell University law professor Lynn Stout's new book [4], “The Shareholder Value Myth,” is a welcome contribution to this movement -- a must-read for anyone who seeks to understand the relationship between corporations and the public and to learn how to overturn a myth that has done incalculable damage to our society and economy. Below is an excerpt from the Introduction to Stout's book. ~Editor

The Dumbest Idea in the World
The Deepwater Horizon was an oil drilling rig, a massive floating structure that cost more than a third of a billion dollars to build and measured the length of a football field from bottom to top. On the night of April 20, 2010, the Deepwater Horizon was working in the Gulf of Mexico, finishing an exploratory well named Macondo for the corporation BP. Suddenly the rig was rocked by a loud explosion. Within minutes the Deepwater Horizon was transformed into a column of fire that burned for nearly  two days before collapsing into the depths of the Gulf of Mexico. Meanwhile, the Macondo well began vomiting tens of thousands of barrels of oil daily from beneath the sea floor into the Gulf waters. By the time the well was capped in September 2010, the Macondo well blowout was estimated to have caused the largest offshore oil spill in history.1

The  Deepwater  Horizon disaster was tragedy on an epic scale, not only for the rig and the eleven people who died on it, but also for the corporation BP. By June of 2010,  BP had suspended paying  its regular  dividends, and  BP common stock (trading around $60  before the spill) had plunged to less than $30 per share. The result  was a decline in BP’s total stock market value amounting to nearly $100 billion. BP’s shareholders were not the only ones to suffer. The value of BP bonds  tanked as BP’s credit rating was cut from a prestigious AA to the near-junk status BBB. Other oil companies working in the Gulf were idled, along with BP, due to a government-imposed moratorium  on further deepwater drilling in the Gulf. Business  owners and workers in the Gulf fishing  and tourism industries struggled to make a living. Finally, the Gulf ecosystem itself suffered  enormous damage, the full extent of which remains unknown today.