We are approaching a turning point in business where more and more organizational leaders are questioning “shareholder primacy” – the notion that business exists primarily to maximize returns for shareholders. This old idea, gussied up in modern financial theory, has come to represent what’s most wrong with business today; concentrating wealth in fewer and fewer hands, while forcing the costs onto the rest of society and the planet.
It’s time to root these ideas out as the dominant frame for business.
You might not care much for MBAs and business schools, and you may wonder why you should care about what they teach in these programs. But, one of the best ways to get rid of something you don’t want is to stop it from taking root in the first place. If we want to get rid of shareholder primacy, then we need to stop it from taking root, and a good way to do that is to stop teaching it to future business leaders.
The Great Arc of History
Marjorie Kelly’s The Divine Right of Capital is an excellent deep dive into shareholder primacy. It argues that our modern ideas about corporations aren’t actually all that modern; in fact, they come straight out of a feudalistic culture. Our legal system, corporate governance structures, and most basic cultural assumptions about firms, are all stuck in this very old frame that sees companies as just pieces of property – existing not for customers, employees or society, but first and foremost for the benefit of their shareholders.
Over the past few hundred years, as we’ve lifted up our political systems with the lofty ideals of democracy and human rights, our economic systems – though shiny and new on the surface – remain stuck in a very old paradigm that really does concentrate social advantage into the hands of the few. What’s more, we continue to perpetuate these outmoded models by teaching them to future business leaders in the very places where should be pioneering cutting-edge, new understandings of business. Ugh.
Cleaning Up Our Classrooms
The other day though, to my great delight, I ran across two surprising articles in the Financial Times. The first, highlighted the grip that shareholder primacy has in most MBA programs:
“A study conducted by the Brookings Institute in 2011 found that few business schools included content on the purpose of the corporation in the MBA and that students were likely to graduate with the view that increasing shareholder value was the corporation’s primary goal.” … “Moreover, the mistaken idea persists that maximizing the share price is among executives’ legal duties. “Many professors at top schools argue that corporations have a fiduciary responsibility to maximize value to shareholders,” according to the Brookings study.”
The second article, by Sarah Murray, asks why shareholder primacy is still taught in our business schools. It talks about how Milton Friedman, and Michael Jensen and William Meckling published influential articles that laid the intellectual groundwork for shareholder primacy in the 1970’s. Then, as the stock market boomed in the late 90’s, business schools recruited more finance professors, who displaced their “managerialists” predecessors with a new quantitative approach that dovetailed nicely with the black-and-white simplicity of a single-minded focus on maximizing shareholder returns.
What’s most interesting about this second article is that such an outright questioning of shareholder primacy should appear in the Financial Times:
While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model. Yet for reasons ranging from the tenure system to institutional inertia, moving away from this model will be tough.
I graduated from business school several years before the shift that Murray highlights. It was a strong finance school though, so the ideas were already hovering over what I was learning, like some dark approaching storm.
What we teach in schools does matter. In this case, it’s passing along some very bad assumptions about how to run our companies to a whole generation of MBAs.
I believe we are now seeing a groundswell in questioning the shareholder primacy model. You see it in the B Corporation movement, the dynamic growth of social enterprise and in the way business writers are talking about the future of business.
How will the schools respond? A new breed of MBA programs like BGI in Seattle and the Presidio Graduate School in San Francisco, along with a growing number of more traditional schools are now emphasizing ecological sustainability in their programs. This is an excellent sign that the market for MBA programs is shifting. Students are voting with their feet for a new breed of business programming.
Electives in green business and Corporate Social Responsibility aren’t enough though. We need to extract the shareholder-centric business frame from our MBA programs. Shareholder primacy is failing our corporations, our society and our planet. It’s time for an expulsion.