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Changing the Purpose of Business

Changing the Purpose of BusinessFor far too long, the stated purpose of business was to provide shareholder value, with endless increases of profit and in some cases “returning” money back to the shareholders. But have shareholder really earned the right to such money? Have they been providing value to the business?

Now people are starting to ask about the part of shareholders, not just what capitalism does, but the role of shareholders.

Seth Godin kind of questions it in an oblique way in this blog post:

“Corollary to too big to fail”

He says: “Great organizations listen to our frustrations, our hopes and our dreams. Alas, when a company gets big enough, it starts to listen to the requirements of its shareholders and its best-paid executives instead.” (Boldface put in by me to highlight it.)

Hillary Clinton is starting to lambast these “shareholders”, or more specifically, the investors, as reported in this article: “Tyranny of the Quarterly Earnings” by Wired Magazine.

The thrust of the article is on activist shareholders placing undue pressure on companies to boost their stock prices. “These ‘hit and run’ investors encourage companies to keep employee wages low and only make investments that will yield an immediate return for the next earnings report.” (Again, boldface put in by me.) Carl Icahn is mentioned but there are a couple of others mentioned.

Finally, people are starting to talk about how the focus on shareholders alone is bad for America or society in general. These so-called shareholders are hit and run people who swoop in, grab the money, and then leave, sometimes leaving behind a destroyed or weakened company. Her proposal is to tax capital gains if the investor pulls money out too soon. In other words, she wants to give investors an incentive to keep money in the company rather than withdrawing the money after a few months, or one or two years.

It will take a while but hopefully, we will dismantle the “shareholder value” legacy and put in place a better philosophy where everyone benefits, not just a few rapacious financiers.