This is something I think people forget too often. When you build and tune a system to incentivise anti-social behaviour, don’t be surprised when you get anti-social people doing anti-social things. We currently legally demand that management always maximise shareholder value, so that’s what they do, and that’s the sort of person who makes it to higher levels of management. If we changed that goal, the outcome would change too. Unfortunately the lawmakers who would have to make those changes are too invested in the current system for it to happen easily.
I should say that I’m referring to publicly traded companies here, private companies have different incentives.
Directors, including the CEO, don’t have a mandate to increase shareholder value, no, but under UK, and as far as I can see, US law, there are many rules around things like “actions prejudicial to a minor shareholder” and what is actually in the company’s interests, that the shareholders can, and do, sue both the directors and the companies for actions that do not increase shareholder value, especially as companies often hold their own stock on their balance sheets. They can do this because of the way both statutory and case law has formed. If statutory law, at least, made it that companies had a duty of care to their staff, could not lay off or reduce payments to more than some small percentage per year, and had to pay the costs of remidiating their environmental and societal damage as they inflicted it, these cases would largely vanish, and directors would be incentivised to optimise for those things instead.
Basically, if you make getting rich as a shareholder or CEO easier to do without screwing people over than by screwing them, CEOs and their boards will be less willing to screw everyone over in their pursuit of wealth.
This is something I think people forget too often. When you build and tune a system to incentivise anti-social behaviour, don’t be surprised when you get anti-social people doing anti-social things. We currently legally demand that management always maximise shareholder value, so that’s what they do, and that’s the sort of person who makes it to higher levels of management. If we changed that goal, the outcome would change too. Unfortunately the lawmakers who would have to make those changes are too invested in the current system for it to happen easily.
CEOs don’t have a legal mandate to maximize shareholder value.
I should say that I’m referring to publicly traded companies here, private companies have different incentives.
Directors, including the CEO, don’t have a mandate to increase shareholder value, no, but under UK, and as far as I can see, US law, there are many rules around things like “actions prejudicial to a minor shareholder” and what is actually in the company’s interests, that the shareholders can, and do, sue both the directors and the companies for actions that do not increase shareholder value, especially as companies often hold their own stock on their balance sheets. They can do this because of the way both statutory and case law has formed. If statutory law, at least, made it that companies had a duty of care to their staff, could not lay off or reduce payments to more than some small percentage per year, and had to pay the costs of remidiating their environmental and societal damage as they inflicted it, these cases would largely vanish, and directors would be incentivised to optimise for those things instead.
Basically, if you make getting rich as a shareholder or CEO easier to do without screwing people over than by screwing them, CEOs and their boards will be less willing to screw everyone over in their pursuit of wealth.