After making his bones defending entrenched corporate managers from the discipline of the market for corporate control, Martin Lipton lately has been defending entrenched corporate managers from the discipline of the stock market. (Admittedly, I also believe in deferring in some cases to board decisions about takeovers and to insulating boards to some extent from shareholder activism, although I do so for policy rather than business motives.)
In his latest screed, Lipton once again peddles the same gross misrepresentation upon which he seems to dote:
Since the 1970s, when the work of Milton Friedman, Michael Jensen, and Frank Easterbrook took hold in business schools, activists and raiders in high-profile proxy fights and hostile takeovers on Wall Street have wrapped their arms around the shareholder-primacy narrative to advance their own short-termist objectives. Far from shared scholarly interest, their objective was plain: To justify cutting off directors’ reasoned judgment, in favor of maximizing short-term shareholder value, notwithstanding the attendant harm to the health of our corporate and economic landscape and even our national security.
It's as if he thinks the 1980s Chicago School set out to trash the country. In doing so, he completely misrepresents the Chicago School argument. All of which brings to mind Alex Edmans observation that "criticisms of Friedman are based on serious misunderstandings about what he actually wrote, casting doubt on whether their authors actually read beyond the title."
Somewhat unfairly, Friedman’s focus has been taken to mean “short-term value,” generating gains to benefit current shareholders at the expense of other stakeholders. But Friedman is best read as embracing maximizing shareholder value over the long run. ... There is another rub, and Friedman anticipated it: Even long-term shareholder-value maximization can’t address all problems faced by a firm. Some problems — climate change, for example — are arguably more complex than Friedman envisioned. In these cases, public policy changes are required.
Turning to Jensen, Lipton's misrepresentation of his position is even more egregious. Jensen himself wrote:
... we must give employees and managers a structure that will help them resist the temptation to maximize the short-term financial performance (usually profits, or sometimes even more silly, earnings per share) of the organization. Such short-term profit maximization is a sure way to destroy value. ...
Indeed, it is obvious that we cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency.
Does that even remotely resemble Lipton's disingenuous misrepresentation?
In fact, as I discuss at length in my book, The Profit Motive: Defending Shareholder Value Maximization, Friedman, Jensen, and other proponents of shareholder value maximization (yours truly included) favor long-term perspectives. Yet Lipton consistently misrepresents their position.
In the second place, it is not the shareholder value maximization principle that threatens our economy but rather the half-baked stakeholderism Lipton expounds. Steven Kaplan observes:
Professor Friedman was and is right. A world in which businesses maximise shareholder value has been immensely productive and successful over the past 50 years. Accordingly, business should continue to maximise shareholder value as long as it stays within the rules of the game. Any other goal incentivises disorder, disinvestment, government interference and, ultimately, decline.
Thisis, of course, the basic point of the second half of my book The Profit Motive: Defending Shareholder Value Maximization, in the course of which I critique Lipton's prior arguments at length.
