What is the reasoning behind this idea. I can understand that stockholders technically own the private company, but without employees or customers the company wouldn’t exist. Companies exist because of a variety of forces including governmental protection through the justice system, customers, employees and suppliers. Why is the loyalty supposed to be to the stockholders above all the other groups?
You answered your own question: because they own it. There isn’t any other answer. The company wouldn’t exist w/o customers, true, but the company was not formed [B*]for ***the customers-- it was formed to make money for the owners. Customers trade value for value with a company, and have no loyalty to that company other than the value they derive from the product(s) produced by the company.
I was just thinking about this question today, but in a different way. When a company goes public, they have an IPO, where their stock is initially offered at some pre-negotiated price, and exactly how many shares there will be to offer. Then, the price can go up or down from there.
Just like what John Mace said, companies usually have an IPO in order to raise mass amounts of capital to either start, or further grow their business. Before any stock is sold, the company owns every single piece of stock. Then they sell them off to investors during the IPO. The proceeds from those initial stock purchases go directly to the company. Once all of the stock is sold, that’s it. No more. And all the money that the company gets, well, they better use it wisely, because that’s it. No more.
Then, the listing Stock Markets goes on to further trade it, as the price goes up and down. The originating company gets absolutely no proceeds in these trades, unless, of course, they are buying and selling their own stock.
But, since the company gets no proceeds from these later trades, and chances are that only a few of the people who hold that stock are original purchasers of the stock from the IPO, what loyalty does the company have for those stock holders?
Not only that, but a dividend is expected to eventually be paid to each share of that stock, by the company. Huh?
Now, ask most stock investors, and very few of them are buying stock out of sentimentality. Most are buying stock in order to make money. They may not even know what the company does. Chances are, they never visited the company, or met any employees from the company. So, they are simply there to make money by selling something that is worth more than what they paid for it. They do not show any loyalty.
So, let me try to answer my own question.
A company is loyal to its stock holders because the stock holders are trying to make a profit by buying and selling it. The profit that they can make depends on how valuable the stock is.
But, then again, why does the company even care? They aren’t getting any proceeds out of it. The value could go to .01, and the company still gets to keep the IPO money.
Because, 1, if the stockholders get too upset about the performance of the stock or the company, they’re going to fire the officers, and 2. if the company ever wants to issue new stock to raise money, they’re going to want it to sell at a decent rate.
While there is a certain amount of “ownership” in the psychological sense inherent in being top management of a broadly-owned publicly-traded company, Chicago Faucet, there is inherently no difference between the president of a company and the janitor who cleans his executive restroom – both are employees of the company. The actual owners, the stockholders, can theoretically, and have occasionally actually, taken action to get rid of a venal or incompetent management and get a company whose value has dropped moving back towards profitability.
If you’re my boss, I’m answerable to you, and you to your own boss – and the top executives are answerable to the owners as a group. Though they can afford to piss off someone who owns 100 shares, they cannot afford to do so to enough stockholders to threaten a majority supporting them – and if they want a free hand in company operation, they are well advised not to upset any significant amount of stockholders.
See: Fiorina, Carleton S.
I’m no expert, but isn’t it even more than loyalty? When a company sells stock aren’t the executives of that company essentially entering into a legally binding contract which states that they will always act in the best interests of their stockholders? If they excessively violate this can’t they not only be fired, but prosecuted?
Ms. Fiornia is leaving with a $20 million+ Golden Parachute. i don’t think she’ll be in any dire economic straits any time soon (unlike said janitor who cleans up the executive washrooms).
What do you get when you combine 2 large PCs companies that are losing market share to Dell? One huge PC campany that will lose market share to Dell.
Has there even been a successful merger of two large computer companies? I can’t think of one.
I guess the moral of the story is that it’s better to be the president than the janitor.
It isn’t. That is just the way it is in the United States.
In Japan, for example, the stockholders are third place, after employees and customers.
Japan’s companies have done pretty well using that system. Or at least they were doing spectacularly well with it. One of the reasons is that putting the stockholders in first place leads to a very short term thinking, while concentrating on employees and customers first may help in the long term.
Japan’s system is only focused on employees if you look at it in a specific way. Japan’s companies traditionally are focused around the executives. The executives want to run a successful company.
Success is probably more important to a Japanese businessman than an American businessman. Some American CEO’s walk away quite happy with themselves if they take over a company and then merge it into some larger conglomerate, making themselves and the stockholders money in the process. While a traditional Japanese business view would be the company had been “conquered” by the company that bought it.
So by success I mean financial strenght/safety, durability et cetera.
The Japanese use a Z-management system that focuses on very reliable, high skilled workers that feel they are part of the company and want to do their best to make the company succeed at all levels. The executives however aren’t in it to make employees happy, their employee relations are just how they feel they keep the company strong, and that’s the real goal above and over everything else.
It’s just the local supermarket. They say customer first but they really mean “business first.” Customer first sayings just exist because supermarket owners are businessmen who know their business does better when they have happy repeat customers. But they still haven’t set up shop to “serve the customers” they set up shop to run a successful (profitable) business.
Legally, the board of directors owes a fiduciary duty to the shareholders and is supposed to look after their interest. This is a complicated topic that can – and has – filled treatises on corporate law, but the basics are this:
-
A director owes a duty of loyalty to the company; he can’t, for example, use his position to enrich himself by approporiating for himself the buisiness opportunities of the company.
-
A director owes a duty of care. That is, they aren’t supposed to just rubber stamp decisions – they’re supposed to review things carefully and exercise independent judgment as to what’s best for the shareholders.
-
Ordinarily, the duty of care only requires an adequate review, not a particular substantive decision. Directors are shielded by the business judgment rule – as long as they’ve considered a decision carefully and that decision isn’t totally irrational, they’ve met their duty even if the decision turns out poorly.
-
Deviation from #3. If a company is being put up for sale, the directors have a duty to maximize the price recieved by the shareholders. It is in fact a breach of their fiduciary duty to consider other factors like the likelihood of layoffs when evaluating competing buyers.
That is back of the envelope type stuff; the subject is actually a lot more nuanced. But the overall point should be clear: directors are there to protect shareholders. By extension, so are the senior executives, since they are hired and fired by the board.
Oh, and it isn’t a matter of being prosecuted. What happens is shareholders can bring shareholder derivative suits alleging a breach of fiduciary duty. It’s still purely a civil, not criminal, matter.