How Bank of America exposes the false promise of the shareholder revolution
Something interesting is happening at Bank of America: The shareholders are squabbling.
Unpacking why will require a brief tour of economic theory, recent history, and Hollywood. (Of all things.) But it will also give us a chance to examine how we wound up with the corporations we have, and what we might be able to do to make them better.
But first, the dish: Last Tuesday, Bank of America's shareholders took a contentious vote that secured CEO Brian Moynihan's ability to continue as the chairman of the corporate board. At a previous meeting in 2009, shareholders passed a bylaw requiring that those two jobs be held by separate people. The idea was that an independent chairman was needed to keep the CEO in check, and ensure he serves the interests of the company and the shareholders first. But then the board essentially brushed aside that decision by appointing Moynihan to both roles, setting off the latest confrontation.
"The organizational mind-set is not 'How can we better serve our customers?' but 'How can we charge more money for doing less?'" Frederick E. Rowe Jr., a Dallas money manager who sold off his Bank of America stock in protest of that culture, told The New York Times. "Not coincidentally, the company’s attitude is similar toward its shareholders, the legal owners of the business, to whom the board owes its primary fiduciary duty."
The opposition got a relatively large vote — 37 percent — but Moynihan's backers nonetheless prevailed.
Rather than get into the merits of this dispute, it's worth noting how weird it is that this is actually the issue. The tribal divides within corporations that gave rise to this fight are a relatively recent phenomenon, historically speaking. As economist J.W. Mason laid out in a helpful paper, most all corporations were run as privately held, gargantuan family businesses in the late 1800s. The rise of shareholder ownership as the norm occurred around the turn of the century, and was such a new phenomenon that major economists like John Maynard Keynes marveled at the sudden turn corporations were taking to "socialize" themselves.
While the shareholders were ostensibly "owners," they wielded little-to-no real power over business decisions. They invested in corporations, and then received a modest fixed payout. But management essentially ran things according to what they thought was best, by their own standards, with little regard to what shareholders thought.
That all changed in the 1980s, when shareholders reasserted their power over corporate decision-making and the flow of money through corporations. If you're a movie buff, the famous speeches by Danny DeVito and Michael Douglas — in Other People's Money and Wall Street, respectively — were both made by characters defending the shareholder revolution. Changes in regulations and various court decisions were part of what allowed that transformation. But some of it was reminiscent of the revolution in the use of the filibuster: a shift in norms once people realized those informal norms were the only thing holding them back.
In Other People's Money, DeVito's character claims his revolution will be best for everybody in the long run. By liquifying companies that aren't performing well (by his particular standards), the money could be reinvested in better projects that will grow jobs and incomes. This is a pretty standard bit of rhetorical jujitsu in defense of the belief that any corporation's first duty is to maximizing shareholder value. But the data doesn't back it up: Mason's paper and further work show that former correlations between corporate cash flows, borrowing, and investment have detached in recent decades, as corporations have become massive cash machines spitting out money to shareholders. Indeed, shareholders' demands for payouts have become so intense that it appears to even drive corporate borrowing. As a result, equity — shareholders' ownership stake in companies — has become a net drain on many corporate balance sheets.
At the start of the shareholder revolution, it was seen as a hostile conflict between shareholders and management. But these days, corporate governance has adjusted such that CEOs and upper management are usually hard to disentangle from the corporate boards ostensibly elected by shareholders to oversee them. They're also rewarded primarily with stock, so they're essentially shareholders themselves. It's no coincidence that inequality has been driven primarily by capital gains income, and that inequality and CEO compensation took off in conjunction with the 1980s shareholder revolt.
As Mason put it in another piece, capitalists aren't interested in doing some particular social good. They're interested in being able to liquidate that social good into cold hard cash at their convenience. Shareholders, CEOs, and corporate boards all fall under the definition of "capitalists" for these purposes. And the modern stock market provides the ATM they all use.
Or, to quote DeVito's Larry The Liquidator: "You don't care if they manufacture wire and cable, fry chicken, or grow tangerines. You want to make money!"
And that's why "maximizing shareholder value" fails to deliver the broad benefits for all Americans that it claims to.
So yes, it's interesting, at a certain level, that mutual funds were in support of Moynihan holding both jobs at Bank of America and public pension systems weren't; that both have various intersecting conflicts of interest on the matter; and that it's hard to find actual evidence that it matters for shareholder wealth whether positions of chairman and CEO are held by the same person or not. There are possible reforms we could make to federal law, which would then influence the structure of corporate law in this space. But the deeper truth is that the connection the investor Rowe implies — between how a company treats its shareholders and how it treats its customers (or workers, or society at large) — isn't actually there. Shareholders are a class unto themselves, and their interests are not those of customers — or the interests of workers, or the interests of the rest of us.
Perhaps the warring mutual funds and pension systems should hug it out and get back to cooperative, data-driven efforts to maximize shareholder wealth. But meanwhile, the rest of us might want to ask why we ever allowed them to maximize that wealth in the first place.