For executives, directors and owners of large, publicly traded companies, total shareholder return – TSR – has been the era’s dominant mantra. Improved shareprice plus cash dividends have come to define the currency of the realm. For company executives, corporate directors and portfolio managers to think otherwise is to violate their oath of office, to fall short of their fiduciary duty.
That is the formulation that has dominated the executive suite and board room for the past two decades. And little wonder. Institutional investors – pension funds, investment companies, hedge funds and other professionals that oversee giant portfolios – now control two-thirds of America’s publicly traded shares. This has given them the clout to force company leaders to focus on delivering near-term shareholder value above all else. Executives and directors who repeatedly fall short can find their careers cut short.
But what might seem an idée fixe of the American way is really a moment’s artifice, a prescription that served a past era but less well the current one. The rise of investor capitalism helped force out self-serving and poorly-performing executives, and bolstered boardroom prevention of executive malfeasance. Yet in doing so, it created two byproducts that have become increasingly dysfunctional for both companies and the country.
The first is an unrelenting pressure of the equity market on company leaders to meet quarterly TSR expectations, regardless of the impact on the domestic workforce. Many companies have consequently streamlined their rosters at home and expanded their operations in China, India and other fast-growing markets abroad.
The second is an incessant equity-market demand on company leaders to focus on their own advantage whatever the disadvantage for others. Fewer executives and directors have thus been able to step forward to advocate what is required for a vibrant economy, not just what is required for their own prosperity.
But with domestic employment stalled and U.S. growth imperiled, now is a good time for executives, directors and owners to revise the rules of investor capitalism, placing long-term collective growth and employment security back in their mission statements.
If Fortune 500 companies, for instance, each added just 1,000 Americans to their payrolls, they could jointly expand U.S. employment by half a million and cut national unemployment by a third of a point. The culture of investor capitalism would discourage if not prohibit such an action, but that is precisely why it is time for the past era’s mindset to give way to a revised attitude.
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