The Harvard Business Review offers a provocative thought in its April 2010 issue: According to two professors at overseas universities (which may be relevant), shareholders are not the owners of corporations – and boards of directors shouldn’t feel so compelled to make decisions in the shareholders’ interest.
No, this isn’t an April Fool’s Day joke – at least, I’m pretty sure it’s not.
Citing the recent Kraft Foods takeover of Cadbury, a case of M&A not welcomed on the British side of the Atlantic, the article asks whether the Cadbury board could have said no – or said it more emphatically – and stood its ground.
Loizos Heracleous, a professor of strategy and organization at the University of Warwick, UK, and Luh Luh Lan, associate professor of law at the National University of Singapore, offer companies what has to be a contrary opinion:
Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person.
The two go on to say that boards can put their own judgment ahead of shareholder interests in making decisions such as whether to be acquired:
What’s more, when directors go against shareholder wishes – even when a loss of value is documented – courts side with directors the vast majority of the time.
Directors are mostly misinformed about their obligations, the profs write.
As an investor relations practitioner (and small shareholder of a few companies), I disagree with the academics. My core philosophy of IR is that management and boards should treat shareowners as exactly that – the owners of the company.
In the cultural funk that seems to follow the pain of each recession or financial crisis, we are once again hearing voices that declare our companies should lay aside the self-interest of shareholders and pursue the greater good.
Harvard and other universities seem to be advocating on this issue: In an HBR article last summer, a Stanford business prof made a similar point, arguing that stakeholders, rather than shareholders, should come first in corporate decision making.