“No, the shareholders don’t own the corporation”

The excellent Justin Fox makes the excellent point that I have made many times: that nobody in the ecosystem of publicly traded companies — including shareholders – is anything like a business owner.

And no, the shareholders don’t own the corporation — they own securities that give them a not very well-defined stake in its earnings, and the freedom to flee with no responsibility for the corporation’s liabilities if things go pear-shaped.

Justin’s post — and the discussion with Felix Salmon — is well worth reading. I also especially liked the paper by Lynn Stout that Justin links to: “Bad and Not-So-Bad Arguments For Shareholder Primacy.”

Restating Justin somewhat, the key difference affecting incentives, from my perspective: The difficulty of exit for real business owners, and the time required to achieve it, is huge. Having sold quite a few businesses myself, I can assure you that it requires months or years of hard work. There’s real risk to the business associated with the process (revealing company secrets to other players, freaking out employees, suppliers, and customers). And the expected results, when you start the process, are deucedly uncertain.

By contrast, shareholders can exit with a few mouse clicks.

Because they can’t just walk away with their “share” of the business, instantly and effortlessly converted into cash, business owners have every incentive to keep all the stakeholders in the business — suppliers, creditors, employees, managers, customers — happy and working together. In short, maintaining and building a “going [and growing] concern.” For shareholders, those incentives are diluted to the point of nonexistence.

The notion that the ecosystem of modern business bears any relationship to Adam Smith’s village of butchers and bakers is profoundly deluded.

Cross-posted at Angry Bear.

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