The World's Dumbest Idea: Maximizing Shareholder Value [pdf]
"Maximizing shareholder value" has indeed gotten out of hand. There are several reasons for this.<p>One is tax policy.  A corporation can pay for its capital in three ways: 1) dividends on stock, 2) interest on loans, and 3) stock buybacks to increase the stock price.  The first is taxed more highly than the second two. This has a huge influence on corporate behavior.  Because payments on loans are not taxed, converting equity to debt increases profits. This funds the entire "private equity" industry, which is really about leveraged buyouts.  This bias in favor of loans also increases the involvement of the banking industry in corporate finance.<p>Loans and investments aren't really that different.  They once were; lenders expected to be paid back. Then came junk bonds, where the interest rate is cranked up to compensate for the risk, and the securitiziation of debt, which allowed off-loading the risk onto other investors.  (See 2008 financial crisis.)<p>There's an occasional call to "end the double taxation of dividends". Taxing interest paid and stock buybacks at the same rate would be equally effective. This would be a good time to do that economically, because interest rates are so low.<p>Stock buybacks are mostly a tax dodge.  But that's not the full reason for their popularity. For stockholders, they're no better than dividends. But for stock <i>option</i> holders, which usually include the CEO, they're a windfall.  Option holders get nothing when the company pays a dividend and the stock price remains the same.  But in a buyback, the stock goes up and they win big.  This is one of the major factors driving CEO pay upward.  (If you assume CEOs are rational actors as regards their own compensation, much corporate behavior becomes clearer.) Japan doesn't allow stock buybacks for most types of corporations. The US does. It doesn't really benefit anybody but management.<p>So that's the tax policy argument. It's dull, but important.<p>As for why companies prioritize shareholders so much, more than they used to, the reason is simple - less fear by companies.  Companies used to be afraid that overdoing it would lead to government action. Their business might be nationalized, taken over by the Government. Britain did that to the rail, coal, steel, airline, power and telephone industries.  The US never went quite that far, but electric power and telephone companies used to be regulated utilities with rate-of-return regulation, and the airline and trucking industries were regulated by the Civil Aeronautics Board and the Interstate Commerce Commission. In the US, this was a political compromise between big business and small business. Small businesses didn't want big monopolies to have control over their essential services, like power and transportation.<p>All this changed starting in the late 1970s.  Nationalized and regulated businesses were stable, but seemed inefficient. They had no incentive to take risks to improve.   The history of the Reagan era is well known, so that doesn't have to be repeated here, but reviewing the history of deregulation is useful. What seems to happen in deregulation of regulated monopolies is that a large number of new companies enter the field, and prices go down. Then most of the new companies go bust, and the winners consolidate.  The result tends to be deregulated monopolies.  Look at the last 30 years of the telephone industry, from AT&T to lots of little companies and back to AT&T.<p>There's another source for the decrease in corporate fear - the end of communism.  It's hard to realize this now, but from the 1930s through the 1970s, there was real worry in the US that communism might beat capitalism economically. By the 1950s and 1960s, the USSR had a successful space program and was industrializing rapidly.  Capitalism had serious ideological competition.  In the 1980s, though, it became clear that the USSR couldn't make their system work. It worked for some of the big, centralized stuff - coal, steel, power, and such. But the rest of the economy didn't work very well. With that threat removed, companies could stop worrying about socialism and communism gaining popularity.<p>Related to this was the decline in labor unions. This has a lot of causes, but the biggest one is simply that unions peaked in the era when industry centered around huge plants with huge numbers of semi-skilled employees.  Those were the situations in which unions had the most leverage. There were once steel mills which employed 5,000 people with shovels.  If you visit a steel mill today, there will be some shovels around, but they're just for cleanup. You'll see a lot of machinery and not many people. Manufacturing employs 7% of the US workforce.  It was around 40% in 1950.<p>Labor unions once had a big influence on working conditions.  When a sizable portion of the workforce was unionized, non-union businesses tended to have working conditions not much worse than union shops. Companies didn't want a labor-organizing campaign. So the 8 hour day and the 40 hour week were standard, and pay tended to follow union levels in non-union businesses.  That's disappeared.<p>As a result of these changes, there's no major political opposition left to "maximizing shareholder value". That's why we're where we are now.