Towards a More Accurate Capitalism

There is plenty of stuff in this article from The Nation that I do not agree with. But, some excellent points are made too. I've been harping lately on the fact that shareholders need to monitor corporate boards and boards need to monitor management, so that the activities of a company create shareholder value. Here is part of the reason that is so problematic:

The AFL's Office of Investment won a pivotal victory for all mutual-fund investors in early 2003 when it persuaded the Securities and Exchange Commission to require that mutual funds must disclose how they vote the proxies in corporate-governance shareholder fights. Fidelity and Vanguard, the two largest mutual funds, led the industry in opposing the measure, and for good reason. These investment firms regularly vote against the interests of their own rank-and-file investors in order to curry favor with corporate managements. Why? Because the corporations hire them to manage corporate-run pension funds and 401(k) plans. If Fidelity and Vanguard vote against the corporate boards, they will lose lucrative contracts. If their votes against the investors are revealed, they will lose lots of them. Disclosure thus opens up a new front for leveraging corporate behavior and enforcing the fiduciary obligations in finance.

Shareholder value doesn't just mean a good return on the stock price – it means whatever shareholders value. Here's a great quote from the article:

"The capital that belongs to working people should serve their purposes and values; right now it doesn't," Blackwell says.

Bingo. It is perfectly legitimate to run a company and NOT focus on profit. If the owners want to run it for the benefit of the employees or the community or whatever, that is fine, and if the shareholders receive a lower financial return on their investment, perhaps the social return will make up for that.

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I think companies should be run for profit. People have invested money into these companies, and it would be immoral to do anything other than provide them with the best return possible. But, that is done under the assumption that financial return is what they are seeking (which it usually is). However, the actions of corporations do have effects on the environment, society, and culture, etc. If people truly value these things, capitalism should reflect that.

The article isn't really focused on this topic, but I think this is the most important point from it – if shareholders get more involved, the actions of a corporation will become a more accurate reflection of what shareholders value, and that is how it should be.