Today’s Wall Street Journal features an excellent op ed on how to rein in CEOs’ politically-correct grandstanding, namely, shareholder lawsuits suing the CEOs for damage to shareholder value. Excerpts follow:
“When CEOs Play Politics, Shareholders Can Take Them to Court
“After Target established an ‘inclusive’ restroom policy, its share price plummeted by 40%.
“Memo to activist CEOs: Dust off your notes, open your textbooks, and reread the basics of corporate finance taught at every credible university. The fiduciary responsibility of a CEO is to safeguard the company’s assets and acknowledge this overriding principle: “It’s not our money but that of the shareholders.”
“In today’s heated political climate, some executives have rejected the fundamentals in favor of short-term publicity for themselves and their corporations. When several CEOs quickly resigned over the past few days from the now-disbanded White House Council on Manufacturing, they cited personal views or political disagreement as their reason for leaving.…Wouldn’t shareholders be better off with their interests represented in this powerful group of government officials who control regulatory policy?
…“Target Corp. shareholders have watched helplessly since last year as another case of political posturing played out in North Carolina, where we work and live. Target’s activist CEO, Brian Cornell, responded to the state’s contentious House Bill 2, also known as the bathroom law, by announcing a new “inclusive” bathroom policy in April 2016. What were the results? Plummeting sales due to a widespread boycott, an erosion of market share and, most important, a 40% drop in Target’s stock price between April 2016 and July 2017. That devastation equated to a $20 billion loss of shareholder value while the market rose 15% in that same period.
“For the owners of the company—the thousands of small shareholders and the millions of Americans whose pension plans own Target stock—this performance did not affect their annual incomes, but it affected their life savings and retirement. They got sucker-punched. They should punch back.
…“In the landmark 1919 case Dodge v. Ford, the Michigan Supreme Court laid out the ruling that has guided corporate America ever since. Ford Motor Co. must make decisions in the interests of its shareholders, the court ruled, rather than in a charitable manner. The case is often cited as affirming the principle of “shareholder primacy.”
…“When Howard Schultz of Starbucks decides to take away Christmas cups or hire refugees as a challenge to President Trump, and the stock fares miserably compared with its competition, do the coffee chain’s 24,000 small shareholders have the right to sue? Again, we say yes.
…“Mr. Pritchett is senior vice president of the John Locke Foundation. Mr. Tiryakian is professor of corporate finance and business economics at Duke University.”
Hat tip: Wall Street Journal, Aug. 18, 2017
Click here to go to the previous Founders Broadsheet post (“Friday’s news (8/18/2017)”)
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