Capitalism and Shareholder Activism

This posting is on the topic of shareholder activism and its role in the capitalist system.

Although often misunderstood, shareholder activism is derived from the fundamental purpose of corporations under capitalism. Activists sometimes get a bad reputation in the media. They are often accused of having an “agenda” or disdainfully described as attempting to “hijack” the normal orderly functioning of a company. This portrayal is unfortunately at odds with the proper purpose of corporations. The sole purpose of a corporation is to maximize profits to its owners. Everything else is superfluous.

To the extent that corporate executives are not owners of the company, their job is to maximize returns for shareholders. They are employees of the owners and therefore properly subordinate to owners. Nothing more, nothing less. Very often however, managers of corporations loose sight of this and fail to act in the interests of shareholders, who by law are owners of corporations.

When corporate managers begin to loose perspective, it is appropriate for shareholders to take action to force management changes. Unfortunately, it frequently happens that corporate managers loose perspective and allow earning to slip. In these cases, shareholders must step in to force changes. A classic example of this kind of “activist shareholder” is Karl Icahn, who famously attempted a takeover of the Motorolla corporation after its CEO Ed Zander failed to realize his corporations potential (here).

But, you don’t have to be billionaire like Karl Icahn to claim your rights as a shareholder. If a company you own is not reaching its potential, you should feel empowered to write letters to your CEO, attend meetings or contact other shareholders on message boards to voice your views. The main point here is don’t believe the media hype – if management is screwing up, under capitalism it is your right to take action.

Best,

James