Origins of Shareholder Primacy - 1916 Ford Motor Company Case

• Henry Ford (founder/majority stockholder) wanted to use surplus cash for expansion plans, hire more workers, build more cars
• Ford raised factory worker wages significantly, offered 40-hour work week benefits
• Ford's stated ambition: "employ still more men, spread benefit of industrial system to greatest possible number, help them build up their lives and homes"
• Ford put "greatest share of profits back into business" instead of dividends
• Minority shareholders (John and Horace Dodge - 10% ownership) sued Ford
  • Wanted Ford to lower wages, raise Model T prices, maintain regular dividends
  • Used special dividends to fund their own car company (Dodge) - became Ford's biggest rival
• Court sided with minority shareholders, established shareholder primacy precedent
• Ruling forced Ford to consider shareholder interests above other business ambitions
• Business judgment rule upheld - executives can act in company's best interest even if stock price doesn't increase
• Ford's strategy was actually ruthless business tactic:
  • Deny competitors workforce through higher wages
  • Price Model T just above cost to prevent profitable budget automobile competition

Evolution of CEO Compensation Structure

• Mid-1960s to 1970s: American stock markets traded sideways
• CEOs paid normal salary + small bonus like other employees
• Economic Policy Institute/National Bureau of Labor Statistics data: CEOs made ~20x average employee pay
• CEOs motivated to keep company running safely for long-term job security
• 1990s: Financiers aligned CEO interests with stock price performance
  • Smaller cash salary + stock options tied to stock performance
  • CEO compensation jumped from 60x to 380x average worker pay
• Modern extreme: Elon Musk demanding $50 billion compensation for one year

Strategy 1: "Picking Up Pennies in Front of Steamroller"

• Multi-million dollar bonus packages incentivize short-term stock price increases
• Fortune Magazine: Average Fortune 500 CEO tenure now only 7 years
• Long-term projects (decades payoff) effectively useless unless announcement drives stock price
• Cost-cutting focus areas: security auditing, risk management, safety controls, long-term development, training
• Major corporate failures from this approach:
  • Silicon Valley Bank: "terrible" risk management department per regulators
  • Lehman Brothers: couldn't resist subprime mortgage bond revenue
  • Boeing: airline failures from cutting safety controls/testing
  • HSBC: billions in revenue from serving international criminals
• CEOs collected enormous bonuses before company failures, some got golden parachutes

Strategy 2: Jack Welch's GE Transformation (1981-2001)

• Welch worked up from entry-level position, radically reshaped company
• Made 72,000 of GE's 400,000 employees redundant
• Sold off entire company divisions
• Invested heavily in financial/media arms (GE Capital became primary focus)
• Pioneered outsourcing, bragged about it on CNBC (GE-owned network)
• Stock price rose from $6 to $370 per share during tenure
• Exit package: $417 million
• 1981 (Welch's start year): Last year worker productivity increases matched wage increases
• Post-Welch results:
  • GE stock fell ~70% from all-time high during 400% market bull run
  • Outsourcing delivered worse products, customers bought from competitors
  • Company became least desirable to work for (mass layoffs, firing bottom 10% annually)
  • Top talent went elsewhere
• Welch's suspicious financial performance:
  • Met/beat analyst forecasts 46 of 48 quarters (96% hit rate)
  • Hit exact penny forecast in 41 of 46 quarters (89% perfection)
  • Achieved through "creative accounting" - got GE in trouble with SEC
• Welch later called maximizing shareholder value "stupid" but continued practices due to financial incentives

Strategy 3: Short-Term Focus Dominance

• Average stock holding periods declining consistently:
  • 1975: 5 years average holding period
  • 2021: Less than 1 year average holding period
• Contributing factors:
  • Electronic brokerages made trading easier
  • Less secure financial situations requiring share sales for unexpected expenses
  • Largest dips in holding periods: 2001, 2008 (down markets/job losses)
  • Long-term capital gains tax laws encourage year-to-year profits over dividends
• Result: CEOs delivering profitable quarters more popular than those reinvesting in training, R&D, safety
• Short-term thinking unsustainable but becomes next shareholder/CEO's problem

Modern Corporate Impact

• Mass layoffs, environmental catastrophes, corporate frauds, record workplace inequality
• Original 1960s champion of shareholder value maximization later called it "dumbest idea in the world"
• Could "rock capitalism to its core"
• Maximizing shareholder value isn't even good for shareholders
• Business Roundtable sparked debate about corporation purpose
• Shareholder returns no longer main goal for many companies