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The Case for Shareholder Capitalism: How the Pursuit of Profit Benefits All
Unlock the power of shareholder capitalism -- a system that transcends zero-sum games and Wall Street stereotypes. In its essence, shareholder capitalism enables mutually beneficial trade, a concept ingrained in our human history for over 300,000 years. This approach fosters specialization, fuels innovation, and propels economic growth.
In this engaging new audiobook, David McLean explains how embracing shareholder capitalism doesn't negate the significance of other institutions; rather, it allows businesses to excel in providing the goods, services, and jobs that make society better off. Shareholder capitalism isn't about disregarding stakeholders; it thrives on mutually beneficial partnerships, and managers are entrusted to maximize shareholder value, focusing on companies' long-term success, which drives overall prosperity. Profits, the ultimate measure of value, steer businesses toward creating goods and services that benefit society.
While shareholder capitalism is the overarching theme in Finance 101 courses, it is increasingly criticized, especially with the popularization of concepts like ESG investing and stakeholder capitalism. McLean argues that corporate social responsibility, while well-intentioned, shouldn't replace the democratic process in policymaking, and can lead to unintended consequences. Our journey through capitalism, beginning around 1800, has brought unprecedented prosperity, and it's essential to safeguard this system for the betterment of society, with democracy and free trade as our guiding beacons.
In this engaging new audiobook, David McLean explains how embracing shareholder capitalism doesn't negate the significance of other institutions; rather, it allows businesses to excel in providing the goods, services, and jobs that make society better off. Shareholder capitalism isn't about disregarding stakeholders; it thrives on mutually beneficial partnerships, and managers are entrusted to maximize shareholder value, focusing on companies' long-term success, which drives overall prosperity. Profits, the ultimate measure of value, steer businesses toward creating goods and services that benefit society.
While shareholder capitalism is the overarching theme in Finance 101 courses, it is increasingly criticized, especially with the popularization of concepts like ESG investing and stakeholder capitalism. McLean argues that corporate social responsibility, while well-intentioned, shouldn't replace the democratic process in policymaking, and can lead to unintended consequences. Our journey through capitalism, beginning around 1800, has brought unprecedented prosperity, and it's essential to safeguard this system for the betterment of society, with democracy and free trade as our guiding beacons.
- GenresEconomics
256 pages, Paperback
Published December 12, 2023
103 people want to read
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January 10, 2025
This is an excellent book, and a thorough and cogent defense of shareholder capitalism. McLean is a professor of Finance at Georgetown University, and it seems that many accountants and economists have forgotten their education from Finance 101. This book is a necessary reminder. McLean points out that “capitalism is not a philosophy. It defines a society where people trade freely and respect property rights. Shareholder capitalism is based on the idea that mutually beneficial trading applies to business owners.” Is there any doubt that what all shareholders (investors) have in common is they prefer more wealth to less? Then it’s also true that managers—employees by definition—cannot use investors’—owners’—assets for purposes that don’t benefit shareholders.
Stakeholder—employees, customers, suppliers, etc.—trade with, in essence, the shareholder. It’s always just people trading with other people, as we’ve done for millennia.
Milton Friedman in his famous 1971 article about maximizing profits was not proposing a new theory, that the purpose of a business “is to increase its profits. The goal is to maximize the value of the business, or shareholder wealth. Thomas Sowell has written that, “Profits are perhaps the most misconceived subject in economics.” To the critics who think profit is a zero-sum game, the author asks, if so, why do those other stakeholders continue to play the game? Profit is leftover that owners are entitled to after they’ve made other stakeholders better off. Shareholders eat last. It’s the other stakeholders, not shareholders, who collectively determine whether firm makes a profit. This point seems to be lost on a lot of people. To earn a profit, the corporation must take care of all stakeholders, while adhering to laws and regulations. Dealing heroin is profitable, but illegal, and thus not shareholder capitalism. Shareholder capitalism assigns both profits and losses to the shareholders. Firms make losses because their stakeholders are free to choose. Maximizing shareholder value requires managers to play the long game, as any student learns in Finance 101. Why is Microsoft’s price 31 times greater than its earnings? Because its shareholders own all its future profits. Apple has a price-to-earnings ratio of 24; Google’s 19; Tesla’s 57. Many young firms have negative profits but are still worth millions or even billions of dollars. You can both lower short-term profits and increase value. Virtually every investment does so. To maximize shareholder value means manager will accept all positive Net Present Value (NPV) projects and reject all negative NPV projects.
People sometimes argue that the stock market is a casino because the seller of a share Apple for $175 doesn’t provide Apple with the money, only the seller of the share. However, the buyer is contributing to Apple’s liquidity. As Mclean points out, “For a seller to convert shares to cash, needs willing buyer because its shares are liquid. Illiquid assets that can’t be easily converted to cash are priced at a discount. Liquidity contributes to company’s growth because original shareholders would have been less willing invest if no liquid market which to sell shares.”
“Key insight of Adam Smith’s Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight…”—Milton Friedman and Rose Friedman, Free to Choose
McLean also points out that “A company cannot serve only its shareholders. Impossible. Shareholders are served by consistent profits. To earn consistent profits, firm must consistently serve its other stakeholders.” The “community” is always mentioned as a stakeholder, yet who gets to speak for the community? Firms are regulated by federal, state, local governments, all elected by the community.
"Whom managers end up being accountable to in stakeholder-centric world? Uncountable number of stakeholders. Could managers ever accused of making a wrong decision? If I justified corporate decision as serving interests of workers, community, Metropolitan Opera, how could my decision be challenged? The focus on shareholders is what gives you clear accountability." —Glenn Hubbard, CEA, W. Bush
McLean asks, “So, what is stakeholder capitalism? We have two possibilities:
1. Stakeholder capitalism is same thing as shareholder capitalism. Larry Fink, characterized stakeholder capitalism as consisting of “mutually beneficial” relations between a firm and its other stakeholders. This description is no different from shareholder capitalism.
2. Stakeholder capitalism is an oxymoron. Klaus Schwab and the Business Roundtable CEOs don’t discuss mutual benefits when describe stakeholder capitalism. This omission leaves managers to use firm’s resources for causes don’t benefit shareholders.”
Under stakeholder capitalism, CEO is accountable to everyone, and therefore to no one. Any decision justified. CEO no longer employee but a philosopher-king, carte blanche with firm’s resources.
The short-term fallacy: false claim shareholder capitalism encourages managers focus on short-term profits expense of long-term growth. Completely wrong. Value of a business has little to do with short-term profits, lot to do with growth in profits over long run. Many world’s most valuable companies derive worth from their growth opportunities, not current profits. For example, “Pfizer spent almost $14 billion on R&D investments in 2021, lowered its profits by the same amount. Would Pfizer’s shareholders be better off had cut all its R&D spending, $14 billion more in profits? Why shareholders willing to pay $270 billion for company $21.98 billion in profits? The $14 billion in R&D makes Pfizer’s stock price higher. If Pfizer cut R&D stock price would likely fall. Short-term fallacy suggests shareholders too ignorant to realize this tradeoff. If that is so, then why did Pfizer spend $14 billion? Merck $12.2 billion? Johnson & Johnson $14.7 billion? AstraZeneca spend $9.7 billion?” Excellent questions!
What about share buybacks, the bugaboo of Senators Marco Rubio, Charles Schumer and Elizabeth Warren? If no NPV projects exist, excess funds should be returned to shareholders. There exists two payout mechanisms: cash dividends and share repurchases. “People who argue more investment is always better don’t understand Economics. Value of what created exceeds cost of resources being used. Not all investment does that. When firms pay out, shareholders can invest into different firms that have positive NPV investments. In reality, investments can just as easily destroy value. Invest, invest, Boeing should build new manufacturing build planes, even if no demand. Starbucks open lots more stores.” Warren Buffett says, “Told all repurchases harmful to shareholders or country, or beneficial to CEOs, you’re listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
McLean is a skeptic of ESG and its ratings, and provides empirical evidence for the absurdity of these subjective measurements: “The ESG score is not an economic outcome like shareholder value. Shareholder value reflects the creation of wealth resulting from mutually beneficial trading. ESG is a metric someone made up; you or I could issue our own ESG rating would be no less legitimate ones currently being issued.”
What about externalities? That’s what regulation is for, at both the federal and state levels. Seeing how 1,091,796 federal regulations were on the books at theend of 2022, and the average U.S. state has 138,841 regulations (California the most with 403,774, and the least Idaho, with 36,612) can you really argue that we have trouble regulating corporations?
McLean concludes by asking: “So why did Joseph Schumpeter predict that capitalism would not survive? Capitalism creates wealth, wealth creates the intellectual class, people who work in academia, media, government, nonprofits, and claim to know the answers to everything. Yet the track record of rule by intellectual class is terrible—includes totalitarianism, mass starvation, and forced sterilizations. We should try to prove Schumpeter wrong for as long as we can.”
If you want an intelligent and learned defense of shareholder capitalism to fend off the arguments of ESG and Stakeholder Theory, this book needs to be in your library.
We devoted an episode on The Soul of Enterprise to discussing this fantastic book: Episode #488: Wealth’s Way: The Wisdom and Wonders of Shareholder Capitalism. You can listen here: https://www.thesoulofenterprise.com/488
Stakeholder—employees, customers, suppliers, etc.—trade with, in essence, the shareholder. It’s always just people trading with other people, as we’ve done for millennia.
Milton Friedman in his famous 1971 article about maximizing profits was not proposing a new theory, that the purpose of a business “is to increase its profits. The goal is to maximize the value of the business, or shareholder wealth. Thomas Sowell has written that, “Profits are perhaps the most misconceived subject in economics.” To the critics who think profit is a zero-sum game, the author asks, if so, why do those other stakeholders continue to play the game? Profit is leftover that owners are entitled to after they’ve made other stakeholders better off. Shareholders eat last. It’s the other stakeholders, not shareholders, who collectively determine whether firm makes a profit. This point seems to be lost on a lot of people. To earn a profit, the corporation must take care of all stakeholders, while adhering to laws and regulations. Dealing heroin is profitable, but illegal, and thus not shareholder capitalism. Shareholder capitalism assigns both profits and losses to the shareholders. Firms make losses because their stakeholders are free to choose. Maximizing shareholder value requires managers to play the long game, as any student learns in Finance 101. Why is Microsoft’s price 31 times greater than its earnings? Because its shareholders own all its future profits. Apple has a price-to-earnings ratio of 24; Google’s 19; Tesla’s 57. Many young firms have negative profits but are still worth millions or even billions of dollars. You can both lower short-term profits and increase value. Virtually every investment does so. To maximize shareholder value means manager will accept all positive Net Present Value (NPV) projects and reject all negative NPV projects.
People sometimes argue that the stock market is a casino because the seller of a share Apple for $175 doesn’t provide Apple with the money, only the seller of the share. However, the buyer is contributing to Apple’s liquidity. As Mclean points out, “For a seller to convert shares to cash, needs willing buyer because its shares are liquid. Illiquid assets that can’t be easily converted to cash are priced at a discount. Liquidity contributes to company’s growth because original shareholders would have been less willing invest if no liquid market which to sell shares.”
“Key insight of Adam Smith’s Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight…”—Milton Friedman and Rose Friedman, Free to Choose
McLean also points out that “A company cannot serve only its shareholders. Impossible. Shareholders are served by consistent profits. To earn consistent profits, firm must consistently serve its other stakeholders.” The “community” is always mentioned as a stakeholder, yet who gets to speak for the community? Firms are regulated by federal, state, local governments, all elected by the community.
"Whom managers end up being accountable to in stakeholder-centric world? Uncountable number of stakeholders. Could managers ever accused of making a wrong decision? If I justified corporate decision as serving interests of workers, community, Metropolitan Opera, how could my decision be challenged? The focus on shareholders is what gives you clear accountability." —Glenn Hubbard, CEA, W. Bush
McLean asks, “So, what is stakeholder capitalism? We have two possibilities:
1. Stakeholder capitalism is same thing as shareholder capitalism. Larry Fink, characterized stakeholder capitalism as consisting of “mutually beneficial” relations between a firm and its other stakeholders. This description is no different from shareholder capitalism.
2. Stakeholder capitalism is an oxymoron. Klaus Schwab and the Business Roundtable CEOs don’t discuss mutual benefits when describe stakeholder capitalism. This omission leaves managers to use firm’s resources for causes don’t benefit shareholders.”
Under stakeholder capitalism, CEO is accountable to everyone, and therefore to no one. Any decision justified. CEO no longer employee but a philosopher-king, carte blanche with firm’s resources.
The short-term fallacy: false claim shareholder capitalism encourages managers focus on short-term profits expense of long-term growth. Completely wrong. Value of a business has little to do with short-term profits, lot to do with growth in profits over long run. Many world’s most valuable companies derive worth from their growth opportunities, not current profits. For example, “Pfizer spent almost $14 billion on R&D investments in 2021, lowered its profits by the same amount. Would Pfizer’s shareholders be better off had cut all its R&D spending, $14 billion more in profits? Why shareholders willing to pay $270 billion for company $21.98 billion in profits? The $14 billion in R&D makes Pfizer’s stock price higher. If Pfizer cut R&D stock price would likely fall. Short-term fallacy suggests shareholders too ignorant to realize this tradeoff. If that is so, then why did Pfizer spend $14 billion? Merck $12.2 billion? Johnson & Johnson $14.7 billion? AstraZeneca spend $9.7 billion?” Excellent questions!
What about share buybacks, the bugaboo of Senators Marco Rubio, Charles Schumer and Elizabeth Warren? If no NPV projects exist, excess funds should be returned to shareholders. There exists two payout mechanisms: cash dividends and share repurchases. “People who argue more investment is always better don’t understand Economics. Value of what created exceeds cost of resources being used. Not all investment does that. When firms pay out, shareholders can invest into different firms that have positive NPV investments. In reality, investments can just as easily destroy value. Invest, invest, Boeing should build new manufacturing build planes, even if no demand. Starbucks open lots more stores.” Warren Buffett says, “Told all repurchases harmful to shareholders or country, or beneficial to CEOs, you’re listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
McLean is a skeptic of ESG and its ratings, and provides empirical evidence for the absurdity of these subjective measurements: “The ESG score is not an economic outcome like shareholder value. Shareholder value reflects the creation of wealth resulting from mutually beneficial trading. ESG is a metric someone made up; you or I could issue our own ESG rating would be no less legitimate ones currently being issued.”
What about externalities? That’s what regulation is for, at both the federal and state levels. Seeing how 1,091,796 federal regulations were on the books at theend of 2022, and the average U.S. state has 138,841 regulations (California the most with 403,774, and the least Idaho, with 36,612) can you really argue that we have trouble regulating corporations?
McLean concludes by asking: “So why did Joseph Schumpeter predict that capitalism would not survive? Capitalism creates wealth, wealth creates the intellectual class, people who work in academia, media, government, nonprofits, and claim to know the answers to everything. Yet the track record of rule by intellectual class is terrible—includes totalitarianism, mass starvation, and forced sterilizations. We should try to prove Schumpeter wrong for as long as we can.”
If you want an intelligent and learned defense of shareholder capitalism to fend off the arguments of ESG and Stakeholder Theory, this book needs to be in your library.
We devoted an episode on The Soul of Enterprise to discussing this fantastic book: Episode #488: Wealth’s Way: The Wisdom and Wonders of Shareholder Capitalism. You can listen here: https://www.thesoulofenterprise.com/488
February 14, 2025
This is a fantastic book. There has been so much confusion about the goal of a business and how the profit of a business will benefit the economy, thus creating wealth for the society. This book clearly lays out the economic rationale with simple layman language that how shareholder capitalism is not in conflict with the pursuit of wealth creation. The discussion is not only intuitive with many vivid examples and easy-to-ready statistics, but also clears up so much misperception that certain parties of the society have created.
I highly recommend this book. People without economics or finance background will still find this book interesting and enlightening. Very well-written and fun to read.
I highly recommend this book. People without economics or finance background will still find this book interesting and enlightening. Very well-written and fun to read.
January 23, 2025
I picked this book up because Michael Mauboussin recommended it as his favorite books of 2024. I didn't really gain anything from this book, should have DNF'd it (damn my stubbornness), and the author seems to have written it to lash out at the World Economic Forum, Larry Fink, and Elizabeth Warren. Shareholder capitalism is an important topic in 2025 and I think there could have been a more interesting discussion around the validity of corporate social responsibility, but it seems as though the author was more interested in an elementary framing of ESG, etc. as a way to lob softballs for his arguments.
Displaying 1 - 3 of 3 reviews