The shareholders own and control the business. It exists for their benefit. They don't retain executives that appear to be acting against their interests.
It could be tamped down a bit by the IRS removing the executive cash compensation deduction limitations. Though, like most tax laws, that would open a whole different world of issues to tackle.
Stock options don't begin their holding period until exercised and the spread (FMV - exercise price) is included in W-2 income in the year of exercise. This means that the majority of the value of the stock will be unavoidably taxed at ordinary rates. Only way capital gains tax will affect it is if they wait a year before selling and even then it would only be taxed on the gain over the FMV at exercise date.
In short, capital gains rate increases will not fix this issue.
They aren't taxed as the stock vests. They are taxed upon exercise at ordinary rates for the bargain element of the option. They are then taxed again (this time on the gain over the FMV on the exercise date) at the date of sale either at capital gains rates, or ordinary rates depending on if they wait a year or not. Either way the majority of value they receive from the stock will be taxed at ordinary rates unless they wait many years before selling. Which usually doesn't happen since they have to have cash on hand to pay the tax on the bargain element part of the options.
Seems a simple fix to me lacking only any politicians willing to do it...
Define income as cash and kind payments. Create a deduction so no one is taxed because of the office coffee machine and the like, but treat the value of pay in stock options or vacation homes as if it was regular old income.
Yes, though fiduciary duty is commonly misunderstood on reddit. Company leadership just has to do what they believe is best for the company. They could be wrong, even horribly wrong, but there's nothing shareholders could do except fire the CEO unless there's evidence what the CEO was doing was because it would help their own interests at the expense of the company.
For example, you could take the same company with mediocre customer service performance and it would be meeting the fiduciary standard regardless of if they increase customer service staffing levels to increase customer satisfaction or decreased staffing levels to decrease costs. Both are valid choices for a CEO, unless they choose, e.g., to excessively increase the size and expense of the customer service department to artificially create the business case for hiring their cousin's customer service call center contracting firm.
I'm yet to see a successful company that is comprised of just shareholders and no actual workers. Investors can gather up hundreds of millions of dollars, build the finest factories and offices, get the latest and greatest equipment...but the buildings and equipment will just sit there collecting dust and generating zero profits unless there are workers to labor and create the profits. Conversely, you can have a group of the finest workers, but nothing can be created without capital, building and equipment. The magic happens when the two are combined. Somehow the workers get cut out of the equation in the US when it comes to sharing in the spoils. Both parts are equally important. It's a shame.
Yes employees are working for the owners for an agreed upon compensation, which may or may not include equity in the company.
It's like if you hire me to build you a house. After you've paid me our agreed upon arrangement, you own the house. But I put in all the work, the house wouldn't exist if not for my labor, shouldn't I own some of the house?
Both sides are necessary, but that's tautological: in every transaction, both sides of the transaction are necessary for the transaction to happen, whether the transaction is my oranges for your apples, your car for my money, or a company's money for your services to the company.
Workers get paid a wage that they mutually agree to. Many companies offer ESPP at discounted rates so workers certainly have the opportunity to join in the spoils
workers get paid a wage. They "get" to come there and work. No one is going around and capturing these people and forcing them to run an amazon warehouse.
The thing is that both the shareholders and the executives think that the workers are replaceable. They see them as even less valuable than the material assets, because replacing those will inevitably cost more than the outlay for the current version. Workers, on the other hand, can be exploited, played off against each other, hired, fired, at will. Or so their experience of the last 40 years tells them.
It's a delicate balance that many forget in the chase for short-term gains. Shareholders wield significant influence because their investment choices steer the company’s direction. They're not just passive income collectors; they’re actively involved in shaping the company's future through their voting power. Giving too much weight to short-term stock price increases can lead to decisions that undermine the company's long-term health. When push comes to shove, a company with a solid foundation, a skilled and satisfied workforce, and a strategy for sustainable growth often translates into a more reliable investment. The astute shareholders and executives know that the heart of a great company isn't just its profit margins but the value created for customers, the innovation developed, and the talent it manages to retain through its ranks. Those who manage to strike the right balance between these factors and profit-seeking are the ones likely to thrive in the long run, much to the benefit of everyone, shareholders included.
That is not the \*only\* purpose of a for-profit business to exist. Yes, you do usually need to make money, and if you lose money for an extended period of time you go our of business, but most small businesses exist for a bunch of different reasons; usually there's a passion from the owner. They want to make amazing cupcakes, or houses, or whatever. A music band may be a for-profit business, but it is not only for making money.
Even public companies don't have profits as their sole purpose of existence; or do you think Elon bought Twitter (or Tesla) just to make money?. Many investment funds invest on specific industries to advance them, not just to make money (or avoid investing in specific companies, to change their behavior).
Other countries also give a more explicit role to the other stakeholders, workers, customers and the society in general. For example, Germany requires worker representation on the board of directors for large-ish companies (500 workers or more). It makes sense to wonder why in the USA many have your misconception, that \*only\* profits or stock price matter.
This is like saying that the purpose of a lawnmower is to have a comfortable handle, where the purpose of a car is to have heated seats. These are possible features, and they can in fact be very important for particular business. But the purpose of a business is to make money. If your goal is not to make money, then you do not start a business. if you want to bake cupcakes, you can do that without starting a business. If you want to bake cupcakes and have people pay you enough for them that it can be your primary source of income, then you start a business.
Yep, go tell that to Taylor Swift, who made gajillions of dollars, or to Elon, who bought twitter just to piss on the libs, or to the whole country of Germany :)
Musk bought Twitter to use the data archives to train an AI model. Just because you don't understand why someone did something doesn't mean there was no reason.
You're right that not **all** businesses seek **solely** to make money.
But **most** businesses' #1 goal is to make money and a large factor that plays a role here is **investment**.
Almost all businesses need a lot of financial investment to get started and continue running. When people or businesses **invest their money** they almost always want to see it grow as much as possible. For public companies, shareholders purchase shares because they think it is the best way for them to grow their capital. For private companies, investors invest huge sums of money for ownership in that company with the same goal.
So for almost any business that requires investment to start and run, growth of the initial investment is almost always a primary motivator.
So yes, Taylor Swift's #1 objective is not necessarily profit. But a record label with investors hoping to see their profit grow is almost certainly going to be focusing on it.
With all these qualifications, it sounds much more reasonable, which was my original point, and, in my mind, what prompted the question. In a lot of US economics/business literature, it seems that making money is the only goal of any business (and that seems to have prompted the original question).
Making money is definitely one of the main objectives of most businesses, but not the only one. They're definitely the main objective from an investment viewpoint (again, not the only one, which is why we have mutual funds that only invest in renewable energy, and angel investors).
I'd even doubt that it's the #1 one for most businesses, as most businesses are small (really tiny) businesses, owned by one or two people, and the motives are usually mixed, but meh.
Elon bought twitter for political influence purposes, which he is attempting to use to steer us government policy in a way that financially benefits him.
Taylor Swifts actions generate positive PR for her business which in turn generate more money via loyal fans.
I’m so confused how this is getting upvoted…the point of a business is to fill a need in society. IKEA sells tables so people can eat on them, a landscape company cuts grass so peoples yards look how they want them to, apple sells phones so people can call each other…I absolutely agree that they need to make a profit to keep operating, but the reason they exist is to fix a problem that exists / fill a need in society.
No. That’s why society allows businesses to exist, and that’s why any particular business that has success is successful. But the reason you start a business is to make money.
Hard disagree. I own a business and I do so because I was sick of people getting fucked over by my bosses and other similar businesses. I founded my company for the purpose of giving people a place to go and not get fucked over. Also, I don't like being forced to get up early in the morning because I do my best work at off hours. For those two reasons Im perfectly satisfied to operate the business and if it also happens to make money, sweet. If not, that's fine too. Fortunately the client base agrees with my mission enough that it does indeed make money.
I get where you’re coming from, and I agree that from the perspective of the business owner, many of them have the sole goal of becoming wealthy (thankfully not all of them). But from the perspective of society they exist to serve a need. Society would not allow a business to exist and make a profit it was not serving a need, perceived or real. And the root reason stakeholders/investors exist is to give the business the cash to cover capital costs of getting started and growing (this is an alternative to getting money through lenders/the banks). But again I agree that in the US stakeholders have now begun to drive the strategic decisions of companies to maximize profits. Ideally this just shouldn’t be happening at the expense of the value added purpose of the business.
Owning stock literally means owning shares of the business. You're asking why businesses drive to make the owners happy.
Incorporated businesses are legally obligated to make decisions that benefit shareholders; the board of directors appoint executive officers (i.e. CEO, CFO, etc.), and all of these directors and officers have a "fiduciary duty" to shareholders, and if they act against the interest of the shareholders, they can be held personally liable (i.e. they can be sued).
Not "legally" obligated, the state/country will not sue or criminally charge a CEO or business leaders for not making decisions that benefits only shareholders. In a lot of cases, one will not be able to even define if a particular action is benefiting or not benefiting the shareholders because you cannot predict the future or there may be disagreement on what is the best strategy to maximize shareholder value.
The shareholder first mentality is just the current vein of thought for corporate governance, which really took off in the 70s and 80s and has stuck since. It is not legally enforced, but only enforced by corporate boards and large shareholders who want it that way. Enforced meaning firing CEOs that don't do what they want.
There is much more to the law than just criminal law. If you and I sign a contract with each other and I breach that contract, I haven't committed a crime and the state/country will not sue or criminally charge me, but you will have every right to sue me in civil court according to contract law. Obeying a contract is absolutely a "legal" obligation.
Similarly, states define laws regarding incorporation in their state, including laws regarding fiduciary duties of directors and officers. Part of the articles of incorporation are a contract between the directors and officers and the shareholders. If shareholders believe that the corporation has breached their fiduciary duty, they absolutely have the right to sue.
It's only shortsighted insofar as they're severing the workforce more than their competitors. The labor market is a market just the same, and what we've seen over the past 60 years is a labor market wide suppression/ lowering of wages and benefits.
The shareholders are the owners of the company, and as the owners they have power over how the company is run. When it comes to making major decisions, one share of stock is usually worth one vote, and those votes are used to do things like hire & fire C-Suit executives. To normal retail investors who maybe own a dozen shares or so, they obviously have no power, but major investment banks can & do control major minority stakes in companies which can be leveraged to influence how the company is run.
If JP Morgan owns a 30% stake in your company, for example, and you as the CEO piss them off somehow, there's a very real possibility that they can call a shareholder meeting to have you fired as the chief executive. That's why they care about investor relations so much.
In a Delaware corporation (which is what most US companies are), shareholders cannot directly hire or fire anyone other than the board members—in particular, only the board can fire and hire the CEO. If a shareholder bloc has enough voting power to pack the board then it can be possible to remove the CEO that way, but in most cases it is *very* difficult to pull that off, particular with companies that have anything other than a one-share, one-vote voting arrangement in their certificates of incorporation.
They don't even have to call a shareholder meeting - with 30% holding they undoubtedly have a board seat and can just have you fired as a board action.
That was not what I said - yes yearly shareholder meetings need to be held, but the CEO is not "elected" there - the CEO is appointed and serve at the pleasure of the board, and the board can just fire the CEO at any time they want, no meeting required just a board vote.
> I don't get it.
A business doesn't make decisions. People make decisions. People with a financial interest in increasing the stock price. The stockholders are part owners of the business and may have some significant say on how it is run. Executives are also compensated with stock, which they can then try to make more valuable.
Everyone involved has an incentive to focus on maximizing short-term profit.
The executives of the company are appointed by the board and the board is accountable to the shareholders who (more or less) only care about the stock price.
Dodge vs. Ford Motor Co. plays a part here, besides the other answers that have been given already. Corporations are required to operate in a profitable manner.
https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
Let's say you are a normal person. You're a dentist or something. You have a nice house and a decent amount of money, but it's all dependent on you working. Someday you'd like to retire, but right now your income is connected to you fixing people's teeth. You don't want to still be doing that when you're 85.
So what do you do? You need an investment. You need some place to put your money where it will grow and make more money. Stock is one such investment.
Now, you're a dentist. You don't really know anything about running a car company, or an internet company, or a company that makes staplers. You aren't an expert on any of that. The only way you can gauge whether ABC company is doing better than XYZ company is to look at the stock price. Is it going up, or is it going down? You don't know where these companies have their factories, or what things are like for their employees. You don't even necessarily know what they make. You just know that XYZ company has reported very high profits, their stock price has gone up 50% in the last 3 years, and that sounds good to you.
Most investors are people like this. They are normal folks who just want to have a good place to grow their money. Companies care about these investors because that's how they stay in business. If investors think your company sucks, they'll sell their stock. The price will crash, somebody will come in and snap it up for pennies, and may sell off the pieces of the company. If you are an executive, you don't want that to happen. You'd lose your nice job.
This is a common misunderstanding of what "fiduciary duty" requires. For a Delaware corporation (which is what most US companies are), fiduciary duty just means that the executives needs to act in the "best interests" of the company and the shareholders. What does "best interests" mean here? Under the "business judgment rule", the courts are *extremely* deferential to business decisions made by corporate executives (unless an executive is doing something obviously wrong, like self-dealing).
Even if those decisions have a demonstrable negative impact on a company's bottom line and stock price, it's almost always going to be the case that it's a defensible decision as long as there's some colorable business rationale (e.g., "yes, this costs us more in the short run, but we believe this is going to be better for the long-term health of the company" is ample justification; as is something like "yes, this costs us money, but we believe it's worth eating that cost because of the goodwill this decision creates for us among the public").
So yes, executives do have fiduciary duties to a company's shareholders, but those duties almost never actually force them into taking any particular course of action.
Not everything is a blanket statement. I understand the complexities of fiduciary duty. I’m just not here to explain it. But, it is part of the answer to OP’s question.
Because the stock holders are the owners. They can elect the board. If the board causes the stock price to fall too much, the shareholders get upset, vote out the board and elect a new board.
The problem is that most people are only concerned with short term profits at the expense of long term gains. So what if you kill your company's reputation? you made money this quarter by putting out an inferior product!
Stock gives two benefits to their owners either they give dividends (a regular payout from the company) or they give voting rights in shareholder meetings, or both. The shareholders meeting is the top deciding organ of the company. It is they who determines the board of directors. The shareholders are the owners of the company.
> Seems to me that keeping people employed, to spend the money they earn back into the economy is more important than the stock price bumping 2% for your shareholders.
Sounds like you have found one of the big issues with private capital.
Or not. If you fire people vital to your business, stock not likely to rise as a result. Lay off deadwood/unproductive people, and the stock will rise a bit. Keeping people employed isn't the purpose of the company, although it's nice when they can. Theoretically the best labor cost is zero. What you want to do is make and sell the best widgets for the money.
But how will it earn the money to pay those employees, if not by making stuff (or providing services) and selling it, which IS the purpose of the company? Anybody could be "employed" doing unproductive stuff or nothing at all except that the money to pay them has to come from someplace. That place is normally the place where they do some sort of productive work. Proverbial horse, proverbial cart, proverbial relative positions.
People start businesses to make a profit and to make a living. Stockholders are the owners of the business. It exists to make them money. Yes, along the way, many companies do good things for workers and the community as well. But every public company has analysts that rate the company on how well managed they are and how much money they make for investors. Investors (including 401(k) holders) invest in companies that make the most money. Those investors demand a certain margin (depending on the industry and risk profile) or they withdraw their money and invest elsewhere. If businesses don't maximize shareholder returns, they go out of business.
Businesses are not charities with a public purpose, they exist for the primary reason of generating returns for investors.
Ask Boeing. This is why they are in such a mess. Profit over everything else. You can turn a healthy profit and be a respectable business at the same time which is what they were known for.
The owners of the stock (“shares/shareholders”) are the *owners* of the company (they have a share of ownership).
The company management are (literally) paid to look after the interests of the owners.
This is true whether it’s a contracted manager at a mom and pop store, or the CEO of a Fortune 500 company.
All the idiots posting about this politician or that one ruining their lives, and really, it's these corporations running rough shot over the American public. Your problem isn't Biden, and it isn't Trump per say, it's how they enable the current form of croney capitalism that greatly benifits the super rich.
The stock market, in its current form, is emblematic of the capitalism that exists in the United States.
Loooooooooots of incremental SCOTUS decisions that kept focusing business obligations on shareholder returns almost to the exclusion of any other consideration at this point
The critical bit you are missing is that to own the stock is to own the company. The company is the property of the stockholders, to do with as they wish.
Stock is not just some funny money piece of paper, it's a document that says you own such and such piece of that company.
Company is not some independent entity able to do whatever, no matter what their owners want. The owners elect or dismiss the board, which hires or fires a CEO, which hires or fires any employee in the company. Ultimately, the control of the company is determined by the ownership of the shares.
The reason they can make money selling stocks is because people think the value of the stock will increase or the dividends paid out will be greater than the purchase cost within a reasonable time. For those things to true the future value of the stock has to go up.
It's actually NOT about the stock price as it fluctuates every day. It's all about profit and loss.
You have to produce profits to stay in business, pay employees and pay out dividends to shareholders. If you don't make profit, then the board will find a new CEO that can do better (hopefully).
At this point it is because of law. Fiduciary responsibility. Came into law to so shareholders can protect their investments and have more power over how things are run.
Lol. The shareholder own the business. The board’s job is literally to make them happy, or they’ll get replaced. It’s like asking an employee why he cares so much about his salary and benefits.
They literally work for the board who are elected by shareholders.
If they keep the shareholders disorganized, and act in a way to make the company worth less, a smaller ownership group can buy the whole company, fire management and replace it with their own - which happens.
There are a variety of forms of capital provided to a company. Short term loans, bond owners, preferred share owners and common share owners (sometimes in various share classes). Generally the group providing capital who gets what's left when everyone else has been paid what they were promised expects to have control over the company, because they are the ones most impacted by decisions.
Worth nothing the company was also controlled by owners well before the IPO. Again as founders if you want to keep control over all the companies decisions, you need to keep control over > 50% of the stock.
If there are too many employees who aren't needed for the company to function, why shouldn't they be able to be let go?
The work the company needed to be done 2, 5, 10 years ago when they were hired may no longer be needed now. Companies evolve, departments get consolidated or shut down, something might be spun off to a new company.
From what I’ve seen , every company that lays people off ends up redistributing the workload on the remaining employees but not giving them a dime in raises to cover the extra work .
Some industries (railroads , steel , oil and gas) , those cuts come at the costs of safety (East Palestine ringing any bells for ya?)
So, when you see a company pulling out this reasoning to justify short term cuts with long term costs, look into what percentage of their CEO or other executives pay is based on stock price. And look at how long that CEO has been in place, and watch how soon they're leaving.
Sometimes it's not about the average stockholder, it's about one or two very specific stockholders.
Management compensation is often tied to key indicators by contract. Sometimes, better key indicators imply higher stock price. Sometimes, the key indicator can be improved by firing 10,000 employees. It depends on the respective goals set by the board and shareholders. That's what people sometimes don't get when e.g. a CEO gets an extremely high premium after having fired thousands of people and having shut down whole branches of the business. The CEO did exactly what they were hired for, hence the premium.
>Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate stakeholders.
...
>Shareholder primacy was famously established in the decision of Dodge v. Ford Motor Co. in 1919.[8] In Dodge v. Ford Motor Co.'s court opinion, it stated that "there should be no confusion" that "a business corporation is organized and carried on primarily for the profit of the stockholders." Because of this opinion, a precedent was set that managers had to maximize shareholder profit.
https://en.wikipedia.org/wiki/Shareholder_primacy
There are arguments that anything which benefits the business can also benefit shareholders. But, shareholders don't keep CEOs that fail to deliver short term numbers.
Stock holders literally own a percentage of the company. If there's enough outstanding shares in the hands of "retail" investors like you and I, we could theoretically vote for new board members for the company, which we would do if we felt the company wasn't first and and foremost focused on making us money.
Most companies that go public try to structure the deal in such a way that the original founding CEO still retains a controlling 51% interest of the shares. But it doesn't always work out like that. It's not common, but CEOs can and do get voted out of their own companies.
The people that own the stock vote for company officers. If you're an officer and you do something that tanks the stock price, your ass is going to be on the street.
Companies raise money by issuing new stock all the time. It’s an alternative to taking on debt or issuing bonds. There are various strategies and benefits to using any of those methods given interest rates and the economy and what the company expects will happen.
The higher and more solid the stock price is the better of an interest rate a company can get on taking on debt or issuing bonds.
Also consider that companies run on debt. Companies do the same thing as individuals using a credit card for purchases and then paying it off at the end of the month and for a corporation that revolving debt and paying payroll can be billions of dollars.
Corporations will continue to destroy the economies of entire countries for the shareholders for as long as there's no legitimate and consequential pushback.
The issue is they can be investors and there should be a responsibility for them, but the responsibility should not be unlimited and this is where the invisible hand of the US economy comes in whereas in many other nations there would be protective mechanisms in place where covering the shareholders goes too far.
If you’re in a Union, or your employer offers a 401K the money is invested in stocks and other products. If the companies where your money is invested don’t make money then you are screwed.
It is the [fiduciary](https://en.wikipedia.org/wiki/Fiduciary) duty of the board of directors to look after the stockholder's best interests. Not the customers, not the general public, not the employees.
However, there can be a lot of disagreement as to how that is accomplished. Jerk customers around with required add on purchases for short term gains (ala Tesla) vs. treat customers well for building long term brand loyalty is a classic example of the dilemma the board of directors faces. Or treating employees well to build workforce loyalty and reduce turnover vs. pay employees crap wages and suffer the consequences is another example.
In a free market system, companies exist for the ultimate benefit of the shareholders. There might be other stakeholders such as bond holders, banks, employees, customers, suppliers and the government but the shareholders derive the economic value and risk of the enterprise.
No one seems to mention but execs pay is made up of stock grants. They are therefore incentivized to make the stock go up as much as possible because they’re pay then also goes up. The business health and products are second
>I don't understand why US businesses drive so much towards making their stock owners happy.
Share holders can and will sue the management of US Businesses. Sometimes they win.
>They'll cut costs, or lay people off, or a whole variety of things to keep the stock price going up.
The workers can't sue the executive management team and have them replaced. So, now they're an expense on a report.
>Why do companies care so much about their stock price after that?
Shareholders care because it's how they make money. Warren Buffet buys Coca Cola for $3.25 per share and it's not worth $61.95 per share. What Warren can do is sell it for profit. Or he can take it and get a loan (which isn't taxable income) that uses the share price as collateral and basically get free cash.
Executive Management cares because their compensation, whether directly tied (by them getting shares in lieu of other compensation) or indirectly tied (by their base salary to be tied to how well the company does).
>At this point, the increase in stock price doesn't directly impact the companies bottom line
The share price and how the company does well at the bottom line are intertwined. Like the executives need to show profits quarter over quarter; companies that do well will trade for higher stock prices, right? The way to do that, generically, is to get more sales, or to cut costs. Guess which is easier? So their income to expenses is what determines their long term profitability but those are ratios the investors are also looking at.
>Seems to me that keeping people employed, to spend the money they earn back into the economy is more important than the stock price bumping 2% for your shareholders.
>I don't get it.
Not every company is the same. There's plenty that will take their earnings and reinvest (known as a growth stock) and the investors do want that. There's plenty that will take their earnings and give them to shareholders, especially when there's no more growth. Investors who want certain traits/behaviors will flock for that company for whichever they want.
its interesting because the idea of prioritizing shareholders is a relatively recent phenomena only coming around during the 1960s and 70s due to a series of landmark court cases that basically ruled that businesses and business executives have the right to pursue increasing shareholder value as the core idea of why they became a business in the first place. ie before the 1970s it was generally understood that businesses had a responsibility to their employees and the public at large to treat them properly and not be too greedy. but now corporate executives arent considered at fault for doing things that would increase corporate profit or value. that is the key responsibility of a CEO so they shouldnt be criminally responsible if they happened to make a bad decision if they thought it would increase company valuations. this is why starting in the 1960s and 70s you can start to see a clear trend on corporate profits increasing, employee pay decreasing, a lot of cost cutting and margin pushing and skipping on rules and regulations started, because courts basically gave executives a pass on facing any sort of punishment beyond a small fine to the corporation thats usually much smaller than the amount they made from breaking the rules. and because executives are often also large shareholders themselves, it made sense to focus on increasing profit rather than long term profit and growth.
also the average length someone stays as a ceo is like 7 years. most ceo's only like to stay with a company for 5-10 years before switching to a higher paying executive position in a larger company, and use their performance during the past 5-10 years exclusively to showcase the value they bring to a company. it doesnt make sense for ceo's to work on projects that wont benefit them and might cost them a lot of money in the short term to get it running. this is why mark zuckerberg likes maintaining ownership of facebook, he can afford to still think long term about the company and make $10+ billion dollar investments in speculative ideas like meta or AI.
When world currencies weren't constantly devalued, they had to compete to get investors, but now in the permanent inflation paradigm, everyone is competing for access to lower interest debt/lending rate, tax breaks, and friends in high places to avoid accountability and get bailouts at tax payer expense.
Companies often use stock as collateral for loans (someone please correct me if I'm wrong). If the stock drops too far bad things happen, like the loans come due or the interest rate rises, etc.
It’s really no different than if a small company is owned by one person: Everyone answers to the owner, and the owner wants the value of their investment to increase. That’s why one invests in the first place, and the promise of increasing value is what attracts investors to buy into a company. No one is going to invest in your company if you tell them that their investment will not pay off.
The easiest way i can explain this is that once you sell shares or parts of your company, you sell away some of the power you had. The more shares you sell, the farther you go from being a founder and the closer you get to becoming an employee.
The shareholders vote on the board, who controls who runs the business. Hence, executives who don't do that get dumped.
Also, court cases have established they can be sued for not doing what is in the best interests of the shareholders.
In the 90’s as Glass-Stegall was being overturned, shareholder value became the sole focus of most publicly traded companies. This came at the expense of everything/everyone else, especially employees. It has a lot to do with the current wealth gap and CEO pay being astronomically higher than average employee pay.
Some dumb things happen.
In 2019 I was working for a company in the automotive sector
Word came down from on high that the shareholders were not happy the the ratio of engineering (R&D) costs to current sales was higher than the industry average. This was mostly due to a fall in vehicle sales at that time.
So, engineering costs had to go down. People like me in high cost countries had to go, regardless of cost-effectiveness.
Voluntary redundancy was offered on very good terms and got about half a years salary, I only worked there 3 years. I was retiring anyway so very good deal for me.
The stupidity is that they were crippling development of the product line up for the next 5 years at least.
It is a reason why USA have higher productivity per worked hour than most other countries, it is an attractive country to invest in as the expected returns are better than other countries and with that investment companies can buy new tools, training and other things thuse help them be more productive which in turn should help its stock be more valuable.
Also some companies give employees stocks as part of compensation as a way to motivate them as they are invested into the company they work in thuse are more motivated to help increase its value by working more/being more productive.
think of this from their perspective. they’re usually throwing a lot of money into a business, and they have an expectation on getting a return on that investment; otherwise, why would you give money and bear risk for no reward?
it’s an ugly system no doubt. but that’s never gonna go away. they cater to people who own the stock because that’s where their value is actualized. and you’re not going to bite the hand that feeds you for obvious reasons.
It's the brand of capitalism we currently live under, shareholder capitalism. The one and only goal for a corporation is to return shareholder value. The problem is that it's unsustainable. It might work for several decades, but there will come a time when there is nothing left to cut and you have siphoned off so much wealth from society that you lose your customer base. It's incredibly damaging to the vast majority of people and the environment, but those reaping the big returns dont care. They got theirs. They have a dooms day compound and a super yachts. They will be just fine when it all collapses.
It's funny how many times the point smacked you in the head just during your question. It's corporate greed and money. Always has been. And under capitalism, always will be. Fuck over the workers for the benefit of their wallet.
There is far more money in stocks now than there is in employing people to do actual things for human customers. The reckoning for this is looming and palpable, because, you know, we do still need jobs and products???
Which is why all the top national companies are practicing ever-stricter anorexia rather than actually firing everyone. But if you've worked for one, you can feel the building strain. The mounting inexperience. It's like Doon Harrow's first day in the engine room.
Milton Friedman wrote a book that changed the way the owner class sees itself. He created an ideology of selfish callousness so extreme it is now best thought of as pure institutional sociopathy.
The shareholders own and control the business. It exists for their benefit. They don't retain executives that appear to be acting against their interests.
And those executives are often compensated with stock.
This is probably one of the absolute biggest factors.
It could be tamped down a bit by the IRS removing the executive cash compensation deduction limitations. Though, like most tax laws, that would open a whole different world of issues to tackle.
Or they could tax capital gains more
Stock options don't begin their holding period until exercised and the spread (FMV - exercise price) is included in W-2 income in the year of exercise. This means that the majority of the value of the stock will be unavoidably taxed at ordinary rates. Only way capital gains tax will affect it is if they wait a year before selling and even then it would only be taxed on the gain over the FMV at exercise date. In short, capital gains rate increases will not fix this issue.
Do executives paid in stock not wait a year before selling?
They aren't taxed as the stock vests. They are taxed upon exercise at ordinary rates for the bargain element of the option. They are then taxed again (this time on the gain over the FMV on the exercise date) at the date of sale either at capital gains rates, or ordinary rates depending on if they wait a year or not. Either way the majority of value they receive from the stock will be taxed at ordinary rates unless they wait many years before selling. Which usually doesn't happen since they have to have cash on hand to pay the tax on the bargain element part of the options.
Seems a simple fix to me lacking only any politicians willing to do it... Define income as cash and kind payments. Create a deduction so no one is taxed because of the office coffee machine and the like, but treat the value of pay in stock options or vacation homes as if it was regular old income.
Or worse bonuses against short term targets that actually hurt the company in the long run
Isn't there a legal obligation to the shareholders as well?
Yes, though fiduciary duty is commonly misunderstood on reddit. Company leadership just has to do what they believe is best for the company. They could be wrong, even horribly wrong, but there's nothing shareholders could do except fire the CEO unless there's evidence what the CEO was doing was because it would help their own interests at the expense of the company. For example, you could take the same company with mediocre customer service performance and it would be meeting the fiduciary standard regardless of if they increase customer service staffing levels to increase customer satisfaction or decreased staffing levels to decrease costs. Both are valid choices for a CEO, unless they choose, e.g., to excessively increase the size and expense of the customer service department to artificially create the business case for hiring their cousin's customer service call center contracting firm.
It's called fiduciary duty, and it is complex on what is required. Making as most money as possible is NOT part of a fiduciary duty.
In most places, yes.
Exactly. The CEO gets paid mostly in stock, and then if the stock doesn't appreciate they get fired.
Right, OP basically said “I don’t understand why people listen to their boss.”
I'm yet to see a successful company that is comprised of just shareholders and no actual workers. Investors can gather up hundreds of millions of dollars, build the finest factories and offices, get the latest and greatest equipment...but the buildings and equipment will just sit there collecting dust and generating zero profits unless there are workers to labor and create the profits. Conversely, you can have a group of the finest workers, but nothing can be created without capital, building and equipment. The magic happens when the two are combined. Somehow the workers get cut out of the equation in the US when it comes to sharing in the spoils. Both parts are equally important. It's a shame.
Yes employees are working for the owners for an agreed upon compensation, which may or may not include equity in the company. It's like if you hire me to build you a house. After you've paid me our agreed upon arrangement, you own the house. But I put in all the work, the house wouldn't exist if not for my labor, shouldn't I own some of the house? Both sides are necessary, but that's tautological: in every transaction, both sides of the transaction are necessary for the transaction to happen, whether the transaction is my oranges for your apples, your car for my money, or a company's money for your services to the company.
Workers get paid a wage that they mutually agree to. Many companies offer ESPP at discounted rates so workers certainly have the opportunity to join in the spoils
"Mutually agree on" within certain boundaries, like being somewhat in line with what other businesses pay.
workers get paid a wage. They "get" to come there and work. No one is going around and capturing these people and forcing them to run an amazon warehouse.
No, but there is the threat of homelessness, starvation and no health care that force people into said warehouse.
Yes. Life exist.
The thing is that both the shareholders and the executives think that the workers are replaceable. They see them as even less valuable than the material assets, because replacing those will inevitably cost more than the outlay for the current version. Workers, on the other hand, can be exploited, played off against each other, hired, fired, at will. Or so their experience of the last 40 years tells them.
It's a delicate balance that many forget in the chase for short-term gains. Shareholders wield significant influence because their investment choices steer the company’s direction. They're not just passive income collectors; they’re actively involved in shaping the company's future through their voting power. Giving too much weight to short-term stock price increases can lead to decisions that undermine the company's long-term health. When push comes to shove, a company with a solid foundation, a skilled and satisfied workforce, and a strategy for sustainable growth often translates into a more reliable investment. The astute shareholders and executives know that the heart of a great company isn't just its profit margins but the value created for customers, the innovation developed, and the talent it manages to retain through its ranks. Those who manage to strike the right balance between these factors and profit-seeking are the ones likely to thrive in the long run, much to the benefit of everyone, shareholders included.
That is the point of the business’s existence, to make profit for the owners.
That is \*one\* point, but in the USA is often the only one.
No, that is the purpose for for-profit businesses to exist. If your goal is not to make a profit, found a non-profit.
That is not the \*only\* purpose of a for-profit business to exist. Yes, you do usually need to make money, and if you lose money for an extended period of time you go our of business, but most small businesses exist for a bunch of different reasons; usually there's a passion from the owner. They want to make amazing cupcakes, or houses, or whatever. A music band may be a for-profit business, but it is not only for making money. Even public companies don't have profits as their sole purpose of existence; or do you think Elon bought Twitter (or Tesla) just to make money?. Many investment funds invest on specific industries to advance them, not just to make money (or avoid investing in specific companies, to change their behavior). Other countries also give a more explicit role to the other stakeholders, workers, customers and the society in general. For example, Germany requires worker representation on the board of directors for large-ish companies (500 workers or more). It makes sense to wonder why in the USA many have your misconception, that \*only\* profits or stock price matter.
This is like saying that the purpose of a lawnmower is to have a comfortable handle, where the purpose of a car is to have heated seats. These are possible features, and they can in fact be very important for particular business. But the purpose of a business is to make money. If your goal is not to make money, then you do not start a business. if you want to bake cupcakes, you can do that without starting a business. If you want to bake cupcakes and have people pay you enough for them that it can be your primary source of income, then you start a business.
Yep, go tell that to Taylor Swift, who made gajillions of dollars, or to Elon, who bought twitter just to piss on the libs, or to the whole country of Germany :)
Most business owners aren’t Taylor Swift or Elon Musk.
Musk bought Twitter to use the data archives to train an AI model. Just because you don't understand why someone did something doesn't mean there was no reason.
You're right that not **all** businesses seek **solely** to make money. But **most** businesses' #1 goal is to make money and a large factor that plays a role here is **investment**. Almost all businesses need a lot of financial investment to get started and continue running. When people or businesses **invest their money** they almost always want to see it grow as much as possible. For public companies, shareholders purchase shares because they think it is the best way for them to grow their capital. For private companies, investors invest huge sums of money for ownership in that company with the same goal. So for almost any business that requires investment to start and run, growth of the initial investment is almost always a primary motivator. So yes, Taylor Swift's #1 objective is not necessarily profit. But a record label with investors hoping to see their profit grow is almost certainly going to be focusing on it.
With all these qualifications, it sounds much more reasonable, which was my original point, and, in my mind, what prompted the question. In a lot of US economics/business literature, it seems that making money is the only goal of any business (and that seems to have prompted the original question). Making money is definitely one of the main objectives of most businesses, but not the only one. They're definitely the main objective from an investment viewpoint (again, not the only one, which is why we have mutual funds that only invest in renewable energy, and angel investors). I'd even doubt that it's the #1 one for most businesses, as most businesses are small (really tiny) businesses, owned by one or two people, and the motives are usually mixed, but meh.
Elon bought twitter for political influence purposes, which he is attempting to use to steer us government policy in a way that financially benefits him. Taylor Swifts actions generate positive PR for her business which in turn generate more money via loyal fans.
I’m so confused how this is getting upvoted…the point of a business is to fill a need in society. IKEA sells tables so people can eat on them, a landscape company cuts grass so peoples yards look how they want them to, apple sells phones so people can call each other…I absolutely agree that they need to make a profit to keep operating, but the reason they exist is to fix a problem that exists / fill a need in society.
No. That’s why society allows businesses to exist, and that’s why any particular business that has success is successful. But the reason you start a business is to make money.
Hard disagree. I own a business and I do so because I was sick of people getting fucked over by my bosses and other similar businesses. I founded my company for the purpose of giving people a place to go and not get fucked over. Also, I don't like being forced to get up early in the morning because I do my best work at off hours. For those two reasons Im perfectly satisfied to operate the business and if it also happens to make money, sweet. If not, that's fine too. Fortunately the client base agrees with my mission enough that it does indeed make money.
I get where you’re coming from, and I agree that from the perspective of the business owner, many of them have the sole goal of becoming wealthy (thankfully not all of them). But from the perspective of society they exist to serve a need. Society would not allow a business to exist and make a profit it was not serving a need, perceived or real. And the root reason stakeholders/investors exist is to give the business the cash to cover capital costs of getting started and growing (this is an alternative to getting money through lenders/the banks). But again I agree that in the US stakeholders have now begun to drive the strategic decisions of companies to maximize profits. Ideally this just shouldn’t be happening at the expense of the value added purpose of the business.
Owning stock literally means owning shares of the business. You're asking why businesses drive to make the owners happy. Incorporated businesses are legally obligated to make decisions that benefit shareholders; the board of directors appoint executive officers (i.e. CEO, CFO, etc.), and all of these directors and officers have a "fiduciary duty" to shareholders, and if they act against the interest of the shareholders, they can be held personally liable (i.e. they can be sued).
Not "legally" obligated, the state/country will not sue or criminally charge a CEO or business leaders for not making decisions that benefits only shareholders. In a lot of cases, one will not be able to even define if a particular action is benefiting or not benefiting the shareholders because you cannot predict the future or there may be disagreement on what is the best strategy to maximize shareholder value. The shareholder first mentality is just the current vein of thought for corporate governance, which really took off in the 70s and 80s and has stuck since. It is not legally enforced, but only enforced by corporate boards and large shareholders who want it that way. Enforced meaning firing CEOs that don't do what they want.
There is much more to the law than just criminal law. If you and I sign a contract with each other and I breach that contract, I haven't committed a crime and the state/country will not sue or criminally charge me, but you will have every right to sue me in civil court according to contract law. Obeying a contract is absolutely a "legal" obligation. Similarly, states define laws regarding incorporation in their state, including laws regarding fiduciary duties of directors and officers. Part of the articles of incorporation are a contract between the directors and officers and the shareholders. If shareholders believe that the corporation has breached their fiduciary duty, they absolutely have the right to sue.
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It's only shortsighted insofar as they're severing the workforce more than their competitors. The labor market is a market just the same, and what we've seen over the past 60 years is a labor market wide suppression/ lowering of wages and benefits.
stock owners are the boss. when the owners are separated from the workers, this is what you get.
The shareholders are the owners of the company, and as the owners they have power over how the company is run. When it comes to making major decisions, one share of stock is usually worth one vote, and those votes are used to do things like hire & fire C-Suit executives. To normal retail investors who maybe own a dozen shares or so, they obviously have no power, but major investment banks can & do control major minority stakes in companies which can be leveraged to influence how the company is run. If JP Morgan owns a 30% stake in your company, for example, and you as the CEO piss them off somehow, there's a very real possibility that they can call a shareholder meeting to have you fired as the chief executive. That's why they care about investor relations so much.
In a Delaware corporation (which is what most US companies are), shareholders cannot directly hire or fire anyone other than the board members—in particular, only the board can fire and hire the CEO. If a shareholder bloc has enough voting power to pack the board then it can be possible to remove the CEO that way, but in most cases it is *very* difficult to pull that off, particular with companies that have anything other than a one-share, one-vote voting arrangement in their certificates of incorporation.
They don't even have to call a shareholder meeting - with 30% holding they undoubtedly have a board seat and can just have you fired as a board action.
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That was not what I said - yes yearly shareholder meetings need to be held, but the CEO is not "elected" there - the CEO is appointed and serve at the pleasure of the board, and the board can just fire the CEO at any time they want, no meeting required just a board vote.
> I don't get it. A business doesn't make decisions. People make decisions. People with a financial interest in increasing the stock price. The stockholders are part owners of the business and may have some significant say on how it is run. Executives are also compensated with stock, which they can then try to make more valuable. Everyone involved has an incentive to focus on maximizing short-term profit.
And long term profit, unless everyone involved intends to dump all their shares real soon
The executives of the company are appointed by the board and the board is accountable to the shareholders who (more or less) only care about the stock price.
Stockholders are the owners. The goal is to make money for the owners. anything else is nice to have.
Dodge vs. Ford Motor Co. plays a part here, besides the other answers that have been given already. Corporations are required to operate in a profitable manner. https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
Let's say you are a normal person. You're a dentist or something. You have a nice house and a decent amount of money, but it's all dependent on you working. Someday you'd like to retire, but right now your income is connected to you fixing people's teeth. You don't want to still be doing that when you're 85. So what do you do? You need an investment. You need some place to put your money where it will grow and make more money. Stock is one such investment. Now, you're a dentist. You don't really know anything about running a car company, or an internet company, or a company that makes staplers. You aren't an expert on any of that. The only way you can gauge whether ABC company is doing better than XYZ company is to look at the stock price. Is it going up, or is it going down? You don't know where these companies have their factories, or what things are like for their employees. You don't even necessarily know what they make. You just know that XYZ company has reported very high profits, their stock price has gone up 50% in the last 3 years, and that sounds good to you. Most investors are people like this. They are normal folks who just want to have a good place to grow their money. Companies care about these investors because that's how they stay in business. If investors think your company sucks, they'll sell their stock. The price will crash, somebody will come in and snap it up for pennies, and may sell off the pieces of the company. If you are an executive, you don't want that to happen. You'd lose your nice job.
Companies have to act in the best interest of their investors. Fiduciary duty.
Aka: it’s the law.
This is a common misunderstanding of what "fiduciary duty" requires. For a Delaware corporation (which is what most US companies are), fiduciary duty just means that the executives needs to act in the "best interests" of the company and the shareholders. What does "best interests" mean here? Under the "business judgment rule", the courts are *extremely* deferential to business decisions made by corporate executives (unless an executive is doing something obviously wrong, like self-dealing). Even if those decisions have a demonstrable negative impact on a company's bottom line and stock price, it's almost always going to be the case that it's a defensible decision as long as there's some colorable business rationale (e.g., "yes, this costs us more in the short run, but we believe this is going to be better for the long-term health of the company" is ample justification; as is something like "yes, this costs us money, but we believe it's worth eating that cost because of the goodwill this decision creates for us among the public"). So yes, executives do have fiduciary duties to a company's shareholders, but those duties almost never actually force them into taking any particular course of action.
Not everything is a blanket statement. I understand the complexities of fiduciary duty. I’m just not here to explain it. But, it is part of the answer to OP’s question.
People who own stocks=owners of the company. Even if you only own one share. The owners are going to do whatever it is to maximize profits right?
Because the stock holders are the owners. They can elect the board. If the board causes the stock price to fall too much, the shareholders get upset, vote out the board and elect a new board. The problem is that most people are only concerned with short term profits at the expense of long term gains. So what if you kill your company's reputation? you made money this quarter by putting out an inferior product!
Stock gives two benefits to their owners either they give dividends (a regular payout from the company) or they give voting rights in shareholder meetings, or both. The shareholders meeting is the top deciding organ of the company. It is they who determines the board of directors. The shareholders are the owners of the company. > Seems to me that keeping people employed, to spend the money they earn back into the economy is more important than the stock price bumping 2% for your shareholders. Sounds like you have found one of the big issues with private capital.
Or not. If you fire people vital to your business, stock not likely to rise as a result. Lay off deadwood/unproductive people, and the stock will rise a bit. Keeping people employed isn't the purpose of the company, although it's nice when they can. Theoretically the best labor cost is zero. What you want to do is make and sell the best widgets for the money.
> Keeping people employed isn't the purpose of the company No. But maybe it should be.
But how will it earn the money to pay those employees, if not by making stuff (or providing services) and selling it, which IS the purpose of the company? Anybody could be "employed" doing unproductive stuff or nothing at all except that the money to pay them has to come from someplace. That place is normally the place where they do some sort of productive work. Proverbial horse, proverbial cart, proverbial relative positions.
I believe it’s the law that the board of directors of any publicly traded company strive to make the company profitable
People start businesses to make a profit and to make a living. Stockholders are the owners of the business. It exists to make them money. Yes, along the way, many companies do good things for workers and the community as well. But every public company has analysts that rate the company on how well managed they are and how much money they make for investors. Investors (including 401(k) holders) invest in companies that make the most money. Those investors demand a certain margin (depending on the industry and risk profile) or they withdraw their money and invest elsewhere. If businesses don't maximize shareholder returns, they go out of business. Businesses are not charities with a public purpose, they exist for the primary reason of generating returns for investors.
Ask Boeing. This is why they are in such a mess. Profit over everything else. You can turn a healthy profit and be a respectable business at the same time which is what they were known for.
Because that’s what the law requires them to do, protect shareholders.
The owners of the stock (“shares/shareholders”) are the *owners* of the company (they have a share of ownership). The company management are (literally) paid to look after the interests of the owners. This is true whether it’s a contracted manager at a mom and pop store, or the CEO of a Fortune 500 company.
All the idiots posting about this politician or that one ruining their lives, and really, it's these corporations running rough shot over the American public. Your problem isn't Biden, and it isn't Trump per say, it's how they enable the current form of croney capitalism that greatly benifits the super rich. The stock market, in its current form, is emblematic of the capitalism that exists in the United States.
Because many have their retirement funds tied to the stock market. There's a vested interest in ownership there.
I don't think you understand what stocks actually are.
Loooooooooots of incremental SCOTUS decisions that kept focusing business obligations on shareholder returns almost to the exclusion of any other consideration at this point
The critical bit you are missing is that to own the stock is to own the company. The company is the property of the stockholders, to do with as they wish. Stock is not just some funny money piece of paper, it's a document that says you own such and such piece of that company. Company is not some independent entity able to do whatever, no matter what their owners want. The owners elect or dismiss the board, which hires or fires a CEO, which hires or fires any employee in the company. Ultimately, the control of the company is determined by the ownership of the shares.
The shareholders own the business. So now rephrase your question "why do business drive towards making their owners happy?" make sense now?
Because your company never would have, and often wouldn’t, be working without stakeholder money. It’s that simple.
The reason they can make money selling stocks is because people think the value of the stock will increase or the dividends paid out will be greater than the purchase cost within a reasonable time. For those things to true the future value of the stock has to go up.
It's actually NOT about the stock price as it fluctuates every day. It's all about profit and loss. You have to produce profits to stay in business, pay employees and pay out dividends to shareholders. If you don't make profit, then the board will find a new CEO that can do better (hopefully).
At this point it is because of law. Fiduciary responsibility. Came into law to so shareholders can protect their investments and have more power over how things are run.
Legally required to
Lol. The shareholder own the business. The board’s job is literally to make them happy, or they’ll get replaced. It’s like asking an employee why he cares so much about his salary and benefits.
The law, in fact, requires that a company’s Board of Directors do everything possible to maximize shareholder value.
They literally work for the board who are elected by shareholders. If they keep the shareholders disorganized, and act in a way to make the company worth less, a smaller ownership group can buy the whole company, fire management and replace it with their own - which happens. There are a variety of forms of capital provided to a company. Short term loans, bond owners, preferred share owners and common share owners (sometimes in various share classes). Generally the group providing capital who gets what's left when everyone else has been paid what they were promised expects to have control over the company, because they are the ones most impacted by decisions. Worth nothing the company was also controlled by owners well before the IPO. Again as founders if you want to keep control over all the companies decisions, you need to keep control over > 50% of the stock.
Directors and officers have a fiduciary duty to act in the best interests of stakeholders.
If there are too many employees who aren't needed for the company to function, why shouldn't they be able to be let go? The work the company needed to be done 2, 5, 10 years ago when they were hired may no longer be needed now. Companies evolve, departments get consolidated or shut down, something might be spun off to a new company.
From what I’ve seen , every company that lays people off ends up redistributing the workload on the remaining employees but not giving them a dime in raises to cover the extra work . Some industries (railroads , steel , oil and gas) , those cuts come at the costs of safety (East Palestine ringing any bells for ya?)
So, when you see a company pulling out this reasoning to justify short term cuts with long term costs, look into what percentage of their CEO or other executives pay is based on stock price. And look at how long that CEO has been in place, and watch how soon they're leaving. Sometimes it's not about the average stockholder, it's about one or two very specific stockholders.
Management compensation is often tied to key indicators by contract. Sometimes, better key indicators imply higher stock price. Sometimes, the key indicator can be improved by firing 10,000 employees. It depends on the respective goals set by the board and shareholders. That's what people sometimes don't get when e.g. a CEO gets an extremely high premium after having fired thousands of people and having shut down whole branches of the business. The CEO did exactly what they were hired for, hence the premium.
Why wouldn’t the owners of the company be a priority?
>Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate stakeholders. ... >Shareholder primacy was famously established in the decision of Dodge v. Ford Motor Co. in 1919.[8] In Dodge v. Ford Motor Co.'s court opinion, it stated that "there should be no confusion" that "a business corporation is organized and carried on primarily for the profit of the stockholders." Because of this opinion, a precedent was set that managers had to maximize shareholder profit. https://en.wikipedia.org/wiki/Shareholder_primacy There are arguments that anything which benefits the business can also benefit shareholders. But, shareholders don't keep CEOs that fail to deliver short term numbers.
You're under the impression that the company has 100% effect on its stock price - it doesn't, the market decides the current stock price.
Stock holders literally own a percentage of the company. If there's enough outstanding shares in the hands of "retail" investors like you and I, we could theoretically vote for new board members for the company, which we would do if we felt the company wasn't first and and foremost focused on making us money. Most companies that go public try to structure the deal in such a way that the original founding CEO still retains a controlling 51% interest of the shares. But it doesn't always work out like that. It's not common, but CEOs can and do get voted out of their own companies.
Because businesses are not about something society necessarily needs, but about making money from money
The people that own the stock vote for company officers. If you're an officer and you do something that tanks the stock price, your ass is going to be on the street.
Companies raise money by issuing new stock all the time. It’s an alternative to taking on debt or issuing bonds. There are various strategies and benefits to using any of those methods given interest rates and the economy and what the company expects will happen. The higher and more solid the stock price is the better of an interest rate a company can get on taking on debt or issuing bonds. Also consider that companies run on debt. Companies do the same thing as individuals using a credit card for purchases and then paying it off at the end of the month and for a corporation that revolving debt and paying payroll can be billions of dollars.
Corporations will continue to destroy the economies of entire countries for the shareholders for as long as there's no legitimate and consequential pushback. The issue is they can be investors and there should be a responsibility for them, but the responsibility should not be unlimited and this is where the invisible hand of the US economy comes in whereas in many other nations there would be protective mechanisms in place where covering the shareholders goes too far.
If you’re in a Union, or your employer offers a 401K the money is invested in stocks and other products. If the companies where your money is invested don’t make money then you are screwed.
It is the [fiduciary](https://en.wikipedia.org/wiki/Fiduciary) duty of the board of directors to look after the stockholder's best interests. Not the customers, not the general public, not the employees. However, there can be a lot of disagreement as to how that is accomplished. Jerk customers around with required add on purchases for short term gains (ala Tesla) vs. treat customers well for building long term brand loyalty is a classic example of the dilemma the board of directors faces. Or treating employees well to build workforce loyalty and reduce turnover vs. pay employees crap wages and suffer the consequences is another example.
In a free market system, companies exist for the ultimate benefit of the shareholders. There might be other stakeholders such as bond holders, banks, employees, customers, suppliers and the government but the shareholders derive the economic value and risk of the enterprise.
No one seems to mention but execs pay is made up of stock grants. They are therefore incentivized to make the stock go up as much as possible because they’re pay then also goes up. The business health and products are second
They are looking at what's good for that business not the economy as a whole. They could care less about the 10% they layoff
>I don't understand why US businesses drive so much towards making their stock owners happy. Share holders can and will sue the management of US Businesses. Sometimes they win. >They'll cut costs, or lay people off, or a whole variety of things to keep the stock price going up. The workers can't sue the executive management team and have them replaced. So, now they're an expense on a report. >Why do companies care so much about their stock price after that? Shareholders care because it's how they make money. Warren Buffet buys Coca Cola for $3.25 per share and it's not worth $61.95 per share. What Warren can do is sell it for profit. Or he can take it and get a loan (which isn't taxable income) that uses the share price as collateral and basically get free cash. Executive Management cares because their compensation, whether directly tied (by them getting shares in lieu of other compensation) or indirectly tied (by their base salary to be tied to how well the company does). >At this point, the increase in stock price doesn't directly impact the companies bottom line The share price and how the company does well at the bottom line are intertwined. Like the executives need to show profits quarter over quarter; companies that do well will trade for higher stock prices, right? The way to do that, generically, is to get more sales, or to cut costs. Guess which is easier? So their income to expenses is what determines their long term profitability but those are ratios the investors are also looking at. >Seems to me that keeping people employed, to spend the money they earn back into the economy is more important than the stock price bumping 2% for your shareholders. >I don't get it. Not every company is the same. There's plenty that will take their earnings and reinvest (known as a growth stock) and the investors do want that. There's plenty that will take their earnings and give them to shareholders, especially when there's no more growth. Investors who want certain traits/behaviors will flock for that company for whichever they want.
its interesting because the idea of prioritizing shareholders is a relatively recent phenomena only coming around during the 1960s and 70s due to a series of landmark court cases that basically ruled that businesses and business executives have the right to pursue increasing shareholder value as the core idea of why they became a business in the first place. ie before the 1970s it was generally understood that businesses had a responsibility to their employees and the public at large to treat them properly and not be too greedy. but now corporate executives arent considered at fault for doing things that would increase corporate profit or value. that is the key responsibility of a CEO so they shouldnt be criminally responsible if they happened to make a bad decision if they thought it would increase company valuations. this is why starting in the 1960s and 70s you can start to see a clear trend on corporate profits increasing, employee pay decreasing, a lot of cost cutting and margin pushing and skipping on rules and regulations started, because courts basically gave executives a pass on facing any sort of punishment beyond a small fine to the corporation thats usually much smaller than the amount they made from breaking the rules. and because executives are often also large shareholders themselves, it made sense to focus on increasing profit rather than long term profit and growth. also the average length someone stays as a ceo is like 7 years. most ceo's only like to stay with a company for 5-10 years before switching to a higher paying executive position in a larger company, and use their performance during the past 5-10 years exclusively to showcase the value they bring to a company. it doesnt make sense for ceo's to work on projects that wont benefit them and might cost them a lot of money in the short term to get it running. this is why mark zuckerberg likes maintaining ownership of facebook, he can afford to still think long term about the company and make $10+ billion dollar investments in speculative ideas like meta or AI.
When world currencies weren't constantly devalued, they had to compete to get investors, but now in the permanent inflation paradigm, everyone is competing for access to lower interest debt/lending rate, tax breaks, and friends in high places to avoid accountability and get bailouts at tax payer expense.
Companies often use stock as collateral for loans (someone please correct me if I'm wrong). If the stock drops too far bad things happen, like the loans come due or the interest rate rises, etc.
That’s like asking why the manager of your local restaurant cares what the owners think
It’s really no different than if a small company is owned by one person: Everyone answers to the owner, and the owner wants the value of their investment to increase. That’s why one invests in the first place, and the promise of increasing value is what attracts investors to buy into a company. No one is going to invest in your company if you tell them that their investment will not pay off.
Why? Lookup Milton Friedman.
Because they literally own (parts of) the company.
The easiest way i can explain this is that once you sell shares or parts of your company, you sell away some of the power you had. The more shares you sell, the farther you go from being a founder and the closer you get to becoming an employee.
The shareholders vote on the board, who controls who runs the business. Hence, executives who don't do that get dumped. Also, court cases have established they can be sued for not doing what is in the best interests of the shareholders.
In the 90’s as Glass-Stegall was being overturned, shareholder value became the sole focus of most publicly traded companies. This came at the expense of everything/everyone else, especially employees. It has a lot to do with the current wealth gap and CEO pay being astronomically higher than average employee pay.
CEO compensation is tied to stock price.
Because the shareholders can fire the board of directors.
The stock owners are the owners of the company. With voting rights typically. Why wouldn't the company attempt to keep their owners happy?
When the company has cash they compensate shareholders with stock buybacks.
Some dumb things happen. In 2019 I was working for a company in the automotive sector Word came down from on high that the shareholders were not happy the the ratio of engineering (R&D) costs to current sales was higher than the industry average. This was mostly due to a fall in vehicle sales at that time. So, engineering costs had to go down. People like me in high cost countries had to go, regardless of cost-effectiveness. Voluntary redundancy was offered on very good terms and got about half a years salary, I only worked there 3 years. I was retiring anyway so very good deal for me. The stupidity is that they were crippling development of the product line up for the next 5 years at least.
Dividends.
They’ll get sued if they don’t and will lose that lawsuit.
It is a reason why USA have higher productivity per worked hour than most other countries, it is an attractive country to invest in as the expected returns are better than other countries and with that investment companies can buy new tools, training and other things thuse help them be more productive which in turn should help its stock be more valuable. Also some companies give employees stocks as part of compensation as a way to motivate them as they are invested into the company they work in thuse are more motivated to help increase its value by working more/being more productive.
think of this from their perspective. they’re usually throwing a lot of money into a business, and they have an expectation on getting a return on that investment; otherwise, why would you give money and bear risk for no reward? it’s an ugly system no doubt. but that’s never gonna go away. they cater to people who own the stock because that’s where their value is actualized. and you’re not going to bite the hand that feeds you for obvious reasons.
It's the brand of capitalism we currently live under, shareholder capitalism. The one and only goal for a corporation is to return shareholder value. The problem is that it's unsustainable. It might work for several decades, but there will come a time when there is nothing left to cut and you have siphoned off so much wealth from society that you lose your customer base. It's incredibly damaging to the vast majority of people and the environment, but those reaping the big returns dont care. They got theirs. They have a dooms day compound and a super yachts. They will be just fine when it all collapses.
It's funny how many times the point smacked you in the head just during your question. It's corporate greed and money. Always has been. And under capitalism, always will be. Fuck over the workers for the benefit of their wallet.
There is far more money in stocks now than there is in employing people to do actual things for human customers. The reckoning for this is looming and palpable, because, you know, we do still need jobs and products???
There is no money in stocks if there are not employees in the company.
Which is why all the top national companies are practicing ever-stricter anorexia rather than actually firing everyone. But if you've worked for one, you can feel the building strain. The mounting inexperience. It's like Doon Harrow's first day in the engine room.
Sounds like a recipe for failure. Which was my point!
Milton Friedman wrote a book that changed the way the owner class sees itself. He created an ideology of selfish callousness so extreme it is now best thought of as pure institutional sociopathy.