The Disturbing Implications of Shareholders as Business Conscience

When Shareholders are the last line of defense against bad business behavior, something is profoundly wrong.

Embattled drug company Mylan, who infamously jacked up the price of the life-saving Epi-Pen for no other reason than that they held a monopoly on the drug and wanted higher profits, is back in the news again. As expected, the news is not good. A recent government report suggested that the company over-charged U.S. Taxpayers to the tune of $1.27 billion for the Epi-Pens supplied which were covered under government-run health insurance programs such as Medicare and Medicaid. This news appears to have sparked a shareholder revolt at Mylan, when four institutional investors circulated letters attempting to block the re-election of six members of the Board of Directors at the company, saying that the greed at the company has gone too far. Admittedly, this investor block held just over 1% of shares, so the impact of this revolt is minimal.

This isn’t the first time shareholders have been in open revolt with the management and Boards of the businesses they are associated with. Barclay’s Bank over in London has been roiling lately under a scandal that pit shareholders against CEO Jes Staley, who has been accused of using the bank’s security system in an attempt to unmask the identity of a whistle-blower. This whistle-blower was voicing concerns about another hire that Staley brought on board at the bank, and Staley later admitted that he wanted to protect the new hire. Staley has played the typical post-scandal moves of apologizing and accepting a “large” cut to his bonus. But some shareholders don’t think this is enough, and are being advised to abstain from an upcoming vote to re-elect Staley to the Board of Directors.

Back on this side of the pond, shareholders with a 62.3% portion of total shares in the company Exxon Mobile led a rebellion and forced the company to study the impact of measures designed to keep global temperatures from rising more than 2 degrees, in line with goals from the Paris Climate Agreement. This recognition of climate change in a major player in the fossil fuel industry comes at a time when the current occupant of the White House recently announced that he is withdrawing the US from that agreement, a move which will hurt many businesses in the US, including within the energy sector.

I find these instances of Shareholders as Conscience to be very interesting for a number of reasons. In the classic business model, companies exist to provide profit to themselves and to their shareholders. Because shareholder value is determined by the market price per share and shareholders can come and go at a rapid clip, this tends to focus the management of the business on short-term gains. Providing value increases to keep the shareholders happy often leads to poor ethical and management practices which do indeed increase value, but over time present great risks to the future of the business. This model also eliminates any socio-political influences which might persuade the business to make a decision which would be good for the business long term, but would run afoul of the mantra to increase shareholder value, such as the debates around accessibility to a lifesaving drug or the existence and impact of climate change.

However in these cases, and in several others, it appears that Shareholders are acting against their own immediate best interest and for the sake of future returns or future value or out of broader concerns, a concept more in line with the Stakeholder Theory. Stakeholder Theory puts the long-term value of the company front and center, taking into account things like socio-political influences, the perspective of employees and the like in order to ensure the long term value and growth of the company, despite the possibility of immediate hits to shareholder value. It’s the business world version of taking the long view, rather than the short view.

The question is why is this happening? Is it merely a group of like-minded activist investors trying to flex their muscle? Is it closer to altruism? Is it simply an awareness that at some point risky behavior becomes too great a threat and must be dealt with? Is it the equivalent of the Nuclear Option, a natural outcome of poor business ethics and management going un-addressed by the Board of Directors, thus forcing the hands of Shareholders as a last-ditch effort to reign in bad behavior? The answers to these questions are as varied as the situations themselves.

Whatever the answers, the implication of these questions and these situations is profound. On the one hand, it can be wonderfully reassuring to see. The business world is littered with examples of companies not only behaving badly, but getting away with it almost completely unscathed. It is refreshing to see someone finally standing up to this bad behavior, hauling these unethical leaders to the carpet and holding them accountable for their bad behavior and the problems they create.

On the other hand it does indicate that something is profoundly wrong with business and society when we have to rely on the existence of altruistic-minded Shareholders to stand up and correct problems like this. There are numerous other lines of defense that should have tripped up problems like what happened at Mylan or Barclays well before it reached Shareholder level. The fact that none of these other defenses were triggered indicates profound problems not only for the company, but for business and society overall.

While I am comforted in these particular instances that Shareholders took a stand for what is right, I am deeply concerned that it even reached the Shareholder level, and I am even more disturbed at the possibility that this may be the last effective line of defense against bad corporate behavior that we as a society have left.



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