Common Misunderstandings About Corporations
Some widely-held beliefs about business corporations are erroneous. Business experts, financial press, economists and lawyers who rely upon these beliefs fail to grasp the legal features of corporate entities and the role that business corporations play, or can play, in our society. Striving for a global understanding of the nature of business corporations and corporate law, we address three fundamental characteristics that are commonly misunderstood.
Statement on Company Law, The Modern Corporation Project
First, shareholders do not own business corporations, nor do they own the assets of the corporate entities. (Just because you own stock in Apple doesn't mean you can help yourself to an iPad in an Apple store.) Shareholders own shares. Shares provide bundles of intangible rights, such as the rights to receive dividends and to vote on limited issues.
A Team Production Theory of Corporate Law , 85 Va. L. Rev. 247, Margaret M. Blair & Lynn Stout (1999)
Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Margaret M. Blair (1995)
Second, shareholders who purchase shares on stock exchanges (NYSEG, NASDAQ,
et cetera) do not contribute capital or assets to business corporations. In fact, when shareholders buy shares on the secondary market, the price is paid to the selling shareholder. In recent years, business corporations have paid out more money to shareholders, through share repurchases and dividend distributions, than they have raised from shareholders by issuing stock. The notion that shareholders contribute capital to corporations is thus blind to reality in the majority of cases.
Profits Without Prosperity: Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off, Harv. Bus. Rev., William Lazonick (Sept. 2014)
Ending Short-Termism: An Investment Agenda for Growth, The Roosevelt Inst., Financialization Project, Mike Konczal, J.W. Mason, & Amanda Page-Hoongrajok (2015)
Understanding Short-Termism: Questions and Consequences, The Roosevelt Inst., Financialization Project, J.W. Mason (2015)
Third, corporate directors are not required to maximize shareholder value. As the U.S. Supreme Court recently stated, "modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so."
(BURWELL v. HOBBY LOBBY STORES, INC.
In nearly all legal jurisdictions, disinterested and informed directors have the discretion to act in what they believe to be the interest of the business corporate entity, even if this differs from maximizing profits for present shareholders. Usually maximizing shareholder value is not a legal obligation, but the product of the pressure that activist shareholders, stock-based compensation schemes and financial markets impose on corporate directors.
The Shareholder Value Myth , Eur. Fin. Rev. Lynn Stout (April 30, 2013)