Is long term value creation a suitable concept to regulate the corporate jungle of clowns and monkeys?
In December 2019 Boeing fired its chief executive, Dennis A. Muilenburg, who ‘set off the worst crisis in the manufacturing giant’s 103-year history’. Could long term value creation as a new corporate purpose have prevented this crisis?
On August 19, 2019 the Business Roundtable proclaimed a new purpose of the corporation replacing its former purpose of shareholder value. The proclamation sparked a huge backlash: there are no concrete promises and a number of the signatories have a track record of scandals. Some of the corporations involved would offer bad contracts to employees, ignore labor unions, put pressure on suppliers, try to avoid paying taxes and lobby against new sustainability enhancing regulations. The statement would just be something to keep up appearances. The Boeing case could be seen as an illustration of the mentioned vices.
In November 2019 shareholders of Boeing filed a lawsuit in Delaware complaining that Boeings board did nothing to investigate the safety of the 737 MAX and thus caused value destruction which violates the fiduciary duties the board has to shareholders. The lawsuit is a follow up of a class action, filed on 9 April 2019 with a federal court in Chicago. Shareholders are trying to seek damages after Boeing’s market value tumbled. On January 11, 2020 the Boeing crisis intensified due to an embarrassing email phase. A number of [edbjn3] internal documents paint a shocking picture of Boeings corporate policy, procedures, purposes and values. One comment was that ‘this airplane is designed by clowns who in turn are supervised by monkeys.’ Fired CEO Muilenburg was chief executive of Boeing and one of the signatories to a statement made by the Business Roundtable earlier that year in August 2019 that redefined the purpose of a corporation – to promote ‘an economy that serves all Americans’. In the statement 181 CEO’s move away from shareholder primacy, and include a commitment to all stakeholders.’
According to the complaint in the lawsuit, Boeing “effectively put profitability and growth ahead of airplane safety and honesty”. This complaint is remarkable from an Anglo-Saxon corporate law point of view, that corporations are designed as a legal fiction to promote the welfare of shareholders. During the 70’s this neoclassical shareholder value doctrine came flying over – whether by Boeing or not – across the Atlantic ocean from the US to Europe. If corporations maximize shareholder value – or profit (which Friedman proclaimed to be its sole responsibility) – the implicit ideology was that they also contribute to society. Shareholder value supposedly takes into account all future consequences; so it is not in the interest of the corporation to act with a ‘narrow’ purpose in mind. Efficient capital markets would therefore seem perfect valuators of corporations. And shareholder value as a yardstick is attractive because it is a one dimensional measure. Executives exactly know “what to do”: calculating discounted cash flows. This is the prevailing image in textbooks of Anglo-Saxon corporate finance in which valuation is a simple technical exercise; but the devil is in the details: where do these cash flows come from? We therefore question this simple way of representing shareholder value. Shareholder value is only a result, not a strategy. Besides there are serious doubts about the efficient market hypothesis.
In addition to this we state that the value problem is more fundamental. Firms can create value, but value creation is only possible in a complex and uncertain world. It can be argued that the “creatable” value is already a known fact, it cannot be created anymore. The fundamental value is thus unknown and unknowable – and the perfect reflection of it is logically impossible. It is just a social construction. It is not only the reflection of value creation that is problematic however: is enduring value creation possible within the boundaries of the corporation?
Long value creation may also be the wrong yardstick. What we mentioned with regard to shareholder value being a social construction can also be said with regard to long term value creation. Besides that we would like to point out that value creation and value capture are often confused. Value creation is the result of a collaborative effort from all identified stakeholders (or society?). Value capture refers to the profit taking at firm level. A corporation can invest in innovation and employees – creating new opportunities, and solutions, but others - competitors or stakeholders can reap the benefits. In stating that a corporation should aim for value creation, the corporation would be deemed a vessel to serve a public interest, to create a kind of public good. This would turn the former slogan “what is good for the corporation is good for society” into “what is good for society is good for the corporation”: a fair Environment Social Governance policy is inevitable and ultimately contributes to shareholder value. Long term value creation could thus be considered to be the same as shareholder value. It could make the underlying process of value creation more transparent; but the difficulty is in finding and representing the right dimensions that are the basis of long term value creation.
Long term value creation is a concept full of contradictions: it is uncertain and impossible, has (too?) many dimensions, may be the wrong concept, and in a way is more or less the same – just the underpinning – for shareholder value. Long term value creation would seem to be just as fluid and controversial as shareholder value. We therefore have doubts if long term value creation would have been able to prevent the value destruction policy of Boeing.