Challenging shareholder value primacy

Ever considered how much employee and customer loyalty are worth? The board of privately held grocery chain Market Basket – all members of the embattled Demoulas family – has had an uncomfortable opportunity to weigh the question up close over the past two months.

In June, the board fired the company’s president, Arthur T Demoulas, who last year opposed a plan by the board, chaired by his cousin, Arthur S Demoulas, to pay an additional dividend of $300 mn to shareholders – all Demoulas family members. An accumulated cash stockpile has enabled Market Basket to offer relatively high salaries and good benefits to workers, and low prices to shoppers. In response to Arthur T’s firing, employees in the company’s 71 stores walked off their jobs and customers have stayed away, both groups refusing to return until Arthur T’s reinstatement.

Some observers see the board’s move as reflective of the ideology of maximizing shareholder value. Although Market Basket isn’t publicly traded, it still has controlling shareholders who may have wanted to prepare it for a public offering. Such shareholders often pressure the firm to start generating accounting results that would appeal to shareholders in a public company, says Lynn Stout, whose 2012 book The shareholder value myth probes the origins of and faulty basis for the ideology of shareholder value primacy that dominates current corporate thinking.

To increase reported earnings so the business appeals to private equity investors or agents of another exit vehicle, private companies often ‘behave in ways that are very similar to public companies’, Stout says. ‘They may have a long history of treating employees well. That goes out the window, benefits get cut, product quality may go down in hopes of increasing reported profits, leverage may go up. It really is very much shareholder value thinking in a private company as a strategy for getting ready to take it public.’

Taking the company public may have been the board’s initial aim, but this week, after fraught negotiation, the board seems to have agreed to accept the ousted president’s offer to buy the 50.1 percent of the company owned by his cousin and other family members for $1.5 bn – a combination of private equity loans, mortgaging much of the commercial real estate that Market Basket owns, and cash from Arthur T and supportive family members, according to a series of Boston Globe stories. Despite partial funding from private equity interests, the business would be controlled by Arthur T for the foreseeable future.

As a senior executive, Arthur T is an anomaly in Stout’s view. As a result of a 1993 tax code change that encouraged executive pay to be tied to share price performance, ‘you have this scenario in most public companies where the CEO’s interests are aligned with the activist hedge fund’s interest,’ she says. The average CEO’s tenure has fallen below six years and CEOs are likely to have 80 percent of their wealth and salary tied up in share price performance.

‘So we have a world now where the CEOs of large public companies are also pretty much interested in pumping up the share price in the relatively short term,’ Stout continues. ‘It’s fairly unusual to see a CEO [even of a private company] being vocal and saying, This is not the best thing for the company or its employees or customers.’

There’s a growing challenge to shareholder value primacy from business leaders at Costco, Starbucks and McKinsey, and from thought leaders at Harvard and Wharton, says Stout. The Aspen Institute’s Business and Society Program has challenged it for 16 years and the Brookings Institution recently created a program on corporate purpose. There are more than 1,000 ‘B corporations’ (the B stands for benefit) such as eyeglass maker Warby Parker committed to social as well as business goals. Corporate governance programs need to be aware of this movement and be ready to change with the times.