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Ryan Nauman
VP, Product and Market Strategist
Stephen Berei
VP, Client Services & Implementation
Jeremy Poulin
Senior Client Consultant

What is the purpose of a public corporation?

May 12, 2015 Ryan Nauman

One of the things I still remember from my business courses at St. Cloud State University was that a corporation’s primary purpose is to maximize their shareholder’s value. Maximizing the companies’ shareholders’ return is a goal for all corporations, but should it be the primary goal? One could also say that the welfare of the employees should be a primary goal considering the corporation is the employee’s livelihood. Debt holders can also be considered a high priority for a corporation. Traditionally, corporations have paid out dividends and bought back shares as ways to maximize shareholder’s value. Laurence Fink, chief executive of BlackRock, recently brought this subject front and center when he sent a letter to the chief executives of the largest 500 U.S. companies.

Mr. Fink urged the chief executives to reconsider shareholder friendly activities such as paying out dividends and buying back stock. These activities obviously increase shareholders return and help maximize their value. The question lies in who is behind these decisions to pay out dividends or buy back shares and is the decision in the best interest of the corporation? When an individual invests in a company, typically the investor is looking at it as a long term investment, or looking for a short term gain before selling it. 

Around the 1980’s another type of investor came to light, the “corporate raider” or more recently known as an “activist investor”. Activist investors can be individuals or groups of investors that gobble up large equity stakes in a corporation with the goal of obtaining seats on the company’s board of directors in order to affect change in the company. In most cases these “activists” are looking for mismanaged companies they feel can be managed more effectively to increase the company’s value. Obviously these investors are looking to increase the value of the company and sell it for a quick profit, or maybe pressure the board of directors into paying out large dividends or buying back stock. Who benefits when these investment groups pressure a board of directors into these corporate decisions? Does this increase the return of all shareholders? Or does it only maximize the value of the short term and activist investors? How do these decisions affect the other stakeholders such as the employees and the debt holders?

I don’t think Mr. Fink is anti-activist as much as he is pro-corporation. Mr. Fink is going back to the basics and urging the chief executives to evaluate what the best return on invested capital is, rather than giving way to the pressures of the shareholders. The activities that provide the best return on invested capital often have a very positive affect on the wellbeing of the company. All stakeholders benefit and come together when the company is thriving. Higher returns for all shareholders, more bonuses’ and other benefits for the employees, interest payments to debt holders are more secure and finally the corporation is providing great products and services to its customers.

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