Hi Bob,
Since Berle & Means (1932), legal scholars (e.g., Stout 2002) have been clear that shareholders are neither the owners nor residual claimants (i.e., owners of the profit) of the public corporation. Why then does the accounting profession continue to treat shareholders as owners and residual claimants?
Specifically: (1) Why are dividends not expensed as a cost of capital? (2) Why is Shareholders’ Equity treated like its Owner’s Equity in a sole proprietorship, insinuating that shareholders own the profits? Finally, doesn’t treating shareholders as owners, when they are not, violate representational faithfulness? These are valid questions that should not be avoided out of ignorance of the law or for political reasons.
Addressing this issue of erroneously implying shareholder ownership is important to society. It is well accepted that the result of calling shareholders "residual claimants" and owners has been the increased use of executive stock option pay (Cf Jensen and Murphy 1990). This use of executive stock options has resulted in the expontential growth in executive pay, which, in turn, has resulted in the exponetial growth of stock buybacks--purportedly made to "return value to owners" (Lazonick 2010). How are executive stock options and buybacks justified if shareholders are not owners, residual claimants, or even investors (99% are not even true investors as they purchased shares on the secondary market)?! The accounting profession has perpetuated the myth of shareholder ownership and is, therefore, culpable for any misallocation of resources from the corporation to executives and wealthy shareholders. Thus, the questions above are important.
Bob, what do you plan to do about this? Thanks for your time. Todd Sayre CPA PhD (Associate Professor of Accounting at the University of San Francisco)
Comment
For anyone interested in verifying the claim that legal scholars reject shareholder ownership, please refer to the papers below:
1. Bad and Not-So-Bad Arguments For Shareholder Primacy. Lynn Stout. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=331464
2. The Dividend Problem: Are Shareholders Entitled to the Residual. Daniel Greenwood. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=799144
3. The Myth of Shareholder Ownership and Its Implications for Accounting. Todd Sayre. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1464148
and also Eugene Fama.
4. Fama, Eugene F. 1980. “Agency Problems and the Theory of the Firm.” The Journal of Political Economy. Vol. 88. No. 2. April. pp. 288-307.
This paper is not on SSRN. The quote is: “Dispelling the tenacious notion that a firm is owned by its securities holders is important because it is a first step toward understanding that control over a firm’s decisions is not necessarily the province of security holders.” (Fama 1980, p.290).
Michael Jensen --- http://en.wikipedia.org/wiki/Michael_Jensen
Maximizing Shareholder Value --- http://en.wikipedia.org/wiki/Shareholder_value#Maximizing_shareholder_value
Research at the University of Rochester --- https://urresearch.rochester.edu/home.action
Jensen Comment
Note that this site includes a long listing of research in accounting, finance, and economics, much of it based on positivism and financial markets.
"Why the “Maximizing Shareholder Value” Theory of Corporate Governance is Bogus," Naked Capitalism, October 21, 2013 ---
http://www.nakedcapitalism.com/2013/10/why-the-maximizing-shareholder-value-theory-of-corporate-governance-is-bogus.html
Jensen Comment
Mike Jensen was the headliner at the 2013 American Accounting Association Annual Meetings. AAA members can watch various videos by him and about him at the AAA Commons Website.
Actually Al Rappaport at Northwestern may have been more influential in spreading the word about creating shareholder value ---
Rappaport, Alfred (1998). Creating Shareholder Value: A guide for managers and investors. New York: The Free Press. pp. 13–29.
It would be interesting if Mike Jensen and/or Al Rappaport wrote rebuttals to this article.
Bob Jensen's threads on triple-bottom reporting ---
http://www.trinity.edu/rjensen/Theory02.htm#TripleBottom
Bob Jensen's threads on theory are at
http://www.trinity.edu/rjensen/Theory01.htm