One comment I’ve heard numerous times – both directly in regard to Etsy’s increasingly cynical business manoeuvres, and to the similar actions of other corporations – is that these companies have no choice. According to a lot of people, the job of the CEO – nay, the legal obligation of the CEO! – is to provide value for the company’s shareholders. This is apparently a cast iron law of business, and trying to argue against it is not only naive but futile; I’ve been told more than once that I’m fighting against something that’s not only common sense, but actually enshrined in law itself.
However, the issue of shareholder value is a complex one, subject to a huge amount of debate amongst both business leaders and economists. Some business leaders do, swearing by it as the first rule of business, but others consider the emphasis on shareholder value to be misplaced, or even to show a fundamental misunderstanding of how businesses create value. Jack Welch, the long serving CEO of General Electric, called it “the dumbest idea in the world”. Whilst no one would dispute that a for-profit company must – you guessed it – make a profit in order to succeed, and I think we can also all agree that the purpose of a company’s director or CEO is to guide a company to success, there is still a huge amount of debate over how to achieve that profit and success. After all, if there was just one guaranteed and simple way to make money in business, we’d all be millionaires.
The legal rights of shareholders are nowhere near as strong, or as black and white, as many people seem to think. News coverage of shareholder action against company directors – the highly publicised string of legal actions over Elon Musk’s erratic tweets springs to mind – often gives a false impression of shareholders being able to sue any business director who doesn’t immediately and directly make them profits.
However, in the example of Musk, he isn’t simply being sued because he damaged the shareholder value of Tesla. He’s not even just been in trouble with shareholders, but also federal regulators. His first controversial tweet involved false public information about his company which, yes, did impact the share price, but was ultimately subject not to a lawsuit, but instead a $40 million fraud settlement with the Securities and Exchange commission. He’s also in trouble with shareholders for breach of an agreement not tweet about the company in this way again and, separately, for using a large amount of company money to buy a business founded by his cousins, allegedly without any due oversight, a lot of conflict of interest, and no real justification for the huge amount of money he payed for the business.
These incidents are mixed, involving not only shareholder litigation but regulators, and whilst some of them do involve mechanisms designed to prevent outright damage to a company’s value, none of them are simply about the shareholders not getting as much profit as possible from the company.
In fact, as Julian Velasco writes, “although the law seems to have coalesced around the norm of shareholder primacy – that the main goal of the corporation should be to maximise shareholder wealth – this is not necessarily reflected in the specific legal rights of the shareholder.” Under US law, he notes, the main legal rights shareholders have involving company value are simply the rights to a portion of the company’s profit, and to sell their shares (thereby profiting from any rise in the company’s overall value).
Shareholders certainly do not have the legal right to recourse just because a CEO is keeping a company on a more business moderate course, providing steady reliable profits, and treating customers and buyers with respect. Damaging a company’s value is one thing, but there is no law specifically obliging CEOs to make aggressively profit-driven decisions, such as Etsy’s moves to jack up fees and create new systems to pressurise sellers. This type of legal right would be impossible to enfore because, ultimately, shareholder value can be created in two very different ways, either by working for the short or the long-term.
Long-term Investment or Short-term Profit?
A company planning for long-term shareholder value might aim to keep the quality of its products and brand high, re-investing a large percentage of profits back into the company in order to continue growing. It would also aim to retain skilled staff by providing them with fair working conditions and benefits. As Michael J. Mauboussin writes for the Harvard Business Review, “The premise of shareholder value, properly understood, is that if a company builds value, the stock price will eventually follow. The objective is to build value and then let the price reflect that value.”
On the other hand, a company only interested in creating short-term shareholder value might treat customers and employees badly in the interest of scraping out a bit more cash, improving its margins and cheapening its products for a big pay-day. In the immediate future this kind of behaviour will cause share prices and shareholder value to soar, but in the long term the value given to shareholders will be sorely compromised.
Extreme examples of companies prioritising short-term shareholder value include ones that load themselves with debt in order to leverage their own capital – rendering them vulnerable to business downturns and potential bankruptcy – or using company profits for stock buy-backs (a move which drives up share value). Both of these options serve to boost immediate shareholder profit whilst eventually prohibiting or even damaging business growth.
These are real and very common problems that plague modern companies, not just hypotheticals. A recent study found that private companies in the US invest nearly twice as much as those listed on the stock market – 7% as opposed to 4%. And Mariana Mazzucato, in her book ‘Mission Economy – A Moonshot Guide to Changing Capitalism’ notes that share buy-backs are so prevalent that the Fortune 500 cumulatively spent $4 trillion dollars on them in the 10 years leading up to 2019. Sectors such as energy and aviation, both of which Mazzucato notes make extensive use of buy-backs, could be future-proofing their business models by researching and investing in greener solutions. Doing so would help not only the companies, but also humanity as whole, survive through climate change. Instead they are prioritising the immediate wealth of their shareholders and executives.
Needless to say, this type of short-term investing has also been extremely detrimental to the employees of companies. Steve Dennings notes that the increased emphasis on shareholder compensation that begun in the 1980s has led to workers failing to benefit from their own increased productivity; “in the decades prior to 1980, compensation to workers and productivity had moved in lock step. In the decades after 1980, shareholders were allocated almost all the gains.” Employees are working longer hours, more effectively, and producing more for their companies, but their pay has stagnated and the pressure for more productivity – longer hours and harder work for the same pay – has only increased, whilst shareholder payouts soar.
All of this is what led Jack Welch to dismiss Shareholder Value as the dumbest idea in the world. “Shareholder value is a result, not a strategy,” he explained, “your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal … Short-term profits should be allied with an increase in the long-term value of the company.”
Etsys’ Short-Term Decisions.
Whilst Etsy itself has not – to my knowledge – participated in aggressive financial policies like share buy-backs, anyone even half paying attention to its actions would suspect it of moving towardsa a more profit driven, short-term business model.
Whilst the company’s acquisition of competing European and Brazilian companies seems to indicate that they are thinking long-term (presumably aiming to increase its market share and crush the competition), the rest of their actions tell a different story. In the last decade Etsy has eroded the good faith of its sellers and community by jacking up prices and reducing customer service. New polices have led to the rapidly declining quality of the products available on the site, through both the extreme relaxing of what qualifies as handmade and the terrible policing of listings. It abandoned B-corp status (a voluntary third-party certification involving “high standards of social and environmental performance, transparency and accountability”) after 5 years, and adopted a bunch of vague, generic and completely non-quantifiable corporate goals instead. ‘Keep commerce human’ guys! Ultimately the company is moving farther and farther away from the core values under which it used to trade, which differentiated it from other competitors in a crowded online space like Amazon and Ebay, eroding many of the things which gave it value in the first place.
So whilst people may continue defending the fee increase (‘of course they’re gonna make as high profits are they can – that’s their job!’) in the long term the people in charge of Etsy may actually damage the company’s value with these decisions, chasing away quality sellers and the customers who support them
And just to put the icing on the cake, Etsy started out as the epitome of a long-term planning, values driven business. When they launched onto the stockmarket they did it with reasonable fees that actually reflected the work they were doing on sellers behalf, stricter product guidelines, and B-Corp status. All of these factors would have been taken into account when deciding its share value, and the people who bought into the company would have been well aware of this. The company even framed their high corporate values and determination to stick with them as a risk when making up their stock offering! Of course, if you buy a company you have a right to put push it in any direction you want, including away from its values, but this push is far from inevitable. When shareholders decided to abandon the company’s previous ethos and start ruthlessly gouging out profits, they made a conscious choice to screw over sellers for a quick profit, and they deserve to be held accountable for it in the public mind.
The sad thing is that if Etsy did work for its sellers rather than against them, it could be beneficial to everyone involved, including those pesky shareholders. Of course, trying to turn Etsy back from its myopic social vision and short-term investments might be impossible, and we all may well end up scrabbling to rebuild our businesses elsewhere, whilst Etsy just becomes a sad orange Amazon knockoff. But in the mean time, we are completely within our rights to stand up for ourselves and our own profits. Etsy’s shareholders are not somehow legally owed the maximum possible amount that they can scour from our profits before our companies fail altogether. It’s bad enough them dragging the company they actually own into the ground – we shouldn’t let them drag us down too!