MGMT 230 - 7 Shareholder and Stakeholder Capitalism

Shareholder & Stakeholder Capitalism

Introduction

  • Key Terms:

    • Shareholder Capitalism: Focuses primarily on maximizing shareholder value.

    • Stakeholder Capitalism: Considers the interests of all stakeholders including employees, customers, communities, and the environment.

Elon Musk's Bid for OpenAI

  • Context: Musk's bid for OpenAI, valued at $97.4 billion, raises implications for its non-profit mission.

  • Non-Profit Status: As a non-profit organization, OpenAI has a primary fiduciary duty to:

    • Act in good faith to advance its charitable mission (not necessarily profit-focused).

    • The board can legally reject acquisition offers if such offers undermine the mission, regardless of their size.

Comparison of Fiduciary Duties

  • Fiduciary Duties Overview:

    • Comparison between Nonprofit, Private For-Profit, and Public For-Profit organizations.

Type of Organization

Primary Duty

Can Reject a Higher Offer?

Nonprofit Board

Uphold mission and charitable purpose

Yes, if conflicting with the mission

Private For-Profit Board

Act in the best interest of owners/shareholders

Yes, if justifiable for long-term strategy

Public For-Profit Board

Maximize shareholder value

Harder to reject; must justify based on shareholder interests

Key Takeaways

  • Nonprofits: Prioritize their mission over financial returns and have the authority to reject offers not aligning with their purposes.

  • Private Companies: Have decision-making flexibility to refuse higher financial offers when aligned with long-term strategies.

  • Public Companies: Face stricter obligations to maximize shareholder value, complicating rejection of high offers without strong justification.

Economic Context & Market Influence

Financial Crisis Highlights (2008)

  • U.S. Bailout Statistics: Approximately $200 billion in taxpayer money has been allocated for the bailout of Fannie Mae & Freddie Mac.

  • Stock Market Overview:

    • Major Stock Indices like the S&P 500 exhibited significant declines during financial turmoil, notably a 57.7% decline.

Mortgage-Backed Securities (MBS)

  • Basic Structure of MBS:

    • Example Case Definition: A bank lends $150,000 to John for a house (mortgage). This mortgage is pooled together with others and sold as securities to investors.

    • Illustration of circulation:

    1. Bank lends John the money.

    2. John purchases a house.

    3. Bank sells MBS made up of mortgages to investors.

Risks with Subprime Mortgages

  • Characteristics of Subprime Borrowers:

    • Generally possess lower credit scores.

    • May have a history of late payments and defaults on previous debts.

Collateralized Debt Obligations (CDOs)

  • Nature of CDOs:

    • Similar to MBS but often come with higher risk due to the composition of underlying assets.

Investor Behavior Pre-Crisis

  • Market Trends: Investors bought MBS and CDOs at high volumes, mistakenly considering them to be low-risk.

    • The market allowed loans to individuals regardless of creditworthiness, leading to diminished lending standards.

Short Selling by Michael Burry

  • Michael Burry’s Strategy:

    • Analyzed MBS and CDOs and forecasted the housing market collapse due to high-risk subprime mortgages.

    • He shorted the housing market, thereby betting against it, using credit default swaps for protection against defaults.

  • Outcomes of Strategy: Burry successfully made $700 million by betting against the housing market decline through these mechanisms.

Shifts Toward Stakeholder Capitalism

Rise of Movement

  • Occupy Wall Street’s Influence: The movement highlighted crony capitalism's negative impacts and advocated for stakeholder capitalism.

  • Definition of Stakeholder Capitalism: Incorporating a broader array of stakeholder interests alongside profit motives, such as employees, communities, and environmental factors.

Arguments and Social Contract

  • Social Expectations: Society expects corporations benefiting from limited liability to act responsibly towards social interests. Limited liability shields shareholders from personal liability beyond their investment.

  • Example of Limited Liability: If a shareholder invests $1,000 in a company that goes bankrupt with debts of $1 million, that shareholder only loses their initial investment and not more.

Criticism and Analysis of Stakeholder Capitalism

  • Milton Friedman’s View Against Stakeholder Capitalism:

    • States that businesses have a singular focus