The Past Speaks

An article in Vox reports on new academic research on the plunging percentage of corporate revenues that are devoted to R&D. The paper that is the basis for this article is by Ashish Arora, Sharon Belenzon, Andrea Patacconi.

In the early 20th century, universities weren’t doing as much cutting-edge research themselves (though they were producing a flood of PhDs). So firms like DuPont began investing heavily in scientific capacity. Later, when companies like AT&T and IBM had monopolies in their respective fields, they could afford to continue funding huge scientific research labs.

But while all this corporate research was hugely beneficial to society, it didn’t always produce huge returns for shareholders. Many companies simply failed to commercialize their own discoveries. Xerox’s PARC famously invented the graphical user interface — only to see Apple and Microsoft got rich off of it.

Arora, Belenzon, and Patacconi document that the percentage of revenues devoted to corporate R&D has fallen since 1980. However, they don’t consider the most obvious explanation for this decline: the rise since 1976 of the pernicious ideology of shareholder value. The money that should be going into corporate R&D is being wasted on stock buybacks and other expenditures driven by the fixation on shareholder value.

The Chicago-trained academics who convinced a generation of MBA students that the sole responsibility of a CEO is to increase the share price have a great deal to answer for. Thank god not all CEOs believed that idea: if they had, we never would have had the iPad or continuous price cuts for the Model T. Steve Jobs and Henry Ford both challenged shareholder value ideology and made the world a better place for it. For Jobs, see here, for Ford’s famous fight with shareholders, see here.

The fixation of shareholder value is dangerous, as Roger L. Martin and others have documented. The solution, however, is not for more government regulation but for entrepreneurs and company executives to push back against this idea with both words and deeds.

Personally, I think that the paper by Arora, Belenzon, and Patacconi could benefit from more engagement with the literature by business historians on the evolution and impact of the ideology of shareholder value.  They could start with:

Lazonick, William, and Mary O’Sullivan. “Maximizing shareholder value: a new ideology for corporate governance.” Economy and Society 29, no. 1 (2000): 13-35.

P.S. I’m working on a paper with Kevin Tennent (York Management School) that deals with shareholder value ideology. It is called “Stock Markets, Corporate Governance, and Financial Capitalism”