Accountants can help save the world

Accounting Cafe online seminar series hosted on Zoom on 8 July 2021 — Todd Sayre sets out his manifesto for how accountants can help save the world.

Dr Todd Sayre believes that accounting is not only broken but is contributing to the destruction of the planet. He is calling on accounting academics to help fix this. 

In this online seminar, he gives a broad sweep of the history of corporations from the East India Company to the modern day questioning current accounting orthodoxies along the way. Entity theory, the role of shareholders and the rightful claimants of retained earnings come under ferocious scrutiny.

This is a provocative, fascinating and entertaining session that challenges how accounting and accountants are perceived.

Photo: University of California

00:00Welcome to Accounting Cafe / Introduction
01:35Dr Todd Sayre outlines the scope of the seminar
02:10How does financial reporting help to destroy the world?
06:50–– (1) Is the corporation an association of shareholders?
12:11–– (2) Do shareholders have rights to accumulated profits less dividends?
18:11–– (3) Do shareholders collectively control management?
26:35So what’s the solution?
A historical perspective of the causes of confusion


Toby York

Todd, a huge welcome and thank you for joining us this afternoon at Accounting Cafe.

Todd Sayre

Thanks so much, Toby. And thank you for having me and for promoting something that actually wouldn’t really be promoted very well in accounting and in academics, because, of course, you know, most people are looking at markets and so on, and trying to figure out if accounting is actually being looked at, and all that boring stuff.

And so unfortunately, people, you know, doing that type of research don’t do research in looking at reports and seeing if they actually faithfully represent what they’re supposed to.

So, thanks for the introduction. I just want to say I apologise for my missing tooth. I’m located — I’m in Panama — and normally in San Francisco — and being in Panama, I don’t have access to a good dentist and so on. So, I’m missing a tooth . . .

Toby York

Todd. It adds hugely to the look and the message. Don’t apologise . . .

Todd Sayre


I used to . . . if you look me up, I used to publish in tournament theory. I have a couple of publications in Accounting, Organization & Society. And then when I was doing that, I realised that I wasn’t really doing much for the good of society. I was doing more benefiting corporations than I was benefiting society. So, I switched my research to doing what I’m doing now.

And so what I’m going to talk about is three things. How does reporting help to destroy the world? How can accountants help to save the world? And then, what causes the confusion and how people conceive shareholders.

I’m focused on shareholders of a large going concern corporation that has diverse share ownership. So, I’m not talking about a non-going concern, something in bankruptcy.

How does financial reporting help to destroy the world?

Okay. So how does reporting help to destroy the world? That’s the first thing I want to talk about.

So if you think about a financial statement and I’m talking about, you know, generally accepted accounting principles — the US types of financial statements. Well, what we require, what GAAP requires, is that retained earnings is a subset of shareholders’ equity. So it appears in the financial statements that shareholders own the profits or the accumulated profits less the dividends. And also, the report shows that dividends are treated like a withdrawal as though shareholders are the owners, rather than an expense like we deal with bondholders — we expense interest.

So those are the two things that I think make it look like from a reporting perspective that shareholders own the corporation and especially the residual — the retained earnings. That’s what those reports imply.

So, they imply that shareholders own the corporation. And then based on that, people say, okay, well then, therefore we can go ahead and maximise shareholder value. So what do you do when you maximise shareholder value? If you look at the income statement, you would maximise profit and so to maximise profit, we’re going to maximise revenue and we’re going to minimise expenses. Unfortunately, when you maximise revenue in a finite world, you end up destroying it, ultimately.

And when you minimise expenses, a lot of times that means you won’t clean up pollution — you’ll externalise your costs, and you’ll minimise wages, therefore exploiting workers and so on.

So when I say destroying the world, this is what I’m talking about. I’m talking about financial statements that imply that shareholders are owners, and that gives an excuse for the board or management to maximise shareholder value by maximising shareholder value in a finite world, especially with a fossil-fuel based economy, it wrecks the world. And so that’s the problem.

And then it wouldn’t be a problem, of course, if the financial statements are accurately representing shareholders and their place in the corporation, but they’re not.

So what the problem is, is this. I’ve been reading a lot of research in the first half of the 20th century and what you see there is that accountants are justifying treating shareholders as owners on the basis that the corporation is an association of shareholders where the shareholders have privately contracted the corporation into existence. And then they delegated their authority to govern, to the board and shareholders have the rights to the residual and shareholders collectively control the management.

So that was the argument that was made and it’s all incorrect. It is all incorrect and that’s the next section that I’m going to address.

So let’s just talk about this real quickly. So is the corporation an association? No, it’s an entity. Okay, so that’s the first point I’m going to make.

Do the shareholders create the corporation? No, they don’t. The corporation is created and then the board sells shares to stockholders. So the shareholders come after the corporation’s created not before. So therefore the shareholders don’t delegate authority because they were never there to do it in the first place. The state delegates authority to the board.

Okay. And then shareholders have rights to the residual? That’s a little tricky. They have rights and I guess so, but so do a lot of other groups have access to the residual. So that’s what I’m going to talk about next.

So, what I’ve tried to do is make the case that reporting as it’s currently done, implies that shareholders are owners, and that implication justifies maximising shareholder value and in maximising shareholder value you destroy the world.

So let me go on.

So how can accountants help to save the world? Well, first, let’s talk about why this thing is wrong. And I just went over it real quickly. But let’s talk about it more specifically.

Is the corporation an association of shareholders?

So the first question is, is the corporation an association of shareholders who privately contract the corporation into existence and then delegated their authority to the board?

To me, that — it’s just so ridiculous to think that. But let’s just see why. So here the opposing facts to that.

The first thing is, the corporation must own property to exist as a long-term contracting entity. So in order for a corporation to exist — and we’re talking about any corporation, non-profit, governmental, whatever — the corporation has to be able to own its own property. Okay.

So what that means is that statutes are required to shield the entities’ property from capital providers and the creditors of capital providers. So this comes from a paper by Hansmann and Kraakman. I think I got the pronunciation right. Maybe I think it’s in 2000 and then Blair and Stout in 1999. And then Hansmann, Kraakman, & Squire in 2006 and so on.

The ability to own property cannot be privately contracted.

And what they say is this. The most important thing to a corporation is the ability to own property. Without that, it’s not a corporation. The ability to own property cannot be privately contracted. The reason why is because you can’t contract such that the creditors of shareholders can’t access the assets of the corporation to pay for whatever the shareholder owes. So that’s the catch here. So that’s why you can’t privately contract a corporation into existence because you can’t stop the creditors of shareholders from accessing the assets.

So there’s one caveat to that. So I don’t know if you’re with me on that. So, you know, the idea is that, you have to have the corporation own property and the only way to do that is by statutes to shield creditors of shareholders from access to that property.

Now, you do have trusts and the trust actually was allowed in courts in England, I want to say in the early 1700s or late 1600s, in England, I guess it was 1720 South Sea Bubble, you had an Act there that disallowed corporations from forming. And so therefore in England you did have some corporations form around a trust. The trust was a lot more inefficient. And then it went away when England allowed general incorporation I think in 1855 or so.

And then in America, the trust didn’t work so well because it wasn’t recognised across state lines. And so what they did was they did another network of trust, and that was busted up in the 1890s.

Okay, so I just want to say that was the caveat — they did have a contractually organised trust — it didn’t work very well.

Okay. So I think that’s the main thing I wanted to say there. That the corporation is not an association that’s privately contracted because you cannot privately contract the ability to shield creditors of shareholders from the corporate assets.

Now, another thing that this ability for a corporation to own property does, it enables a stock market. So, a business corporation can’t have a stock market unless the corporation owned its own assets, because otherwise, I mean, you’d buy stock and then people would take the assets.

So we can see as evidence that you need the government involved to have the corporation own property because we don’t see a stock market until 1602. 1602 is when the Dutch East India Trading Company was formed. And in doing so the government set up a stock market to be able to trade shares. So the people invest in the company, right, because their capital is going to be de-privatised and would be part of the corporation’s capital, so they couldn’t get it out. So they formed a stock market, to enable investors to be able to exit their investment through buying stock in this new stock market.

Are you guys with me on that? So that provides evidence that the government is required to have the property [corporation] own assets, because if it wasn’t required, then we would have seen a stock market before 1602, right? So that’s the evidence for that.

So, therefore, shareholders do not privately contract the corporation into existence, and it is the state who delegates the authority to govern, to the board, not the shareholders.

Do shareholders have rights to accumulated profits less dividends?

Okay, so question two. Do shareholders have rights to the residual, the profits, the accumulated profits, less the dividends? If you’re talking about retained earnings. And do they collectively control management? Those again, were just the arguments made in the first half of the 19th century. They give us the reports that are now required.

So for shareholders to own the assets related to retained earnings, they need the legal rights and duties of ownership. And this is . . . so I’m talking about what courts require to determine ownership.

Okay. So this is all legal and there’s a bunch of legal scholarship that shows that shareholders are not the owners of the corporation or the owners of the net assets. When I say net assets, I’m talking about equity. And there’s so much legal scholarship since the 1990s that show this. That there’s no one, no legal scholar that claims that the shareholders own the corporation or the net assets. There’s not one of them —they all say they don’t.

And so here’s the basic argument. It’s not the basic argument they use, but it’s the argument that I use to explain what they’re saying. So here’s what they say.

They judge ownership by a bundle of rights and duties. And they say if you have a resemblance to these rights and duties, then we might be able to call you an owner. So they have a whole list of these rights and duties. A guy named Honoré, I think that’s how you pronounce his name, in 1960, had a whole list. And that’s the list I use. And this is an abbreviated list.

The liability to execution for personal debts

So for shareholders to own the assets related to retained earnings, they need the legal rights and duties of ownership, including and this is the first one and they call this — the liability to execution for personal debts.

And what that means is that your personal creditors can come and claim that thing, whatever you’re talking about. Right. That’s what that’s saying. Can personal creditors come and claim that thing? If they can, they probably own it. That’s what they’re saying. Right.

Well, we know from what I just said that personal creditors of shareholders are shielded statutorily from claiming the assets of the corporation. So shareholders definitely do not have that liability of execution for personal debts. They don’t have that one. Okay.

The duty to prohibit harmful use

Next. Another duty that’s typical of ownership is the duty to prohibit harmful use. Do shareholders have the duty to prohibit harmful use? No. They have no liability, Right. They have no liability. If the corporation does something bad, they have no liability for that. If the corporation has debts they can’t pay, they have no liability for that either. And that’s because they have what we call limited liability. Right.

But they actually have no liability. The term limited liability comes from the idea that when people had when people bought stock, they wouldn’t pay for the whole share. And so, therefore, when corporations needed to pay for debt and they couldn’t, they would ask people to pay for the shares for what they still owed. And so therefore their liability was limited to what they still owed on their shares. That’s where that term limited liability comes from. According to a guy named Paddy Ireland.

But they have no liability. So, I mean, I’d like you to think of something that you own that you don’t have any responsibility for. Like if you own a dog, your dog bites somebody, you’re going to be responsible for that. But shareholders aren’t responsible for what the corporation does because they have what they call limited liability. Okay.

The rights to possess, use, sell and manage the assets related to retained earnings

Next. So do shareholders have the rights to possess, use, sell and manage the thing? The thing being in this case, the assets related to retained earnings. So that’s the bigger question. So do shareholders have the right to possess net assets or assets related to retained earnings?

Obviously they don’t. If you walk into a corporation, you own shares in and you grab something off the shelf and say it’s yours, you’ll be arrested. Right? You can’t go and use it either. And of course you couldn’t sell it. You couldn’t go in and grab something off Walmart, you know, the Walmart shelves and sell it just because you’re a shareholder, you can’t do that either.

So then the question becomes, can you manage it? And that’s really what the accountants back in the day, hung their hat on. They said that the shareholders had control. And so in this list of rights and duties, if they have a right to control it, then that’s an indication that they have ownership. But of course, out of the list of, you know, and there’s more than this. Out of that whole list, this is the only one where they actually have something.

But they don’t have a right. If they had a right, then everyone else would have a duty to exclude themselves from managing. And they don’t have that. So they definitely don’t have a right to manage, but they do have political influence over the board.

Do shareholders collectively control management?

Okay. So they do have political influence over the board through their right to vote, which they get from owning a share. They have a right to vote and does that right to vote translate to this other question? Do shareholders collectively control management? Because that was the last thing that the accountants were saying to justify the current reporting format that shareholders collectively controlled management and therefore they own the assets related to the retained earnings.

Shareholders do not have a unified voice and their preferences differ

So here’s the problem with that. First of all, shareholders do not have a unified voice and their preferences differ among each other. So you can think about I mean, if you look back historically, you’ll see like where the shareholders were fighting amongst each other because they were trying to figure out whether shareholders could get one vote per person or one vote per share. There was a massive fight about that because shareholders realised they didn’t all have the same preferences.

So when you talk about mutual funds, pension funds, sovereign funds of governments, hedge funds, CSR funds, do you think they all have the same preferences? I mean, I would argue that a long-term employee would have preferences more in line with mutual funds than they deal with hedge funds.

So to say that the shareholders are going to have a unified voice is not really accurate and a lot of research is coming up . . . that’s the new research that’s coming from finance is on this topic that shareholders, I mean, you know, they’re taking it from the point of view well, why don’t you ask shareholders? Because if you ask shareholders, you’d probably find that, you know, they wouldn’t, you know, destroy the world for a dollar, right, if you ask them. But you just assume that they want to.

And the SEC promotes that which I won’t get into here — but the SEC promotes shareholders having more say so that they’ll maximise shareholder value. And the reason they think that’s important is because of neoclassical economics idea that if you give the owner residual claims and control that you’ll get the most efficient outcome. That’s a little beside the point. Okay.

Other people or other groups also want the residual

So also related to shareholders collectively controlling management well also, not only do they not have a unified voice, but other people or other groups also want the residual. So, labour. Labour historically has fought with shareholders over the residual. So labour can also influence the board through union negotiations and the threat of strikes to get the board to make decisions that will benefit them.

And then finally, management has historically fought against shareholder influence. The Business Roundtable in America and you might know this, recently they changed their purpose back to promoting society. Before that, it was promoting shareholders. And before that, it was promoting society. So definitely, the managers think that they are running the show if they’re saying what the purpose of the corporation is.

It’s funny . . . so I don’t want to get too ahead of myself, but here’s two examples of where management fought against shareholders related to takeovers in the eighties. Takeovers were on the rise in the eighties, and the Business Roundtable executives went state by state to make laws to make it harder for takeovers. And takeovers generally stopped in 1990.

The Business Roundtable also fought against the SEC recently to stop shareholder proxy access.

So, do shareholders collectively control management? You know, somewhat. And they can, but they don’t have a unified voice. Employees also are fighting for the residual, and management is also a countervailing force against shareholders claiming the residual.

So, there’s a lot of . . . so you can’t really say that they collectively control management when other people also do.

The right to vote has not conveyed ownership anywhere, any time over anything

So here’s another thing. And so this is a little less academic, but I want to say it. So, think about this and tell me if I’m wrong. The right to vote has not conveyed ownership anywhere, any time over anything except shareholder ownership of the corporate residual. Why is that?

You know what I’m saying? Like . . . I mean, I can’t think of anything where there’s a voter who’s an owner. In a partnership, partners have veto power. They can take their money and go. So, you know, it’s not really that they have a vote that makes them an owner is that they have veto power, that makes them an owner.

So let’s just consider a couple of things. If only — let’s just suppose that only property owners vote in city elections. You know, that’s how it was done for a while. They stand to benefit. Right. So they’re like almost like a residual claimant from decisions that would be made by a board of directors for a city. But we don’t call them owners. No one ever calls them owners. Right. I mean, you have that situation. But no one ever called voters in city elections owners. Why? What’s the difference between them and the shareholders?

Beneficiaries of trusts have no control but are considered beneficial owners as they have the rights to the trust benefits. So in that case, they’re the residual claimants, the only residual claimants. So you call them beneficial owners, but they don’t vote. The trustees vote and they’re not considered owners.

So these are just some ideas. These are the things I want to ask FASB about.

In reporting, common shares that have no vote and preferred shares are portrayed like common shares with a vote. Right, so. And they’re trying to switch this now because they’re starting to figure out they’re wrong. Right. They’re trying to shift the preferred shareholder capital into liabilities now, with the idea that they have a definite amount like bondholders.

And then in Sweden, Germany and probably other places, employees can elect one half of the operating board, but they’re not considered owners. Why is that? I mean, they definitely get benefits from that. Okay.

So do shareholders collectively control management? My answer is not direct or unilateral control of an owner, but they do have political influence of a voter.

Shareholders may have rights to the residual, but they do not have a legal right to the residual whereby others are legally obligated to exclude themselves. On the contrary, others, such as labour also have rights to the residual and can also influence management.

So I’m using the term “rights to the residual” because that’s what they were saying in the journals back in the first half of the 19th century. “Rights to the residual” doesn’t really make any sense. What they’re trying to say is, can they get any of the residual, and yes, they can. So can labour. So there you know, it’s how much political influence they have over the board, which determines how much they can get — and the law.

And so I didn’t get into the law too much but the law also makes it very difficult for the shareholders to get at that residual without any kind of board approval. I mean, they have to have it.

So what’s the solution?

So of course, I’m saying, you know, what I did was I said that the reports are being done wrong and leading to maximising shareholder value, destroying the world. And I’ve said the reports are based on incorrect justification. Okay, so fine. So then what’s the solution?

Assets equal liabilities

So here’s my solution. How should reports portray shareholders? Well, the solution is actually in the writings of accountants back in the early 1900s. Corporations . . . because back then there was a big argument about whether corporations were entities or associations. And back then, accountants were portraying shareholders in financial reports like capital providers, just like a creditor.

So if you look at old financial reports, say in 1910, they just go, assets equal liabilities. And they just list all the different liabilities they have, including a liability to shareholders. So the corporation is an entity, not an association and so therefore reporting on an entity would suggest assets equal equity. That was what Paton in 1922 said and that was . . . that’s a very famous person in accounting. And then some people said assets equal liabilities — and that is basically the same thing.

They’re saying, take all the sources of capital and just list them and don’t have retained earnings as a subset of shareholders’ equity. And that’s what they did because they didn’t consider shareholders owners, they considered them capital providers.

Dividends are expenses

And so we could go back to that way of reporting and then you would treat dividends as an expense, as a cost of capital expense. To me, that makes way more sense, right, than the way we do it now. We treat the dividends as a withdrawal like the shareholders are owners.

And then finally so I’m saying, you know, do entity reporting. Right. Report on the corporation like it’s an entity without owners — like a non-profit. And then this would be more consistent with tax policy. Tax policy has always considered the corporation an entity and that’s why you have this thing called double taxation.

A summary of the arguments

So in conclusion, accountants can save the world by not portraying shareholders as owners, thereby justifying maximising shareholder value as a private endeavour to the public. I’m not quite sure what I meant in the last couple of words there, but we can save the world by not portraying shareholders like they’re private owners of the corporate assets. Okay.

So I want to say — so the confusion, right, is there’s a confusion about whether the corporation is an association or an entity. If it’s an association, then shareholders are the owners. If it’s an entity, then there are no owners. Okay.

So, I go to the next section now. Are you guys . . . ? This one’s going to be a free for all, a little bit.

So a lot of, you know, big-time attorneys and legal scholars, they say that the corporation is an entity and a state creation. But then there are some other lawyers who believe the opposite. And when I say the opposite, I mean they they believe that the corporation is an association.

And so here in Citizens United, if you are familiar with that case in America, Justice Scalia argued that the — and I’m quoting — “the authorised spokesman of the corporation is a human being who speaks on behalf of human beings who have formed that association”. So what he’s saying here, incorrectly, is that human beings, I mean, formed an association.

It’s the state that formed the corporation, which is an entity. He’s wrong. Right. Like, he was wrong about so many things. He’s wrong here. Right.

The corporations is an entity, and the corporation is — it necessarily has to be formed by the state. Of course human beings are involved. Yeah. But the state has to have statutes to protect the corporate assets from the creditors of shareholders. Okay.

A historical perspective of the causes of confusion

So whats caused this confusion? Okay, here we go. So I believe it goes kind of like this. And this is based on, you know, a lot of scholarship that I’ve read.

The Dutch East India Trading Company

So you have the . . . I call it the VOC. It’s the Dutch East India Trading Company. I call it the VOC. So and that’s just an acronym for the Dutch version of this. So the VOC began as a limited partnership. It’s based on a Roman commenda, and in Rome they did not allow somebody to benefit without having the risks. That was . . . they wouldn’t allow that. Right.

So, if you formed a business and you were going to benefit from that business, you had to take on all the risks. But they did allow a thing called a commenda, which was the limited partnership where they said, if you just put money in and you have no voice, you’re silent. Right. Then your liability can be limited to what you invested. You could have no liability.

So that’s how the VOC started. It started as a limited partnership. And so, therefore, when it transitioned into a corporation, when the Dutch Estates General — the government — when they made the capital of the VOC permanent, they made it so that the VOC could own property. That’s when the corporation was formed. But because it was based on a limited partnership, they did not give shareholders a vote.

So that’s one thing that’s kind of crazy. The VOC never gave shareholders a vote. They just expropriated their capital, made it the property of the VOC and never gave them a vote. Yeah. And that thing ran for 200 years and was very profitable.

And they fought for the vote. They fought for the vote because they saw the East India Trading Company. Those guys got a vote and were like, we want what they got, but they never got one. Okay.

The English East India Trading Company

But the English East India Trading Company began as a member corporation. It didn’t begin as a limited partnership. It began as a member corporation where each member got one vote. So then when they made the capital permanent in the East India Trading Company, they continued to allow shareholders, who were also members, to have a vote of one person, one vote. And then when they wanted to sell more shares, they incentivised investors by giving them more votes for the more shares they owned.

So it wasn’t that they thought that shareholders were going to help in any way in governance by having more votes. It was more of a ploy to get more investment . . . to get more investors in the East India Trading Company. Okay.

So then what happened after that? So they have these votes, right? So we have the East India Trading Company now becoming a corporation and carrying on this idea that the shareholders had a vote because members in the member corporation had a vote.

When I say a member corporation, I’m talking about, you know, it started with the universities in Rome and went on to guilds and so on. Okay.

So then what happened was the English East India Trading Company was unlike the Dutch in that they didn’t have a good stock market. The English didn’t have a good stock market according to Paddy Ireland, until like 1830. And so the way that people looked at the shareholders of the East India Trading Company was that they were the owners because they were holding the shares for so long and they just looked like they were the owners of the net assets and they could actually get a portion . . .

There was a time when they could actually — because they couldn’t sell their shares — they could get a portion of the net assets in relation to the portion of shares they held. They could do that sometimes. So, they looked a little bit like real owners to people for a long time until they got an active stock market and started trading shares. They got an active stock market and started trading shares. People started to question them and say, wait, you know, you’re trading shares, so you’re really not an owner.

Limited liability corporations

And then when England put the law in —you guys know better than I do — 16 I’m sorry 1856 where they gave limited liability to corporations, then people started to say, what you have here is you have a socialised production, but the private benefits going to shareholders who have limited liability, that’s not appropriate. There’s a big argument about that. And that’s where they first started arguing about the shareholders being an entity or an association.

So for 200 years or so, the English looked at the shareholders as owners because they sure looked like owners because they didn’t have a stock market and they had a vote where the Dutch shareholders, they had a stock market, but they didn’t have a vote. Right. And you could see in continental Europe, I don’t think they treat they look at the shareholders as much like owners as they do in English countries. I don’t know how you want to say that.

That’s a whole other area I’d like to get into. But I mean, you can just look at Germany having, you know, employees voting for boards and so on.

Okay. So continuing on. So the Company Act of 1848. This is kind of interesting. So Ireland points to this idea, and I don’t know if I have these Acts quite right. I tried to look this up last night. I couldn’t find it. But I know this is in his papers in another paper, the idea that in England they had these Company Acts in the mid-1800s and then the first one — one of the first ones — they called the corporation an association. I think that was in the limited liability. Now that was in the general incorporation one. And then the next one, which I think was where they give limited liability, they called the corporation an entity.

So even at that high level in England, they were confused about whether the corporation was an association. Right. Privately contracted by shareholders like a partnership. Or an entity that was state created even back then at the higher levels in England, they didn’t seem to know. All right.

The US perspective

So then in America, right. We had some stuff happened in the 1880s, I mean, the 1890s are crazy in America, right? They were like having like a boom economically. But then all these bankruptcies and mergers and there were, you know, the trusts were breaking up naturally actually because of the threat of the Sherman Act. And you had a New Jersey holding company allowed. So everyone merged into New Jersey holding companies in the 1890s and at the turn of the century.

And then the bankers took over and the bankers controlled corporations in America. And then Congress did a commission and the bankers got thrown off the boards. And now, even today, we can only have 20% of bankers on the boards. And then there was a power vacuum. Right.

So in the 1890s, the founders died and left and gave the shares to their heirs. And then the bankers took over like Karl Marx said they would. And then the Congress got the bankers off the boards and, and then there was a power vacuum and then professional managers filled the power vacuum and then Berle & Means said, Well, what the heck do we have now? Right. Because now we don’t have founders sitting on the boards, etc.

The birth of managerialism

And so what Berle & Means 1932 said was that the shareholders are now just nominal owners, meaning they’re not owners and they’re owners in name only and that the corporation should now be run for society. However, we have to still protect the shareholders because they’re widows and orphans.

Then soon later Berle admitted in these arguments in the Harvard Business Law Review, he was arguing with a guy named Dodd, and Dodd and Berle in these arguments agreed that corporations in America were being run for society not shareholders. And everything was cool. Okay.

And it basically went like that in America where we had a thing called managerialism, where the boards are running corporations such that wages increased with productivity. Okay.

And then it changed — and then it changed. So we had managerial . . . they called it managerialism where boards ran corporations more or less for society, definitely not to maximise shareholder value. They did that from the thirties until 1975.

The Austrian and University of Chicago economists

So what happened was in that time, first of all, you had a switch from pensions to retirement funds, which made a lot of people get into the stock market. And then you had arguments from people who were scared of a totalitarian state. I’m talking about the Austrian economists and the University of Chicago economists who were arguing that shareholders own the corporation because — and the reason why was because they couldn’t have a business corporation that they said was “un-owned”, because that would be like socialism.

So they had to make the argument the corporation was owned and had to maximise profit because that would fit well with the neoclassical models. So Milton Friedman published an article in the New York Times magazine, 1970, saying that the social responsibility of executives was to maximise shareholder value.

Of course, Milton Friedman was not an expert in corporate law. He didn’t know what he was talking about, really. It’s really a ridiculous article. You look at that article and Denning from Forbes says this, It’s a ridiculous article. It really doesn’t make any sense. He was outside of his expertise, wasn’t peer reviewed.

A history of agency theory

Then Michael Jensen, I don’t know if you know who that is. He was up for the Nobel Prize a couple of years ago. Fortunately, he didn’t get it. He modelled that article by Milton Friedman on a bet with Karl Brunner from Interlochen Conferences. He and Carl [William] Meckling who was the dean of the University of Chicago at the time, modelled that Friedman article, and it was laughed out of the conferences at Interlochen. And it was laughed out of two conferences at the University of Chicago. Albert Williamson rejected the paper outright, didn’t have it reviewed at all.

And then Jensen created a journal called the Journal of Financial Economics, which is like one of the most prominent journals now. He created that journal and then without a peer review, he published that paper in it as the first paper with Meckling in 1976, and that paper went on to be the most cited paper in social science. I’m sure everyone knows it. So the agency theory paper.

Cambridge papers just came out . . . Genghis, I think that’s how you pronounce the name, just destroys that paper as being just like Friedman’s paper, making no sense at all. And it doesn’t make sense. And if you read the paper carefully, Jensen says he doesn’t even understand corporations in that paper. And Jensen now says the paper doesn’t make sense.

So . . . but yet everyone who quotes it thinks it does. It’s really quite ridiculous.

Takeovers as an incentive for managers

So a guy named Manne in the Sixties and Jensen and Meckling argued . . . First were takeovers. Because how can you get, how can you get boards to maximise shareholder value when they don’t want to? I mean, management doesn’t want to maximise shareholder value. Why would they? If you were a manager of a large corporation, why would you maximise shareholder value? I mean, they’re just speculators in a secondary market. Why do you care? Right.

So managers, they were like, we’ll give shareholders a fair return — makes sense. And they weren’t going to maximise shareholder value. So how do you get them to do it? You threaten them with takeovers or you give them incentive pay.

So they first threatened them with takeovers. And that started in the 1980s, mainly in the late 70s, 1980s. And like I said, the Business Roundtable went state by state and made it so takeovers were very difficult.

Stock price performance as incentive for managers

So then in 1990, Jensen and a guy named Murphy published a paper, the same paper in the Journal of Political Economy in the Harvard Business Review. And that paper had incredible influence over Congress. They went to congressional hearings and made the same argument. And what happened in 1993 is Congress passed the law under Clinton that said that you couldn’t pay executives more in $1,000,000 per year unless it was based on performance.

And Jensen and Murphy said, well, stock price is performance. And so in 1994, you can just see where executives got massive compensation in the form of stock options. Well, of course, if you’re paid in stock options, what are you going to do? You’re going to maximise share price, not in the long run, but when your stock option due date is, right. And so that’s what they did. And they ended up, you know, manipulating accounting numbers to do that. And you’ve got your, you know, your Enrons and your WorldComs in 2000. And that was a result of, in my opinion, the executive equity pay that was given to incentivise executives to maximise shareholder value under the false pretence that shareholders were owners.

Stock buybacks hurt the corporation

Okay. So then what we had, recently you’ve seen the buybacks. The buybacks have been ridiculous. And a guy named Lazonik was published in the Harvard Business Review, got the best paper award published in a bunch of journals. Jensen hated him, and got him kicked off of Harvard. He’s now at University of Mass., Lowell. He’s an incredible, incredible academic. He shows that this maximising shareholder value in these buybacks are actually hurting the corporation itself.

So, question: what causes the confusion in how we conceive shareholders? Answer? The misunderstanding arose in the beginning with the East India Trading Company. Unfortunately, misunderstanding continues in courts, the media, and universities. We, accountants, contribute to misunderstanding through our reports that portray shareholders as owners.

And I’ll leave it there. Yes. Thank you so much. Yeah. All right, let’s hear it.

Selected references and further reading

Blair, M.M., and Stout, L.A. (1999). A Team Production Theory of Corporate Law. Virginia Law Review85(2), pp. 247–328.

Hansmann, H., Kraakman, R., and Squire, R., (2006). Law and the Rise of the Firm. Harvard Law Review, 119(5), pp. 1333-1403, March, Harvard Law and Economics Discussion Paper No. 546, Available at SSRN:

Ireland, P.W. (1999). Company Law and the Myth of Shareholder Ownership, Modern Law Review, 62, pp. 32-57. Available at:

Jensen, M.C., and Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), pp. 305-360. Available at:

Jensen, M.C., and Murphy, K.J. (1990). Performance Pay and Top Management Incentives. Journal of Political Economy, vol. 98, 225-263. Available at:

Lazonick, W. (2014). Profits Without Prosperity. Harvard Business Review, Septembe. Available at:

Stout, L.A. (2012). The shareholder value myth: How putting shareholders first harms investors. San Francisco: Berrett-Koehler.

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  1. […] Note 2: Dr Todd Sayre presented a draft paper “Accountants are Helping to Destroy the World, but They Could Help to Save it” at an Accounting Cafe seminar in July 2021. It’s well worth watching: […]

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