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The more I look at the shareholder system in modern capitalism, the more it starts to appear as nothing more then an otherwise meaningless system that allows rich people to profit off others work while providing nothing and holding no liabilities.

Of course, I will explain why I think this, then I want someone to explain to me why and how I'm wrong. What exactly am I missing?

A company sells shares in order to raise money from the IPO, however:

  1. Why couldn't you just use bonds and other forms of debt instead?
  2. Why should shares give shareholders rights beyond receiving dividends? Couldn't they justify buying the security on that alone?
  3. Why should the company act for their shareholder's profit? They bought an IPO (or, most of the time, didn't) and are receiving dividends? Why should they arbitrarily be given more?
  4. Given that major shareholders are often vary rich; doesn't this system just facilitate unhealthy levels of income inequality given how the workers are treated as liabilities to be minimised?
  5. What's the point of money making via stock buy-backs if smaller companies who could use the money to better compete (and thus help the market) are more rarely in a position to do this?
  6. Don't hostile takeovers using this system do nothing more then create frustration and monopolies?

Again, I get the point of the system, but how does having all this gunk help? Again, it just looks to me like a simple idea that was pumped full of crap that conveniently helps no one except power interests.

But as I said; am I wrong? And if so, how?

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  • $\begingroup$ You have a good point. While the shareholder system is nice in theory, in practice the individual shareholder of a large company has essentially no power, and the company is run to benefit the CEO, board, and (possibly) major shareholders. It's increasingly common that companies are run in a way that does NOT benefit the shareholders, except to the degree needed to prevent a revolt. See The CEO Pay Machine. $\endgroup$ – Hot Licks Dec 20 '17 at 2:19
  • $\begingroup$ Oh? CEOs sometimes try to harm their shareholders for their own profit? Doesn't that further justify and vindicate Marx's critique of Capitalism's "internal class-conflict driven contradictions"? $\endgroup$ – Tirous Dec 22 '17 at 0:57
  • $\begingroup$ Unfortunately, Marx didn't have any better ideas. The problem is that any "ism", even communism, will be corrupted by money, given enough time. $\endgroup$ – Hot Licks Dec 22 '17 at 1:30
  • $\begingroup$ I agree, but I was more saying how this is an example of an economic system where you have two distinct classes of rational actors whom need to be in a relationship for the system to function, but whoms relationship has incentives built into it that encourage one or both classes to try and exploit the others in a way that compromises the system as a whole, thus causing it to break down even if you ignore external sources of corruption like politics. <- aka. Marxian internal-contradictions. $\endgroup$ – Tirous Dec 22 '17 at 1:54
  • $\begingroup$ I didn't say it's politics that causes the corruption -- it's money. $\endgroup$ – Hot Licks Dec 22 '17 at 1:58
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a bit late to the party, but:

While shareholders are traditionally considered owners, whether this is legally true is a matter of dispute

As Cornell Law professor Lynn Stout writes in The Shareholder Value Myth:

http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2311&context=facpub

Although laymen sometimes have difficulty understanding the point, corporations are legal entities that own themselves, just as human entities own themselves. What shareholders own are shares, a type of contact between the shareholder and the legal entity that gives shareholders limited legal rights. In this regard, shareholders stand on equal footing with the corporation’s bondholders, suppliers, and employees, all of whom also enter contracts with the firm that give them limited legal rights.

And as Harvard business professor Jay Lorsch writes:

https://hbr.org/2012/07/what-good-are-shareholders

In legal terms, shareholders don’t own the corporation (they own securities that give them a less-than-well-defined claim on its earnings)...

But remember, shareholders aren’t quite the same as owners. A simple illustration: If you own a car, you’re liable for damages in an accident even if they exceed the value of the car. But shareholders are on the hook only for what they’ve invested. And although some shareholders behave much like owners, most of them are effectively renters

For more, see the works of Stephen Bainbridge or Kent Greenfield, or The Fundamental Rights of the Shareholder by Julian Velasco, which gives a good summary of the debate and shareholders' legal status:

https://lawreview.law.ucdavis.edu/issues/40/2/articles/davisvol40no2_velasco.pdf (see section IV)

Shareholder primacy ideology is bad for the economy

So when you write:

The more I look at the shareholder system in modern capitalism, the more it starts to appear as nothing more then an otherwise meaningless system that allows rich people to profit off others work while providing nothing and holding no liabilities.

There are a lot of very smart and very well-informed people who believe that this is not too far off, and that our financial system is practically designed to cause inequality and wealth extraction.

Here are some interesting papers with some choice quotes:

https://hbr.org/2014/09/profits-without-prosperity

Corporate profitability is not translating into widespread economic prosperity...The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees...

the amount of stock taken out of the market has exceeded the amount issued in almost every year; from 2004 through 2013 this net withdrawal averaged $316 billion a year. In aggregate, the stock market is not functioning as a source of funds for corporate investment...

from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them.

https://hbr.org/2014/06/the-price-of-wall-streets-power

Scholars and executives alike have criticized Wall Street not only for promoting short-term thinking but for sacrificing the interests of employees and customers to benefit shareholders...

One of the most important—and most dangerous—is when a single sector or group is so powerful that it dominates how an entire society thinks about itself. Once you view research from a variety of fields through that lens, it becomes clear that we must do something to curb the enormous and disproportionate power of Wall Street.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2993978

By legitimizing massive distributions of corporate cash to shareholders, MSV directly undermines the building of the organizational capabilities that are the essence of innovative enterprise.

http://cepr.net/documents/publications/private-equity-2012-02.pdf

...regulatory changes that are needed to curb the destructive outcomes associated with some types of private equity activity

https://www.huffingtonpost.com/dean-baker/finance-in-america-promot_b_5628729.html

The bloated financial sector in the United States is a major engine of inequality sucking money away from poor and middle-income households and making folks like Lloyd Blankfein, Jamie Dimon, and Robert Rubin incredibly rich.

(okay, a Huffington Post article isn't an academic paper, but just about everything Dean Baker writes is gold, such as: http://cepr.net/documents/working-paper-upward-distribution-income-rents.pdf)

EDIT: not sure why I'm getting downvoted. I (1) provided two reputable sources arguing that the accepted answer is incorrect (don't have enough rep to comment), and (2) giving a broad answer to a broad question, I explained that the OP's concerns about inequity are completely justified and provided reliable and rigorous reading material if they should want to learn more

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    $\begingroup$ what an interesting perspective! What you say can be true for companies with certain legal forms (such as individual businesses). I disagree however that the shareholders aren't owners as that is spelled out in the business law of several countries. See more here: en.wikipedia.org/wiki/Shareholder $\endgroup$ – JoaoBotelho Dec 21 '17 at 6:24
  • $\begingroup$ @JoaoBotelho thanks! To be fair though, in the link you sent me shareholders are only described as legal owners of shares in the corporation, not the corporation itself. In any case, I get fairly contradictory results if I google "are shareholders owners". It's also possible that this varies internationally; if it's outside the US, I have zero knowledge of what the legal situation is. $\endgroup$ – krock Dec 21 '17 at 21:14
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    $\begingroup$ @krock in the US shareholders are owners of shares for the corporation, so they own a given share of that corporation. It is all about how you distinguish ownership and management. They do own a % of the corporation and can vote in the shareholder meetings where major decisions are taken. Take a look at the applicable US law and read what shareholders are. I’m afraid that leaving your answer as is with the “shareholders are not owners” can be incorrect for whoever finds it later on. $\endgroup$ – JoaoBotelho Dec 22 '17 at 14:27
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    $\begingroup$ @JoaoBotelho okay fair enough, I've softened the language a bit. And I suspect if you read some of the sources I've linked to in the first section, you'll find that the situation is not as clear cut as you are suggesting $\endgroup$ – krock Dec 27 '17 at 18:59
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    $\begingroup$ @Tirous if you buy(=invest on) a house, you own it. Does that feel stupid? The same logic applies to a company. Whether we/you like it or not, ownership is legally defined like that (in the US / UK / Europe at least). If that is socially just or not would be a whole different question, which is not what you initially asked. $\endgroup$ – JoaoBotelho Jan 1 '18 at 3:37
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The shareholder system is a way of distributing the ownership of the company - each shareholder owns a certain part of the company. Shareholders are the owners of the company, in several company legal forms, such as an LLC. They exist before and after an IPO (Initial public offer), meaning that both public (traded) and private companies may have shareholders.

The shareholders can fire and hire the Management team (CEO/CFO/ etc), which answers your questions 2 and 3. They usually signal the Management team which actions they expect the company to take to maximize the company value, reflected by the share value. If the shareholders have a short-term gain objective, this might harm the long-term sustainability of the company - a case where the management team and the shareholders might have different perspectives.

Raising funds through the sale of shares is attractive for companies because it is interest free, and might give you access to much more funds than you would ever be able to get from bonds - depending on how a company communicates its future potential. However, this comes with a loss of ownership. There is only so much unsecured debt one can sell - and debt is always paid back with interest.

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  • $\begingroup$ Thx m8, gonna wait to see if there are more answers before accepting. :) $\endgroup$ – Tirous Dec 3 '17 at 3:09
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    $\begingroup$ It's worth adding a further advantage for companies of shares: in most cases a company is not required to repay the principal. Thus shareholders perform the important function of bearing risk. If the company is profitable they may receive a good return in the form of dividends, but if it isn't they may receive nothing. $\endgroup$ – Adam Bailey Dec 3 '17 at 13:00
  • $\begingroup$ Ya, I guess. But I still don't see why all the added powers need be there. $\endgroup$ – Tirous Dec 3 '17 at 16:47
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Risk is important. A bond (or even a credit) is backed up by the company's assets. Companies go bankrupt because of a mismatch between assets and liabilities maturities (e.g. cannot pay a bond of a loan), but not because they are unsustainable in the long run. If a company goes bankrupt, debtholders are the first on the list (after workers, in some countries) to receive compensation. Sometimes they do assume losses, when the debt is negotiated at a lower value. The shareholder is the last one to get any money out of the assets of the company.

So being a shareholder is more risky than being a bondholder.

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  • $\begingroup$ I'd like to see you apply your "mismatch" criteria to Trump's several bankruptcies. $\endgroup$ – Hot Licks Dec 22 '17 at 1:32

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