23 Things they don't tell you about Capitalism

Proponents of free-market capitalism generally insist that companies should be run in the best interests of their shareholders, who have the strongest incentive to maximize profit. Chang counters that since most shareholders can easily sell their ownership at any time, they tend to prioritize short-term profits over a company’s best interests in the long term.

Historically, business owners were fully responsible for their companies’ debts in the case of failure. Since the mid-19th century, limited liability laws have restricted the outstanding debt that owners of bankrupt companies must pay off, enabling these investors to take greater risks. Over time, a gap developed between the shareholders who own a company and the managers who run it on a daily basis. In the 1980s, the idea of directly rewarding these managers based on how much profit they provided to shareholders—known as “shareholder value maximization”—spread quickly, leading managers to seek profits in the short term, primarily through ruthless cost-cutting measures. For companies like General Motors, the implementation of this idea increased income inequality, reduced investment, and decreased productivity in the long run. Chang concludes with several examples of countries that have tried to reduce the influence of free-floating shareholders through policies such as having government or worker representatives on the executive boards of large enterprises.