Lenore Palladino’s Testimony before the Joint Economic Committee Hearing Examining the Impact of Shareholder Primacy

March 16, 2022

Chairman Beyer, Ranking Member Lee, Members of the Joint Economic Committee, thank you so much for the invitation. I am honored to be here today.

My name is Lenore Palladino, and I am an Assistant Professor of Economics and Public Policy at the University of Massachusetts Amherst. My research focuses on large corporations and their critical role in generating innovation, as well as how public policy can enable sustainable prosperity.

I see shareholder primacy as a flawed theory of the corporation because it makes incorrect assumptions about the role of both shareholders and other corporate stakeholders in the process of production. The arguments from scholars of law and economics that shareholders are “residual claimants” and thus the only group who should have power in corporate governance is silent on how companies actually produce better-quality products over time (i.e., how they make use of their inputs to produce better outputs). The theory of shareholder primacy misunderstands the role of shareholders trading on secondary markets and assumes that employees and other stakeholders take less risk than such shareholders, even though most of us have only one job, and if we’re lucky enough to hold corporate equity, we hold it in completely diversified portfolios—our risk comes from the stressors the entire economy faces, not just one company. My work is rooted in the economics of innovation as developed by economists like Schumpeter and Chandler, and today, William Lazonick.

In practice, the orientation towards ever-increasing share prices by corporate and financial leaders has created constant pressures to pay shareholders or face activist shareholder wrath. The gains from spending corporate funds on financial practices like stock buybacks disproportionately benefit white, wealthy American households, because these are the households who hold the vast majority of corporate securities. Federal Reserve data tells us that only half of US households hold any stock at all. Meanwhile, there are countless examples where the focus on spending corporate funds on shareholders has left companies ill-equipped to face shocks and been used as a justification for holding down labor costs.

Policymakers have a critical opportunity to strengthen American innovation and resilience as we emerge from the pandemic. The economic and geopolitical challenges that face us are not going to stop. That is why it is time to strengthen our commitment to American productivity by reorienting our public policy away from enabling a single-minded focus on share prices and towards enabling innovation.

My testimony today focuses on three key points:

  1. First, defining the key components of economic innovation and resilience in the 21st century;
  2. Then, where corporations and finance have gotten off track – what the harms have been of the prioritization of shareholder primacy and “putting stock prices first”;
  3. Finally, what the opportunities are today to rewrite the rules to orient our economy towards innovation and shared prosperity.