In the prior post, we tracked broadly the treatment of American corporations as economic institutions driven by increases in shareholder value. Boards of directors and CEOs are now being held to building shareholder wealth as their mission.

This second post broadly outlines three ways in which our government agencies, and emerging corporate practice, have bought into this concept.

The SECs disclosure scheme, particularly the mandatory discussion of compensation in annual filings, feeds into analyzing corporations only in terms of their earnings, and evaluating the CEOs in that fashion. The granularity of financial reporting under the SEC’s mandatory XBRL regime, while clearly improving corporate financial reporting, also lends itself to the kinds of calculations and valuations, and consequently the judgments and rankings, of corporate performance based upon easily quantifiable and comparable earnings data.

The current Internal Revenue Code denies public employers a deduction for the salary of the principal executive above $1,000,000 per year, except to the extent that excess compensation is tied to “performance”. Performance is most conveniently and objectively measured through profitability and earnings per share. Since short-term executive compensation often is tied to aspects of such performance, economic goals have become the focus of management. (Recently, compensation advisors have been suggesting an approach that rewards both short-term and long-term shareholder benefits, but the focus has still remained on total shareholder returns as the measuring stick.)

Similarly, the rise of shareholder activism, facilitated by changes in the law and in internal governance practices which eliminate insulation of boards from shareholder pressure, have made corporations more responsive to shareholder interests, and have thus created a system where directors and management cannot protect themselves from the mantra of maximizing shareholder returns.

Although Market Basket is a private company and not wholly analogous to the larger public companies which primarily concern the SEC and the IRS, we can measure how far down the line we have come in buying into shareholder focus as the touch-stone of corporate performance when we measure our own shock, and perhaps negative reaction, to the action of low-level Market Basket employees and local shoppers.

In the past, if an entity wanted to benefit public constituencies, it would form itself as a non-profit enterprise. By definition, the economic power and sustainability of non-profit enterprises is limited. In our third and final post on this subject, we will discuss the possibilities presented by a new form of entity, the “public-benefit corporation.”