Why There Is A Need For A Long-Term Investment Model In Ethiopia
— May 15, 2019
By Michael Posner
But increasingly it has become clear that these firms need to invest more resources into Ethiopia both to make their make production profitable and sustainable over time, and to ensure that Ethiopians are better off because of their presence. Among the steps they will need to take are to increase wages, enhance training, and help provide housing and other basic necessities to the young women who come from around the country to work in the clothing factories. The challenge these firms face in Ethiopia is to balance the pressures to reduce the costs of production with the realization that to succeed over the longer term, they will need to invest more money. This longer-term view is in tension with what many Wall Street investors and analysts are expecting them to do, driven in part by a mistaken understanding of directors’ legal duties to shareholders.
For the last half-century, most analysts and investors have embraced an antiquated investment model that focuses heavily on maximizing short-term shareholder returns. They have focused on these short-term returns at the expense of longer-term wealth creation for corporations and society at large. This focus took shape in the 1970s, when economist Milton Friedman and then others asserted that corporate CEOs are merely agents of shareholders, responsible for conducting business in accordance with shareholders’ core interest: maximizing stock prices. In an often-quoted 1970 article in The New York Times Magazine, Friedman wrote that corporate executives have a fiduciary duty to conduct business in accordance with the desires of shareholders, which he defined as making “as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
Read the full Forbes article.
Michael Posner is a Professor of Business and Society and Director of the NYU Stern Center for Business and Human Rights.