This article provides an answer to the question raised in the title of this post. It argues that the major purpose of the publicly held corporation is to reward investors. That includes top corporate executives who are also major shareholders. It supports that conclusion by showing how corporations have been using their profits. Between 2003 and 2012 the 449 corporations in S&P 500 during that period used 54% of their profits to buyback their own stock. That reduces the number of shares outstanding which increases the price to earnings ratio. That, in turn, boosts share prices. They also returned 37% of their profits to shareholders in the form of dividends. That leaves only 9% of profits for other purposes such as R&D, capital expansion and employee wage increases. It is no wonder that unemployment remains high and median wage growth has been stagnant. The system operates to redistribute income from workers to investors.
These changes in corporate behavior were not accidental. They have occurred in response to government policies and corporate governance. They also contribute to the financialization of our economy. Corporate America and Wall Street are joined at the hip. Corporations are managed as financial assets and Wall Street plays a role in determining the value of those assets.
In 1981 Ronald Regan's SEC removed a rule that limited corporate share buybacks. That eliminated a legal barrier to what we observe today. Tax policies also contributed to these changes. Capital gains on stocks and corporate dividends used to be taxed as ordinary income. Now they are taxed at rates well below income from wages. It is not surprising that corporate executives and other investors prefer to receive their incomes from capital gains and dividends instead of from wages.
Exxon provides one example of how this story plays out. Exxon used 83% of its net income for stock buybacks and dividend payouts. 73% of CEO compensation at Exxon is stock based. Corporate governance at Exxon reflects the financialization of the corporation. The incentive system is consistent with that purpose. Managing the stock price aligns top management with its largest shareholders. It also aligns the corporation with Wall Street analysts and investment bankers. They are primarily concerned with earnings per share and quarterly performance against that target.