The myth of market demands: Where did this really come from?

This article is the first part of a three-piece series. Here is part 2

Here's something that's always puzzled me

For the last twenty years or so, everyone has been saying, "The market demands high returns." The market wants this. The market expects that. The market won't tolerate anything less than X percent growth.

I've been in the C-suite for decades. I've led companies, both private and public. I've sat in boardrooms, worked with investors, and dealt with stock exchanges.

And here's the weird thing. In all those years, I've never actually had a voting shareholder knock on my door and demand higher returns. Never had someone from the stock exchange call me up and say, "Hey Charlene, we need you to hit these numbers." Never even had a bank account manager pressure me for better performance.

You know who DID make outrageous demands? Venture capital investors. Private equity firms. They absolutely made demands. Specific, aggressive, sometimes impossible demands.

So I started wondering: where did this whole "the market demands" thing actually come from? Is it real? Or is it something else entirely?

I went digging. And what I found shocked me. Even after all my years in business, the truth was far from what I had been led to believe. The origins of the market demands myth were not as straightforward as I had thought.

It didn't start with Milton Friedman

Let me take you back to 1970. There's an economist named Milton Friedman, who wrote an essay in The New York Times. The headline says: "The Social Responsibility of Business Is to Increase Its Profits."

Friedman's basic argument was this: companies shouldn't spend money on social responsibility. That's not their job. Their job is to make money for shareholders. Let the shareholders decide what to do with their money - donate to charity, support causes, whatever. But the company? Just focus on profits.

Here's what I've come to understand, though, and this is important: Friedman was mostly talking about what companies shouldn't do. He didn't say much about what they should do. And he certainly wasn't saying "maximize shareholder value at all costs" or "hit quarterly targets no matter what."

But that headline? Oh, that headline took on a life of its own. It became a slogan. A doctrine. Eventually, gospel.

Except nothing much actually changed in the 1970s because of that essay. Companies kept on doing what they were doing.

The real transformation? That came in the 1980s. And it didn't come from some abstract "market." It came from very specific people doing very specific things.

The corporate raiders changed everything

Picture this: it's the early 1980s, and suddenly there are these investors, they get called "corporate raiders," and they're doing something that had been pretty rare before. They're launching hostile takeovers of major companies.

Names you might have heard: Carl Icahn. T. Boone Pickens. Nelson Peltz. These weren't patient, long-term investors. These were people who identified companies they thought were undervalued, and they'd swoop in, buy them up, often using massive amounts of borrowed money, then restructure everything and sell off the pieces for a profit.

They used something called a leveraged buyout, or LBO. Here's how it worked, and I'm going to explain it simply because it's actually wild:

Let's say there's a company worth $100 million. The raider wants to buy it. However, instead of using their own money, they borrow $80 or $90 million. They buy the company. And then, and this is the kicker, they make the company itself pay back that debt.

It's like if I bought your house, took out a mortgage in your name, and then told you that you now had to make the payments. All while I owned the house.

Now, to pay back all that debt, companies had to cut costs dramatically. Sell off divisions. Lay off employees. Stop investing in research and development. Cancel long-term projects. Everything became about generating cash NOW to service the debt.

One CEO said in 1987: "Widespread hostile takeover activity has made maximizing immediate shareholder value appear to be the basic purpose of a business enterprise."

Read that again. He didn't say it was the purpose. He said it appeared to be the purpose. Because of the takeovers.

I lived through this transformation

Let me get personal for a minute, because I lived through exactly what I'm describing.

I was young in the 1980s. During the 80s and early 90s, I was with an international company that went on a buying spree. I was involved in something like 60 acquisitions. For the small acquisitions, we borrowed from the banks; for the larger acquisitions, we used corporate raider tactics. Initially, I was too young and inexperienced to ask questions. I just accepted what was happening around me as normal. Because this is how business works, right?

Ultimately, I left that organization because I couldn't stand the pain of signing the orders to fire 1,500 people who had done nothing wrong, of delivering the news that divisions had to put out the same stellar work with a 50% reduction in their operating budget, and the horror in the R&D and marketing faces when I stopped the new product development pipelines. Truthfully, I had given my all and left with no soul, no heart, and no will.

Years later, in the early noughts, I led a different company to new heights. In five years, we had pulled ourselves up by the bootstraps and were finally doing exceptionally well. We had cash. Solid operations. Good people. A sustainable business.

Then one day, the company was sold in a leveraged buyout.

The next day, I couldn't pay my regular bills, quite literally. A company that had cash suddenly couldn't function. Why? Because all that cash, and all our future cash flow, now had to go to paying off the debt that someone else had taken on to buy us. The personal and professional loss was immense.

Life changed forever that day. Not just for me. For everyone who worked there. For everyone who depended on that company.

And here's the ending to that story. Ten years later, the company was absorbed into another and ceased to exist. Gone. A company that had been healthy, super profitable, and sustainable — just gone.

That's what really happened in the 1980s. Not some abstract "market force." Specific people making specific decisions to extract value through financial engineering instead of building sustainable businesses.

Why the mindset stuck around

The hostile takeovers of the 1980s eventually calmed down. The worst excesses led to bankruptcies and scandals. New regulations came in.

So, why did the "maximize shareholder value" mindset persist? Here's what I've observed:

Two more things happened.

First, in the 1990s, executive compensation underwent a dramatic shift. In 1990, only 20 percent of CEO pay was stock-based. By 1999? Sixty percent. These days?  Even higher.

When most of your pay is in stock, you care a lot about the stock price. You care about it quarterly. You care about it obsessively. Even when you know that what's good for the stock price this quarter might hurt the company five years from now.

I've sat in those rooms. I've watched smart people make decisions they knew were wrong for the company's future because their personal compensation depended on this quarter's numbers. Maybe you've seen this too?

Second, all those corporate raiders? They softened their image. Started calling themselves "activist investors" or "shareholder activists." Sounds better, right? But the tactics stayed essentially the same.

And here's something that still surprises me: research shows that these activist investors often hold only 1 to 2 percent of a company's stock. Just 1 or 2 percent! But they're aggressive. They're loud. They make demands. They threaten proxy fights.

Meanwhile, the institutional investors — the pension funds, the index funds — who own 60, 70, sometimes 80 percent of a company? They stay silent. They rarely make demands. They're passive.

So, we've got this tiny minority making all the noise, and everyone treats it like "the market demands."

A system designed to fight against sustainability

Here's where we are today. We've created and inherited a system where a tiny minority of aggressive investors can exert undue pressure on companies. Where executives are incentivized to prioritize short-term stock prices. Where long-term investments are deferred or cancelled. Where everyone blames "the market." And where the actual majority shareholders, who are in it for the long term, remain silent.

For those of you working in sustainability, in climate, in building businesses that need to invest for the long haul, you can see the problem, right?

When you need to invest in new clean technology, when you need to retool operations for a circular economy, when you need to build resilience for climate impacts — all of that requires long-term investment and short-term costs.

And the system, as currently designed, fights against exactly that kind of thinking.

But here's what I've learned about hope

Once I understood where this pressure really came from, I could start to push back. I could start making different choices.

What would shift for you if you saw "market demands" not as some inevitable force, but as the voice of a tiny, aggressive minority who might not have your company's — or the planet's — best interests at heart?

We are all living with the unintended consequences of actions we collectively took over the last 100 years. Most of us are shaking our heads, wondering why we did such stupid things, and wouldn't it be nice to get a do-over? But you and I both know that do-overs are fantasy. The only thing we can do now is do better. And that do better absolutely must be in the highest good for all.

What's next

In my next article, I'll follow the money even deeper. I want to show you exactly who's making these demands and why. We'll look at private equity, venture capital, and the structural reasons they behave this way. And we'll explore what this means for the kinds of trade-offs every company has to make. The one between quarterly results and long-term investments in things like IT systems, new products, and sustainability initiatives.

Because here's what I know from three decades in those rooms: no company can do everything. Trade-offs must be made. The question is: who's deciding what gets sacrificed? And are they making those decisions based on real market forces, or on mythology we've all been fed?

What trade-offs is your organization making right now? And who's really driving those decisions?

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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