The Myth of Maximizing Shareholder Value

A while ago I was watching Bill Moyers interview Columbia professor and Nobel Memorial prize-winning economist Joe Stieglitz. Moyers was decrying Wall Street and the culprits of the 2008 financial meltdown, and in response to his question of how to remedy this, Stieglitz replied “we forgot that we make the rules.” He went on to say (I’m paraphrasing) that there isn’t and never was a ‘free market’, and that all markets, to serve society properly, require some degree of regulation. Fixing the problem, Stieglitz said, requires telling the politicians to change the rules. He also denounced the widely accepted idea that the real purpose of any business is to maximize shareholder value. In our business, I’ve come to understand the intense pressure that CEOs are under, not the least of which comes from meeting quarterly share price expectations. Yet I have never accepted that; instead believing that when a company values and grows it’s people, they in turn delight customers, innovate, create, and all stakeholders, including shareholders, win big. Shareholder return is a result, not an objective in itself, and when it becomes the overriding objective, we arrive at where we are now.
The link below is a review of Roger Martin’s book Fixing the Game, in Forbes magazine, back in November, 2011. Martin describes how a shift in the 1970′s to the notion that maximizing shareholder value was the true purpose of a business, led to the financial meltdown and the income distribution gap that, he contends (and I agree) is threatening the very system of American capitalism that originally strengthened democracy.
The takeaways for me are threefold:
1) that the majority of CEO’s are well-meaning and capable people, but they are handcuffed by the widely accepted “expectations market” that demands quarterly guidance, and compels a short-term focus and earnings management. This is both damaging to society, and unsustainable in the long run. To allow these leaders to revert to focusing on ‘delighting customers’, and building sustainable businesses that add tremendous value to society, we must shift away from the mindset that the purpose of a business is maximizing shareholder value. Further, regulatory policy must shape and enforce a corresponding behavioural shift.
2) Research continues to show that companies that prioritize employees, customers, and then shareholders (Martin cites J&J, P&G, and Apple) actually generate better (often significantly better) results than those that simply manage to expectations. This implies that reverting to a ‘real-market system’ yields a win/win result for all stakeholders. It takes a longer-term focus, and sometimes more work, but is sustainable and more stable.
3) The problem is much worse now. Four years after the article was written, investment banks are significantly larger than before the 2008 crisis, and Wall Street’s quarterly guidance system continues to reward irresponsible CEO behavior. Executive compensation at best reinforces short-term thinking, and in worst cases, creates moral hazard and self-serving decision-making.
While this story deals with the financial and business sector, the need for strong, authentic leadership in all sectors has never been greater. No one who reads the daily news would deny that the world is experiencing that proverbial ‘paradigm shift’ in not one, but many areas: business, geopolitical, science and technology, cultural, media and more. We are in a place where, as Marshall Goldsmith wrote, “what got you here, won’t get you there.” We need to reinvent a lot of things; discard old systems that no longer serve us well. That calls for deep transformation, and that, in turn calls for courageous, authentic leaders; leaders who remember that we make the rules.

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