During the past 30 years, “maximizing shareholder value” has unquestionably become our dominant economic creed with a vast impact on management practice.
Michael Jensen and William Meckling, authors of the famous 1976 Journal of Financial Economics article “Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure,” can rightly claim that their paper changed the way corporations have operated: how they’ve been governed, how their top executives have been compensated, what strategic priorities they’ve set, and how they’ve dealt with their human resources.
One might argue, in short, that the article has had a transformative effect on a broad scale—so much so that we should ask whether the recent worldwide economic crisis would have played out in the same fashion had “maximizing shareholder value” not become the largely undisputed rallying cry of the corporate elite and the financial markets.
This question, in fact, will lie at the heart of this year’s Global Peter Drucker Forum, which will be held on Nov. 15 and 16 in Vienna, under the title “Capitalism 2.0.”
What follows is a handful of specific lines of inquiry that I suggest for discussion in preparation for the Forum; feedback from readers will be most appreciated.
- How sound is the claim that shareholders “own” the enterprise? Or is it something fundamentally different to own shares in a company as compared with owning a car or an appartment buidling?
- What were the positive and the negative consequences of making managers the agents of shareholders?
- What are some alternatives to the “shareholder value” model, and how well have they been elucidated by economists and business school research?
- What factors led to Jensen and Meckling’s theory becoming so popular? What can we learn from their success if we want to change the model?
- To what degree has a focus on creating “shareholder value” contributed to the still-unfolding global economic crisis?
As you can probably tell, I am part of today’s growing chorus of critics of “maximizing shareholder value.” However, I remember well that when Lou Gerstner announced in 1993 that “shareholder value” would become one of IBM’s core principles, it made a lot of sense to me as a way to bring the company back to life.
The problem is that many corporations have driven the concept to an extreme. They’ve engaged in knee-jerk cost cutting when all slack has already been removed from the system. Pursuing profit as the purpose of the business seems to have become the norm. Peter Drucker, of course, had a very different view: The purpose of a business is to create a customer.
We would be interested in your vote on whether “maximizing shareholder value” has had a positive impact, negative impact or been a neutral force, along with a couple of lines to substantiate your position.
President Peter Drucker Society Europe