Rethinking Corporate Purpose And Performance Measurement: Why 'Shareholder Value Maximization' Is Misguided And What Should Replace It
“For the past quarter-century, the dominant narrative of corporate purpose has been that corporations have but one goal: to maximize ‘shareholder value’….. Many supporters of ‘shareholder value’ emphasize they mean long-term shareholder value. On first inspection, this seems eminently sensible. Yet, once we shift to an amorphous concept like ‘long-term shareowner value’, the claim that shareholder value theory offers a superior way to hold corporate managers accountable begins to collapse….”.
PROFS. TAMARA BELLIFANTI AND LYNN STOUTCORNELL LAW SCHOOL
Is ‘Shareholder Value Maximization’ Misguided?
The June Discussion Forum of the International Centre for Pension Management (ICPM) featured excellent discussions on corporate purpose, measuring corporate performance, and their link to how asset owners such as pension funds should structure and manage their investment programs. The pre-readings included a paper by Profs. Stout and Bellinfanti (S&B) titled “Contested Visions: The Value of Systems Theory for Corporate Law”.i The ‘begins to collapse’ quote above came from that paper. This Letter explains why the authors believe the shareholder value maximization (SVM) narrative is misguided, and what they believe should replace it. I add my own thoughts on the implications of the narrative shift they propose, focusing especially on the action implications for pension funds and other long-horizon investors.
S&B assert that the SVM narrative is still dominant in academic writings and research, in court cases, and in the creation of legislation and regulation (especially in the USA). It serves the goals of special interest groups (e.g., corporate activists) and serves as an ‘objective’ basis for setting executive compensation. It is also deemed to be theoretically-sound because shareholders own corporations, and are its residual claimants. Also, shareholder value is a single quantifiable metric that can be used to contain agency costs and hold corporate boards and managements accountable.
S&B go on to show that the first two arguments are legally incorrect, leaving only the ‘single quantifiable accountability metric’ reason standing. However, this one is increasingly being criticized as promoting short-termism. Can this problem be solved by simply adding ‘long-term’ to the shareholder value maximization narrative? S&B answer ‘no’. Why? Because long-term SVM is an aspiration not subject to actual measurement for decades to come. Further, it is not necessarily the only purpose of the corporation. This leads to a question: how are these other corporate purposes best discovered, and how is their achievement best converted into a series of supporting plans, actions, and results that are measurable today? S&B join a growing number of thought-leaders around the world with their answer: through systems thinking.