July 1, 2018

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.

What Is ‘Systems Thinking’?

S&B describe systems as “sets of distinct but interconnected elements or parts that operate as a unified whole to serve a purpose”. The human body is a system that has evolved naturally over time. A coffee machine is a human-designed system that has improved over time through innovation. Corporations are systems that have evolved over time due to changing socio-economic conditions as well as through a stream of legislative, regulatory, judicial decisions. In this context, applying systems thinking to      corporations naturally involves thinking about their purposes, how well they are being managed to achieve those purposes, and how those management processes can be improved.         

Table 1 (reproduced from our January Letter) shows how this systems thinking can help describe the  purposes of a corporation as well as its key success drivers. In this simplified example, note that the corporation has three purposes rather than one, and that sustainability is a key success criterion. It has a Board of Directors and an executive team that understands and uses systems thinking in the governance and management of the corporation. The organization has thought hard about what it needs to measure and compensate in order to achieve its purposes. And finally, the corporation’s investors understand their own roles in supporting sustainable corporate value-creation.

Table 1    Understanding the Corporation as a Value-Producing Business System   

Corporate Purposes
Create value for customers, employees, and investors in a way that is long-term sustainable
Key Success Drivers
A Board of Directors that is public-minded and strategic (i.e., 10yr(+) timeframe); responsible for CEO/C-Suite oversight, compensation, and success planning
An effective CEO capable of articulating a long-term vision and implementing it
Performance criteria and metrics -> performance review/evaluation/conclusions
Compensation criteria and metrics -> fairness/long-term orientation/transparent
Investors with an active interest in the achievement of corporate objectives through director nominations, 'Say On Pay' voting, private or public strategic engagement, and shareholder resolutions

Source: Adapted from an NSFM document created by Alan Willis – ‘The Elephants in the Room’ ii

Table 1 identifies three elephants in the corporate sustainability room: 1. Selection and effectiveness measurement protocols for corporate board members and governance processes that foster sustainable value-creation, 2. Appropriate metrics for measuring corporate value-creating performance, and 3. Compensation designs that align the long-term interests of all corporate stakeholder groups rather than just management’s. The January Letter concluded that much work remains to be done by institutional investors to shrink the influence of all three of these elephants.

The Letter set out six concrete actions that long-term investors can and should take to foster sustainable value-creation in the companies they invest in: 

  1. Build national lists of qualified/promising corporate Board candidates with strong senses of public duty and strong strategic and systems thinking capabilities.
  2. Require the use of the Integrated Reporting () framework in corporate reporting.
  3. Require corporate innovation and GHG emission reduction targets to be part of the reporting framework.
  4. Require the use of capital efficiency performance metrics and longer measurement time frames in the calculation of Named Executive Officer incentive compensation schemes and pay delivery.
  5. Ensure proxy advisory firms act as fiduciaries and have the skill/experience resources to do their work at the requisite strategic level.
  6. As asset owners and managers, hold yourselves to the same high standards of fiduciary duty, strategic governance, professional competence and conduct, as you do your investee corporations. At the same time, continue to evolve international and national collective action strategies to ensure actions 1-5 have maximum impact.

Subsequent Letters have dug more deeply into these suggestions. For example, the February and April Letters explored the use of the Gordon Model to measure the effectiveness of asset owner investment programs from a sustainability perspective. Following suggestions #2 and #6, the May Letter used the framework to assess the reporting quality of two asset owner organizations themselves. Here, we circle back to another look at #2, dig deeper into #5, and examine how the courts could be engaged to accelerate and broaden the movement towards sustainable corporate value-creation.

Can Artificial Intelligence Encourage Adoption?   

There continues to be resistance in the corporate sector to adopting the framework (e.g., it adds legal liability, costs, and complexity). To address these objections, Prof. Robert Eccles and Mike Krzus (E&K) converted a collection of publicly available information and data on ExxonMobil into a mock integrated report on the company using the framework in 40 hours.iii This sparked the idea of creating an Integrated Report Generator Tool (IRGT) which would use  techniques such as web-scraping and machine-learning to allow investors to create integrated reports from publicly available information on the companies they have invested in (or are considering doing so).   

E&K expect that the IRGT will do four things:

  1. Challenge companies to take integrated reporting into their own hands, and so better control the corporate narrative.
  2. Increase awareness about the necessity and usefulness of integrated disclosure.
  3. Generate more knowledge and research on the current state of public disclosure.
  4. Support new means of communicating non-financial information.

E&K are working with Oxford University’s Said Business School and a local technology company to fund the development of the IRGT.  

Should ISS Be Repositioned?

In her 2009 article “The Proxy Advisory and Corporate Governance Industry: The Case for Increased Oversight and Control” Prof. Belinfanti raised important questions about the industry, especially about its largest firm Institutional Shareholder Services (ISS).iv The firm purportedly provides independent proxy voting research and advice to institutional investors, and corporate governance advice to corporations. ISS is considered to have a major influence on the proxy voting process, but according to Belinfanti, is an agent with no fiduciary duty obligations and operates with little accountability, transparency, and regulatory oversight. She offered three possible solutions to this problem: 1. Bring it under SEC supervision, 2. Establish an independent oversight board, 3. Force clients to be more discerning in how they use ISS services.

More recently, in line with solution #1, the US House of Representatives has passed the Corporate Governance Reform and Transparency Act requiring proxy advisory firms to register with the SEC, disclose potential conflicts of interest and codes of ethics, and publicize methodologies used to make their voting recommendations. The Act is currently under review by the US Senate.

It strikes me that solutions #2 and #3 should also be brought into play. Through its purchase of the globe’s second largest proxy advisory firm Glass Lewis (GL) in 2007, Ontario Teachers’ Pension Plan (OTPP), effectively implemented a form of Belinfanti’s solutions #2 and #3 combined. OTPP sold 20% of GL to the Alberta Investment Management Corporation (AIMCO) in 2013. The press releases by OTPP and AIMCO suggest their motivations:

  • OTPP: “….we believe diversifying GL ownership with like-minded investors will bring valuable new perspectives to the next stage of GL’s development.”
  • AIMCO: “……upholding strong governance is critical to our ability to add value, and GL plays an important role in ensuring integrity in the market for all investors.”

Meanwhile, ISS was sold by MSCI to Vestar Capital Partners in 2014, who in turn sold it to private equity firm Genstar Capital in 2017 for $720M. Surely the time has come to bring ISS under a fiduciary umbrella as well!         

Can the Courts Help Foster Sustainable Capitalism?

Two recent articles by legal scholars suggest judicial activism offers yet another route to accelerating movement towards sustainable capitalism. In their article “In Search of Things Past and Future: Judicial Activism and Corporate Purpose” Ed Waitzer and Douglas Sarro argue that corporate purpose evolves as society norms and expectations evolve. That is why systems thinking is on the rise, supporting long-termism in corporate planning and decision-making as well as in the view that corporations have multiple stakeholder groups whose interests must be considered. Shareholders are only one of these groups. Courts can, and indeed do play active roles in this evolution of thinking towards multiple corporate      purposes and multiple stakeholder groups. Broadly-defined ‘reasonable expectations’ are becoming the doctrine courts will use to judge corporate governance decisions.v

Keith Johnson goes one step further in his article “The Elephant in the Room: Helping the  Delaware Court Develop Law to End Systemic Short-term Bias in Corporate Decision-Making”. In it he suggests the Court would actually welcome a legal action where it could address the issue of short-termism through the ‘business judgement rule’. Institutional investors are logical plaintiffs to initiate such an action.vi

In Conclusion

Organizationally, systems thinking requires two types of activism to be effective : 1. Continuous ‘thought leadership’ to find ‘better ways’ of doing things, and 2. Continuous ‘action leadership’ to turn those ‘better way’ ideas into realities. This Letter is a ‘thought leadership’ contribution. Turning ‘better way’ ideas into realities is up to the readers of this Letter.      

Keith Ambachtsheer 



  1. Published in 2017 in the University of Pennsylvania Law Review. Prof. Belinfanti spoke at the ICPM Forum. Prof. Stout, one of the globe’s most distinguished scholars on corporate governance and related issues, died of cancer at age 60 on April 16, 2018.
  2. Visit http://mvcinternational.com/files/elephants_in_the_room.pdf to view ‘The Elephants in the Room’ graphic.
  3. See Eccles and Krzus (2018) “Constructing ExxonMobil’s First Integrated Report: An Experiment”. 
  4. Published in 2009 in the Stanford Journal of Law, Business, and Finance.
  5. Forthcoming in the Osgoode Hall Law Journal.
  6. Forthcoming in the Michigan Business and Entrepreneurial Law Journal.


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