Reclaiming the Idea of Shareholder Value
“Today there are two camps that aim to define the idea of governing objective, but neither is effective. The first believes the company’s goal is to maximize shareholder value. Countries that operate under common law, including the United States and the United Kingdom, lean in this direction.
The second advocates that the company balance the interests of all stakeholders. Countries that operate under civil law, including France, Germany, and Japan, tend to be in this camp.
The problem with the term ‘maximize shareholder value’ is that it has been hijacked by those who incorrectly believe that the goal is to maximize short-term earnings to boost today’s stock price. Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cash flow. Because an organization’s success depends on long-term relationships with each of its stakeholders, lengthening the investment time horizon benefits not only shareholders but customers, employees, suppliers, creditors, and communities as well.
Balancing stakeholder interests sounds like an entirely reasonable idea. But it cannot serve as a company’s singular governing objective because it is impossible to simultaneously satisfy the interests of all stakeholders. In the absence of a singular governing objective, executives are free to decide as they see fit and to balance those interests however they think is right. And without knowing how managers decide, it is almost impossible to hold them accountable for what they decide. …
… corporate boards must select a clear governing objective. That may mean choosing shareholder or stakeholder value, but that is not enough. Those that do embrace maximizing shareholder value as their governing objective also need to specify the time horizons they will use in their planning and decision-making processes.
Companies that choose to balance the interests of stakeholders as their governing objective must explain how they intend to manage the diverse and often conflicting interests of their stakeholders. In particular, they need to disclose the acceptable limits for tradeoffs they are willing to make at the expense of their shareholders.
Time horizon is a particularly important part of the governing objective’s definition. Some observers contend that focusing on an uncertain long term distracts the organization from what it needs to accomplish in the short term. But the short term and the long term are not adversaries in a zero-sum game. The overriding goal should be to focus continuously on what the organization needs to accomplish in the short and intermediate term in order to achieve its long-term goals. Peter Drucker, the great management thinker, had it right when he said, ‘keep [your] noses to the grindstone while lifting [your] eyes to the hills.'”