Loading...
Myth Busting

Is “Maximizing Shareholder Value” a Myth?

I read an interesting piece in the Washington Post this morning about the “myth” of maximizing shareholder value.  In the piece Harold Meyerson shows, correctly, that there is no law requiring corporations to maximize shareholder value.  He then goes on to argue that this concept has contributed to some of the problems in the US economy today. But I think he incorrectly dismisses the concept of “maximizing shareholder value” in much the same unbalanced way that the concept has come to be abused by those who worship at the altar of shareholder value.  There are a lot of moving parts here, but I’ll offer my views with (hopefully) some brevity.

First of all, it’s true that there’s no law requiring companies to maximize shareholder value.  But this has nothing to do with the basic premise behind the concept of “maximizing shareholder value”.  For instance, corporations have a legal responsibility to abide by the regulatory framework within which they must operate.  This doesn’t mean they have a responsibility to maximize public good.  It just means they can’t break laws that might otherwise harm the general public.  But this legal requirement doesn’t make private entities servants of the government or even the general population.

More importantly, when we discuss the idea of capitalist entities we must consider who the company serves.  A capitalist entity is not legally required to serve anyone.  After all, a company can be run in any manner in which those in charge choose.  So, who does a capitalist entity serve?  Ultimately, the company serves lots of different people and even itself.  The company serves its customers.  The company must also serve itself to some degree.  And the company must serve its owners.  This is generally a complex balancing act and only the best companies can maintain this balance over the long-term.

In the case of owners, most claimants are shareholders.  That is, it is the shareholders who have a legal right to the residual profits that a company earns and they elect the Board of Directors who elect the management of the firm.   Most good capitalists (no, that’s not an oxymoron although it certainly can be!) understand that they must abide by the laws, serve their customers, serve their employees, do what’s in the best interest of the firm and hopefully generate a profit which rewards the owners as well as the corporation and all involved (after all, a company that goes out of business can’t benefit anyone).  These goals are not necessarily at odds with one another.  In fact, the best and most viable corporations generally balance them all pretty well.  The problem is, it’s not easy to balance all of these goals and most companies fail in trying.  In addition, I think one could argue that, in the last 30 years, some components have been ignored at the expense of others.

On the whole, the concept of “maximizing shareholder value” is not a myth at all.  But if taken to an extreme, I think that capitalists can abuse the concept and try to implement this concept with the hope of near-term gains at the expense of long-term gains.  This makes the concept of “maximizing shareholder value” a potentially dangerous one because the desire to maximize short-term gains can, at times, hurt the firm in the long-run.  And that generally involves a good deal of collateral damage. Is that happening to the degree that some commentators tend to imply? I suspect not. On the whole capitalism is the best system aside from all the rest. And the public markets, despite some greed and short-termism are a demonstrable public good. So, it’s not that this concept is inherently evil.  More likely, it’s that the concept can be abused by people who misunderstand how it should be conceptualized within a broader framework of a capitalist entity’s long-term goals.

Comments are closed.