Why maximizing shareholder value is a threat to U.S. business

Abstract

Purpose

The article outlines the arguments by the proponents and opponents of maximizing shareholder value and identifies the true threat the concept poses to U.S. businesses.

Design/methodology/approach

The author quotes authorities on both side of the debate over the validity of maximizing shareholder value as a driving principle of management and points out the risks and the alternatives. He notes that many long-established public corporations in the U.S. have chosen to bow to the power of shareholders and reward them instead of attempting risky initiatives that might create new customers or enhance customer value.

Findings

Maximizing shareholder value is either the guiding principle of business success that provides a rightful reward for investors or a corrupting influence that thwarts investment in employee talent, sustaining innovation, product quality and customer loyalty.

Practical implications

Since the C-suite is hugely compensated for increases in the current stock price, decisions based on “shareholder value” tend to be decisions that boost the current stock price.

Social implications

As evidence the problem is being recognized, some CEOs have already spoken out against preferentially rewarding stockholders instead of investing to sustain the organization.

Originality/value

The author concludes that shareholder value theory has not only failed on its own narrow terms of making money for shareholders. It has been steadily destroying the productive capacity and dynamism of the entire economy.

Citation

Denning, S. (2017), "Why maximizing shareholder value is a threat to U.S. business", Strategy & Leadership, Vol. 45 No. 6, pp. 3-10. https://doi.org/10.1108/SL-09-2017-0084