b-school, Henley, MBA, Personal, Politics, Thoughts

Maximising shareholder value (a mantra that is half a lie)

The main goal of a company is to maximise shareholder value. If you write something like this just a few will disagree. But the fact is that this commonly accepted truth (“commonly accepted” should be disqualifying enough for something to be called truth) contains a great deal of ideology and political positioning. Should we question it then?

Chartered companies were created in Europe as regulated companies, with obligations and rights, that thrived in the 16th century. They were thought to facilitate new enterprises such as international trade and exploration in a time that the world was much bigger than it is today and, seen from the European world-view, unexplored. Usually they were awarded with monopolies resulting from the discovering of new lands. The challenge was to discover, open the new routes and make them profitable. Shareholders provided capital and benefited from profits. There were even “good government” dispositions (yes, that was prior to Enron).

They evolved. They originated the modern limited-liability companies. That was already the 19th century. They required (and still require) an official registration of a constitution document signed by its creators and first shareholders. Before they were only partnerships, some people operating together. But then they could be taxed and could own assets. They bear the consequences of their actions, not their owners. That way any loss would be limited.Those corporations would protect their shareholders, limiting their losses to the capital that had been invested. And they had rights to part of the benefits: dividends.

Corporations thus existed per se, and were accountable to different kinds of stakeholders: not only their shareholders but also their customers, their employees (and that included their managers), their suppliers, the communities where they operate, and the whole of society. The company had to think of all of them.

But in some moment, probably in the same wave of thought that I described in the previous post The darker side of economics (how well intended theories can get the worst out of MBAs) things simply changed.

Shareholder value became anything. Superinflated-ego-CEOs came into view as the media cherished and the public agreed. We became used to greed, to super-heros that, by themselves, transformed companies into successes (yes, like if CEOs did everything all alone, and the shareholders owned everything). They began earning more and more, from stock options to huge sums of money, while employees were either laid-off or with raises along with inflation levels.Somewhere along the road we assumed that the CEOs were the companies and the shareholders owned the assets. Neither is true. The CEOs just have a small share of the work, but in every company there’s much more human capital than the CEO. And it’s the company that owns the assets, shareholders just contribute with another kind of capital in return for a share of the benefits, similarly to what banks do in return for interests. But shareholders can buy and sell at any time in the capital markets. Usually shareholders have no implication at all with the company, being funds that replicate an index or people that invest their savings and have no knowledge of the business at all (neither wish to have).

Shareholders provide funds, assume risks and, of course, expect value. But they are not the only ones to assume risks and expect value: so do employees, that cannot swap jobs as easy as selling stock on the market. And so do banks, and so do countries that, in the first place, enabled their charters and their limited responsibilities.

If they were all theirs, why should the rest of us grant them limited-liabilities? If owners could do whatever they wish with the assets, they should be registered to their names, and assume the whole range of consequences. A world were a few could do anything and still be protected wouldn’t be fair. Risk must be rewarded, for sure, but not just the shareholders’ that surely deserve their retributions: customers that buy must be taken care of because customers that feel that they are only cash cows or cheated won’t be loyal, as employees that feel that loyalty has stopped being reciprocal.


Companies are more than profit machines. There are dilemmas to be solved, stakeholders to be considered and prioritise, there’s more than cost/benefit analysis. They are more than isolated units. And they don’t have to be greedy, as we don’t have to be. There’s still room for principles, for integrity, for loyalty. And that’s for employees, for shareholders, for managers and for CEOs.


4 thoughts on “Maximising shareholder value (a mantra that is half a lie)

  1. Good question: what is actually shareholders’ value? Even if you take the narrow definition shareholder value = profits, the big question is: which profits? The mainstream focus on quarterly profits, but probably we should care about the expected long-term profits. Myopia is a widespread disability.

  2. I totally agree with your reasoning on this one. The companies and the world of finance are actually fooling themselves when they say that a company should work at increasing shareholder value. It is because of notions like these that we see scandals such as Enron, WorldCom etc.

  3. I agree with both of you. Thanks for the comments. It’s nice to see that there’s intelligent people still free from this mental trap. Still there’s hope 🙂

    Best regards

  4. aldertonm says:

    Shareholder wealth maximisation should not at all be company main objective. It should come along as a result of taking care of their products and customers.

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