Shareholder Value

Maximizing the value of a company – the shareholder value – is the best. Not only for shareholders but also for the economy and society as a whole. That’s the basic idea of the “Shareholder Value Movement”. It is the best for society because best performing companies will be able to acquire more capital and can prosper. The implicit assumption is that a better performance in financial terms also means creating more value for society. In the short and long run.

According to the Financial Times, the birth of the “shareholder value movement” is traced back to 1981, when the then new CEO of General Electric, Mr Jack Welch, gave his famous speech “Growing Fast in a Slow-Growth Economy”. Mr Welch put forward the idea that by cutting costs and selling underperforming businesses, the overall GDP will be pushed upward.

The term “shareholder value” was then introduced by Alfred Rappaport in his book “Shareholder Value – A Guide for Managers and Investors” in 1986.

Criticism

Nowadays critics argue that

– the shareholder value movement has not been good for society and the economy as a whole as it created the theoretical basis for over-leveraging the financial economy. With the consequence of triggering the global economic crises, we are in still today.

– it has not been good for shareholders either, as the annual return of the S&P 500 dropped significantly in the period between 1977 and 2008 (see Roger Martin).

– Shareholder Value thinking assumes that the purpose of a company is increasing its own value. But this relates only to the company itself. Systems science show that the purpose of an organization has to relate to the environment it is embedded in, otherwise structures are not viable. The ongoing financial crises seems to have proved this theses.