The Dumbest Business Idea Ever: The Myth of Maximizing Shareholder Value

Lynn Stout in Evonomics:

By the end of the 20^th century, a broad consensus had emerged in the Anglo-American business world that corporations should be governed according to the philosophy often called shareholder primacy. Shareholder primacy theory taught that corporations were owned by their shareholders; that directors and executives should do what the company’s owners/shareholders wanted them to do; and that what shareholders generally wanted managers to do was to maximize “shareholder value,” measured by share price.

Today this consensus is crumbling. As just one example, in the past year no fewer than three prominent New York Times columnists have published articles questioning shareholder value thinking.¹ Shareholder primacy theory is suffering a crisis of confidence. This is happening in large part because it is becoming clear that shareholder value thinking doesn’t seem to work, even for most shareholders.

Consider the example of the United States. The idea that corporations should be managed to maximize shareholder value has led over the past two decades to dramatic shifts in U.S. corporate law and practice. Executive compensation rules, governance practices, and federal securities laws, have all been “reformed” to give shareholders more influence over boards and to make managers more attentive to share price.² The results are disappointing at best. Shareholders are suffering their worst investment returns since the Great Depression;³ the population of publicly-listed companies has declined by 40%;⁴ and the life expectancy of Fortune 500 firms has plunged from 75 years in the early 20th century to only 15 years today.

More here.