Shareholder Value Maximization
2.6 Is Shareholder Value Maximization the Right Objective?
In their widely cited book The Value Imperative—Managing for Superior Shareholder Returns, McTaggart, Kontes, and Mankins (1994) write,
Maximizing shareholder value is not an abstract, shortsighted, impractical, or even, some might think, sinister objective. On the contrary, it is a concrete, future-oriented, pragmatic, and worthy objective, the pursuit of which motivates and enables managers to make substantially better strategic and organizational decisions than they would in pursuit of any other goal. And its accomplishment is essential to the welfare of all the company’s stakeholders, for it is only when wealth is created that customers will continue to enjoy a flow of new, better, and cheaper products and the world’s economies will see new jobs created and old ones improved.McTaggart, Kontes, and Mankins (1994), chap. 1.
Implicit in this statement are three important assumptions, all of which can be challenged:
1. Shareholder value is the best measure of wealth creation for the firm.
2. Shareholder value maximization produces the greatest competitiveness.
3. Shareholder value maximization fairly serves the interests of the company’s other stakeholders.
With respect to the first assumption, it can be argued that “firm value,” which also includes the values to all other financial claimants, such as creditors, debt holders, and preferred shareholders, is a better indicator of wealth. The importance of distinguishing between firm value and shareholder value lies in the fact that managers and boards can make decisions that transfer value from debt holders to shareholders and decrease total firm and social value while increasing shareholder value.
The second assumption—that shareholder value maximization produces the greatest long-term competitiveness—can also be challenged. An increasingly influential group of critics, which also includes a substantial number of CEOs, thinks product-market rather
In their widely cited book The Value Imperative—Managing for Superior Shareholder Returns, McTaggart, Kontes, and Mankins (1994) write,
Maximizing shareholder value is not an abstract, shortsighted, impractical, or even, some might think, sinister objective. On the contrary, it is a concrete, future-oriented, pragmatic, and worthy objective, the pursuit of which motivates and enables managers to make substantially better strategic and organizational decisions than they would in pursuit of any other goal. And its accomplishment is essential to the welfare of all the company’s stakeholders, for it is only when wealth is created that customers will continue to enjoy a flow of new, better, and cheaper products and the world’s economies will see new jobs created and old ones improved.McTaggart, Kontes, and Mankins (1994), chap. 1.
Implicit in this statement are three important assumptions, all of which can be challenged:
1. Shareholder value is the best measure of wealth creation for the firm.
2. Shareholder value maximization produces the greatest competitiveness.
3. Shareholder value maximization fairly serves the interests of the company’s other stakeholders.
With respect to the first assumption, it can be argued that “firm value,” which also includes the values to all other financial claimants, such as creditors, debt holders, and preferred shareholders, is a better indicator of wealth. The importance of distinguishing between firm value and shareholder value lies in the fact that managers and boards can make decisions that transfer value from debt holders to shareholders and decrease total firm and social value while increasing shareholder value.
The second assumption—that shareholder value maximization produces the greatest long-term competitiveness—can also be challenged. An increasingly influential group of critics, which also includes a substantial number of CEOs, thinks product-market rather