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The Myth Of Shareholder Value
The Business Roundtable, an influential group of almost 200 CEOs of America’s largest companies, recently issued a statement that discarded the old notion that the sole purpose of a business is to provide value to shareholders. Instead, it advocated serving a diverse group of stakeholders including customers, employees, suppliers and communities.
The idea is not a new one. In fact, Jack Welch once called shareholder value the dumbest idea in the world. Nevertheless, The Wall Street Journal opinion page immediately pounced, suggesting that the move was just an attempt to “appease the socialists” and that it would undermine financial accountability.
It’s hard to see how acknowledging accountability to stakeholders other than investors would undermine accountability to investors. Shareholders, after all, have the power to fire CEOs. Even more importantly though, the notion that performance can be reduced down to a single metric is foolhardy and dangerous. Managing a business is simply tougher than that.
The Principal-Agent Problem
Every business seeks to make a profit. Ones that do not achieve that basic requirement do not stay in business for long. However, that doesn’t mean that the only reason a business exists is to make money. Clearly, in order to earn a profit over the long term, you need to…
