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Source: Harvard Business Review, July 1, 2018 commentary

Economics & Society

Reclaiming the Idea of Shareholder Value

by Michael J. Mauboussin and Alfred Rappaport

July 01, 2016



Corporate governance issues are constantly in the headlines. Activist investors challenge management strategies. Investors and others ask why companies binge on buybacks while skimping on value-creating investment opportunities. But discussions of corporate governance invariably miss the real problem: most public companies have extensive governance procedures but no governing objective. As a result, there is no sound basis for stakeholders, including shareholders, to assess the performance of the company and its executives.

Corporate governance is a system of checks and balances that a company designs to ensure that it faithfully serves its governing objective. The governing objective is the cornerstone upon which the organization builds its culture, communications, and choices about how it allocates capital. Think of it as a clear statement of what a company is fundamentally trying to achieve.

Today there are two camps that aim to define the idea of governing objective, but neither is effective. The first believes the company’s goal is to maximize shareholder value. Countries that operate under common law, including the United States and the United Kingdom, lean in this direction.

The second advocates that the company balance the interests of all stakeholders. Countries that operate under civil law, including France, Germany, and Japan, tend to be in this camp.

The problem with the term “maximize shareholder value” is that it has been hijacked by those who incorrectly believe that the goal is to maximize short-term earnings to boost today’s stock price. Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cash flow. Because an organization’s success depends on long-term relationships with each of its stakeholders, lengthening the investment time horizon benefits not only shareholders but customers, employees, suppliers, creditors, and communities as well.

Balancing stakeholder interests sounds like an entirely reasonable idea. But it cannot serve as a company’s singular governing objective because it is impossible to simultaneously satisfy the interests of all stakeholders. In the absence of a singular governing objective, executives are free to decide as they see fit and to balance those interests however they think is right. And without knowing how managers decide, it is almost impossible to hold them accountable for what they decide.

Companies must take three steps to establish an effective corporate governance structure and thereby achieve consistency between what they say and what they do.

First, corporate boards must select a clear governing objective. That may mean choosing shareholder or stakeholder value, but that is not enough. Those that do embrace maximizing shareholder value as their governing objective also need to specify the time horizons they will use in their planning and decision-making processes.

Companies that choose to balance the interests of stakeholders as their governing objective must explain how they intend to manage the diverse and often conflicting interests of their stakeholders. In particular, they need to disclose the acceptable limits for tradeoffs they are willing to make at the expense of their shareholders.

Time horizon is a particularly important part of the governing objective’s definition. Some observers contend that focusing on an uncertain long term distracts the organization from what it needs to accomplish in the short term. But the short term and the long term are not adversaries in a zero-sum game. The overriding goal should be to focus continuously on what the organization needs to accomplish in the short and intermediate term in order to achieve its long-term goals. Peter Drucker, the great management thinker, had it right when he said, “keep [your] noses to the grindstone while lifting [your] eyes to the hills.”

Second, companies need to adopt a set of policies that encourage behaviors consistent with the governing objective. This includes non-financial and financial performance metrics as well as incentive compensation plans.

Research shows that non-financial metrics that companies use are commonly untethered to either long-term value creation or the company’s strategic goals. It comes as no surprise that if companies can keep score as they wish, they will often reward managers even when they fail to create value. For example, companies can boost earnings per share by repurchasing shares, thereby hitting compensation targets, while forgoing value-creating investments in the business.

We recognize that designing effective incentives is devilishly difficult and that incentives alone are not the answer. But proper incentives are essential for an organization to faithfully serve its governing objective. Pursuing the governing objective becomes an act of enlightened self-interest for all employees when the proper incentives are in place.

Managements of stakeholder-centric companies have every right to prioritize an objective other than creating shareholder value, but to honor their implicit contract with shareholders they need to disclose the acceptable limit for trade-offs they are willing to make at the expense of their shareholders.

Third, companies must communicate with all of their stakeholders. This includes public disclosure of a governing objective, the time horizon the company will use in its planning and decision-making processes, how it will resolve trade-offs among stakeholder interests, and the specific policies in place that support the governing objective.

This communication allows all stakeholders, including shareholders, to opt in or opt out given a company’s objectives. In particular, CEOs who are compelled to disclose their time horizons are likely to lengthen them. This disclosure alone would serve as a powerful antidote to corporate short-termism.

Take a look at the letter to shareholders that Jeff Bezos, founder and CEO of, wrote to shareholders in 1997. He states that the “fundamental measure of our success will be the shareholder value we create over the long term.”

He then enumerates the ways in which the firm’s policies will support the objective. For instance, he states that “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”

Not only has Bezos been clear about the company’s objectives from the beginning, the company reprints the 1997 letter every year to reinforce the message. Bezos notes, “As far as investors go, our job is to be superclear about our approach, and then investors get to self-select.”

Proposed fixes of corporate governance typically treat the symptoms and fail to address the cause. The root problem is that few companies have a clearly-stated governing objective. As a result, executives can justify almost any decision they make. Our solution dwells not on which governing objective a company should select, but insists that the company be clear about what it is trying to do. Getting companies to do as they say is a win-win for the long-term interests of investors, the companies they invest in as well as all stakeholders.


Michael J. Mauboussin is director of research at BlueMountain Capital Management and an adjunct professor at Columbia Business School in New York City. His latest book is The Success Equation

Alfred Rappaport is the Leonard Spacek Professor Emeritus at Northwestern University’s J.L. Kellogg Graduate School of Management and author of Saving Capitalism from Short-Termism: How to Build Long-Term Value and Take Back Our Financial Future.


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