The Shareholder ForumTM


"Say on Pay" Proposals

Forum Home Page

"Say on Pay" Home Page

Program Reference


Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, June 26, 2012 posting


The Shareholder Value Myth

Posted by Lynn A. Stout, Cornell Law School, on Tuesday June 26, 2012 at 9:16 am

Editor’s Note: Lynn Stout is the Distinguished Professor of Corporate and Business Law at Cornell Law School. This post discusses Professor Stout’s book The Shareholder Value Myth, available for purchase here and for preview here.

Shareholder-value thinking dominates the business world today. Professors, policymakers, and business leaders routinely chant the mantras that public companies “belong” to their shareholders; that the proper goal of corporate governance is to maximize shareholder wealth; and that shareholder wealth is best measured by share price (meaning share price today, not share price next year or next decade).

This dogma drives directors and executives to run public firms with a relentless focus on raising stock price. In the quest to “unlock shareholder value” they sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, outmoded, and unsafe equipment; shower CEOs with stock options and expensive pay packages to “incentivize” them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency; and lobby regulators and Congress to change the law so they can chase short-term profits speculating in high-risk financial derivatives. Yet many individual directors and executives feel uneasy about such strategies, intuiting that a single-minded focus on share price may not serve the interests of society, the company, or shareholders themselves.

The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (Berrett Keohler Publications, 2012) challenges the ideology of shareholder value. Part I, “Debunking the Shareholder Value Myth,” traces the intellectual origins of shareholder-primacy thinking. It shows how the ideology of shareholder value maximization lacks any solid foundation in corporate law, corporate economics, or the empirical evidence. Contrary to what many believe, U.S. corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price. The economic case for shareholder-value maximization similarly rests on incorrect factual claims about the structure of corporations, including the mistaken claims that shareholders “own” corporations, that they have the only residual claim on the firm’s profits, and that they are principals who hire and control directors to act as their agents. Finally, there is a notable lack of persuasive empirical evidence demonstrating that individual corporations run according to the principles of shareholder value maximization perform better over time than those that are not. Worse, when we look at macroeconomic data—overall investment returns, numbers of firms choosing to go or remain public, relative economic performance of “shareholder-friendly” jurisdictions—it suggests shareholder value dogma may be economically counterproductive. Part I concludes shareholder-value ideology is based on wishful thinking, not reality. As a theory of corporate purpose, it is poised for intellectual collapse.

Part II, “What Do Shareholders Really Value?,” surveys promising new theories of corporate purpose being offered by today’s experts in law, business, and economics. These new theories have two interesting and important elements in common. First, where historical challenges to shareholder primacy have focused on the fear that what is good for shareholders might be bad for other corporate stakeholders (customers, employees, creditors) or for the larger society, the new theories focus on the possibility that shareholder-value thinking harms many shareholders themselves. Second, the new theories raise this counterintuitive possibility by pointing out that “shareholder” is an artificial and highly misleading construct. Shareholders are not homogeneous Platonic entities but diverse people who hold stock directly or through pension or mutual funds. Some plan to own their stock for short periods, and care only about today’s stock price. Others expect to hold their shares for decades, and worry about the company’s long-term future. Investors buying shares in new ventures want their companies to make ex ante commitments that attract the loyalty of customers and employees, but after those specific investments have been made, may hope to profit from exploiting those commitments ex post. Some investors are highly diversified, and worry how the company’s actions will affect the value of their other investments and interests. Others are undiversified and unconcerned. Finally, many people are “prosocial,” meaning they are willing to sacrifice at least some profits to allow the company to act in an ethical and socially responsible fashion. Others care only about their own material returns. Rather than recognize and account for differences in shareholders’ interests and values, shareholder value dogma simply privileges the interests of the most myopic, opportunistic, self-destructive, and psychopathically asocial subset of shareholders. This keeps public companies from doing well for either their investors or society as a whole.

The Shareholder Value Myth concludes that the new theories of shareholder interest promise to advance our understanding of corporate purpose beyond the old, stale “shareholders-versus-stakeholders” and “shareholders-versus-society” debates. By revealing how a singled-minded focus on share price endangers the interests of many shareholders themselves, it demonstrates how the perceived gap between the interests of shareholders as a class and those of stakeholders and the broader society may be far narrower than commonly understood. In the process, it offers a more sophisticated and more useful understandings of the role of the public corporations and of good corporate governance that can help business leaders, lawmakers, and investors alike ensure that public corporations reach their full economic potential.

The Shareholder Value Myth may be purchased in its entirety at and at Barnes & Noble. Copies of individual chapters may be accessed free of charge here.


All copyright and trademarks in content on this site are owned by their respective owners. Other content © 2012 The President and Fellows of Harvard College




This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.