What They Tell You

Companies are owned by shareholders. Therefore, they should be run for the benefit of shareholders—to maximize shareholder value. The managers are merely agents of the shareholders. When they pursue other goals, such as empire-building or pleasing workers, they are betraying the trust of the owners. Maximizing shareholder value is not only morally right but also economically efficient, because shareholders are the ones who bear the risk—they are the “residual claimants” who get paid only after everyone else (workers, suppliers, creditors) has been paid.

What They Don’t Tell You

Shareholders are not the only stakeholders in a company. Workers, suppliers, customers, and the community all have stakes. Shareholder value maximization has led to short-termism, excessive executive pay, and economic instability. Shareholders actually bear less risk than workers because they can diversify their portfolios, while workers cannot diversify their jobs. The obsession with shareholder value has hollowed out companies and harmed long-term economic growth.

The Rise of Shareholder Value

The concept of “shareholder value” became dominant in the 1980s. Before that, companies were seen as serving multiple stakeholders. The shift was driven by:

  • Academic theories: Economists like Milton Friedman argued that the social responsibility of business is to increase profits.

  • Hostile takeovers: Raiders argued they were disciplining lazy management on behalf of shareholders.

  • Stock options: Executive compensation was tied to share prices, aligning management with shareholders.

The Problems with Shareholder Value

Short-termism: When managers focus on quarterly earnings, they cut investment in R&D, training, and equipment. This boosts short-term profits but harms long-term competitiveness.

Excessive executive pay: Stock options created huge windfalls for executives, often unrelated to actual performance. CEOs could manipulate share prices through buybacks rather than building value.

Financial engineering: Companies borrowed to buy back shares, increasing leverage and fragility. They became more vulnerable to economic downturns.

Hollowing out: To cut costs, companies outsourced, downsized, and offshored. This transferred risks to workers and suppliers.

Who Bears the Risk?

The argument that shareholders deserve primacy because they bear the most risk is flawed:

  • Diversification: Shareholders can spread their investments across many companies. If one fails, they lose only a fraction of their wealth.

  • Workers: Employees cannot diversify their jobs. If their company fails, they lose everything—income, benefits, pensions, and often their homes.

  • Limited liability: Shareholders can only lose what they invested. Workers can lose much more.

Alternative Models

Many successful economies don’t prioritize shareholder value:

  • Germany: Companies have supervisory boards with worker representation. They take a longer-term view.

  • Japan: Companies prioritize stability and employee welfare. Cross-shareholding reduces pressure for short-term profits.

  • Scandinavia: Strong unions and social partnership balance stakeholder interests.

These economies have often outperformed Anglo-American economies in terms of productivity growth and living standards.

The Consequences

The shareholder value revolution has contributed to:

  • Rising inequality (executives vs. workers)

  • Financial instability (2008 crisis)

  • Declining investment in productive capacity

  • Erosion of worker bargaining power

  • Short-term thinking in business

Rethinking Corporate Purpose

Companies are social institutions, not just bundles of assets owned by shareholders. They exist within communities and depend on public infrastructure, educated workers, and legal systems. A broader view of corporate purpose would consider all stakeholders and long-term sustainability.

Maximizing shareholder value is neither the only way nor the best way to run a company.