Shareholder value maximization has been severely criticized in recent years, but it is not clear what if anything is to take its place.
In this paper we review three models of corporate value creation – shareholder value, stakeholder value and company purpose achievement – and their implications for corporate governance.
We first discuss shareholder value and how it is implemented through dispersed financial ownership, facilitation of takeovers, stock options and other mechanisms. Secondly, we discuss stakeholder value and its implementation through cooperatives, mutuals, employee representation and ESG indicators. Thirdly, we consider the more recent idea of a company purpose, which calls for responsible long-term ownership, management continuity and financial conservatism. We conclude that the purpose view may be the most promising alternative because it addresses weaknesses in the two other models by providing a clear social objective that is consistent with constrained profit maximization. However, we argue that agency problems and tensions with the broader interests of society are likely to persist regardless of value creation model.
“The purpose model—associated among others with Colin Mayer—lets the shareholders of the company choose a socially useful purpose which will typically be to satisfy a social need (a customer demand) by supplying goods and services in a responsible way. In other words, companies exist to serve a social need which they fill by providing society with goods and services. This—rather than making profits or paying wages—is their essential function. The purpose guides the company’s strategy, values, and governance structure, which will normally be directed at business expansion being in accordance with the socially useful purpose. However, there remains a risk that a given purpose will become less socially useful over time, and it is also possible that the narrow-minded focus on the purpose will neglect the broader interest of society by, for example, minimizing taxes or exploiting suppliers. The purpose will therefore need to be revised over time which entails the risk that it will be opportunistically adapted to share value maximization.”