Challenging the Tenets of Management: #1 Shareholder value

The maximisation of shareholder value has been hailed over the last decade as managements’ central and ultimate driving mission or purpose in life. On the surface, it’s one that makes sense too. The shareholders are the ultimate owners of an organization, so the maximisation a business’s financial value (variously defined to include dividends, capital gains, proceeds from buy-back programs and other payouts*) to shareholders should be managers’ primary objective.

Or should it?

Over recent weeks and months the concept of shareholder value maximisation as one of managements’ “holy grails” has come under attack. Even Jack Welch, largely attributed as being the founding father of the school of the shareholder value maximisation movement, has taken a pot shot at it saying “on the face of it, shareholder value is the dumbest idea in the world.[1] [2].

The CEO of Unilever, Paul Polman, added to the debate[3] when he stated that he was driven primarily by the customer saying “I’m not driven and I don’t drive this business model by driving shareholder value …” This led some to re-assert the dominance of the shareholder value focus[4] and others to question if it was indeed possible to focus on both the customer and shareholders[5].  Others note from research that a total and exclusive focus on shareholder value creation can produce highly questionable decision-making[6].

Stefan Stern[5] probably identifies the route cause of the current dilemma by pointing out that the real danger of focusing upon shareholder value creation is when one takes a short-term focus and decisions are centred upon immediate value maximisation for shareholders as opposed to long-term value creation.   If a long-term view is held, then this reinforces the view that the day-to-day job of management is to build a great business. And if you have a great business then by definition you will be maximising shareholder value in the long-run[7].

But does the argument end here?

Well, the answer to this question depends upon how capitalism is defined. Or, should I say, is being redefined. One of the products of the Great Recession is that the locus of power, in terms of who the architects of capitalism will be, is shifting. And if we look at recent events in Europe, the speed of the handover may be faster than most of us expected. New emerging powers are jockeying for position.

It may be worth reflecting upon the following words of President Lula of Brazil at the end of the second BRIC summit[8] earlier this year:

The real baptism by fire of the group [the BRICs – Brazil, Russia, India and China] occurred during the financial crisis of the past two years … the sound response of the four countries to the crisis of the developed world opened up new alternatives to the shabby dogma inherited from the past.

The collapse of financial markets revealed the failure of paradigms previously considered to be unquestionable. Truths about market deregulation collapsed. The ideal of a minimal state also collapsed. The easing of labor rights is no longer a mantra to fight unemployment.

When all these orthodoxies collapsed, the visible hand of the state protected the economic system from the failure created by the invisible hand of the market.

While some of the major countries let speculative excesses flourish, BRIC countries promoted growth focused on work and prudence.

These words could well give us a snapshot of the capitalism of the future. A definition that recognises not only the long-term but also the dominant interests of more than one stakeholder. It is a future that could be rushing our way and events such as the oil spill disaster in the Gulf of Mexico may well be powerful catalysts.

The problem is that many of the tools that we use now – such as the balanced scorecard – may not be geared to help us to take both the long view and the multi-stakeholder perspective.  So here are some questions to consider when looking at your organisation’s approach to performance management:

  • What is the time horizon?
  • Does the approach focus on just one year or are there longer-term goals?
  • Is there a focus on developing long-term enduring benefits for stakeholders?
  • Is the ULTIMATE focus just one one stakeholder (usually shareholders)?
  • Are outcomes for other stakeholders included? If we look at the above quotation we can identify three further stakeholders – employees, regulators and society in general.

[1] S. Stern, “Personal Goods – Unilever warning on ‘shareholder value’,”, Apr. 2010.
[2] F. Guerrera, “Welch condemns share price focus,”, Mar. 2010.
[3] S. Stern, “The Monday Interview – Outsider in a hurry to shake up Unilever,”, Apr. 2010.
[4] K. Lever, “Letters – Misunderstanding shareholder value,”, Apr. 2010.
[5] S. Stern, “Judgment Call: How can you focus on both customer and shareholder?,”, Apr. 2010.
[6] L. Heracleous and L.L. Lan, “The Myth of Shareholder Capitalism,” Harvard Business Review, 2010, April, p. 24.
[7] D. Reece, “Professor John Kay on why the direct approach doesn’t pay,”, Mar. 2010.
[8] L. da Silva, “Brazilian President Lula: BRIC countries must forge a transparent system of global governance,” The Christian Science Monitor, Apr. 2010.

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