The Best Way To Increase Shareholder Value Is To Stop Focusing On Shareholder Value

The reign of Milton Friedman’s (pictured) notion of maximizing shareholder value comes to an end with the Business Roundtable’s recent Statement on the Purpose of a Corporation. SOUTH CHINA MORNING POST VIA GETTY IMAGES

Almost 200 of America’s most prominent CEOs belonging to the Business Roundtable recently redefined the ultimate mission of corporations, overturning the focus on “maximizing shareholder value” that has reigned supreme for the past 20 years. Originally proposed in 1970, Milton Friedman’s doctrine of shareholder value promised a clear-cut method for guiding the efforts of corporate executives. His proposal was simple, attractive — and completely misguided.

Friedman criticized the social responsibilities of business, calling businesspeople who gave weight to matters like the well-being of their employees or protecting the environment “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society.” And yet, Milton’s mantra of maximizing shareholder value above all else was embraced by corporations for decades. But with the Business Roundtable’s recent Statement on the Purpose of a Corporation, executives appear to be changing their tune to broaden the focus of their organizations from an exclusive concentration on the financial profits of shareholders to an extension to other stakeholders: their employees, supply chains and the global environment.

This changing tide is important, of course, because of the inherent societal good implied in extending attention to these additional stakeholders. But there is another reason we should be eager to move away from a sole focus on the interests of shareholders. Research on the topic reveals that merely framing business goals in terms of the “maximizing shareholder value” ethos can increase the likelihood that people are willing to engage in unscrupulous behavior.

In a study I conducted with colleagues a few years ago, we looked at the consequences of this mantra on decision-making. How might the goal of maximizing shareholder value impact one’s moral boundaries? We asked a group of people to make decisions as if they were the CEO of a publicly traded bank that provides financial services to individuals and businesses. We told participants to imagine that a change in policy would lead to a loss of $2.5 billion in revenue, and they must find a way to mitigate the loss. We presented these people with a series of vignettes, each an ethical dilemma that pitted the financial security of the bank against the interests of its non-shareholder stakeholders.

For example, people could choose to charge overdraft fees, increase interest on securities held or use tax shelters to offset income with losses from previous years. Then we asked them to rate how likely they would be to engage in each of these ethically dubious behaviors. But here’s the catch: half of the people were told nothing about their goals as a company, while the other half were told that their bank’s primary mission is to maximize shareholder value and that their efforts as CEO have reliably centered on this principle of corporate governance.

What we found was unsettling. The people who believed that their primary goal as CEO was to maximize shareholder value reported that they would be much more willing to engage in ethically dubious behaviors. The mere mindset of maximizing shareholder value became easy justification for unethical behavior, even among survey respondents with nothing at stake. One can imagine how this might translate to corporate worlds where the pressure to please shareholders is not just a hypothetical scenario, but the day-to-day reality for executives. Companies such as Enron and Theranos that take the approach of focusing on short-term gains may come out on top in the short run but clearly fail to maximize any sort of value in the long run.

Businesses must provide value and be profitable to succeed, a measure that naturally corresponds to shareholder value. The paradox, of course, is that a heightened focus on shareholder value can actually have a negative impact on shareholder value, particularly in the long term. Indeed, the best way to increase shareholder value may be to stop focusing on it. By including other important stakeholders in the guiding principles of a business, executives can maximize their long-term value to shareholders, employees, other businesses, the environment and society as a whole.

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Originally published at

Aline Holzwarth is an applied behavioral scientist, primarily focusing on digital health research and scientifically informed product design.

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