Editing Shareholder value (section)

==Disadvantages of the shareholder value model==
Shareholder value may be detrimental to a company's worth. When all of a company's focus and strategy is concentrated on increasing share prices, the practice and ethics of the firm can become lost because of the following problems with the shareholder value model.<ref>{{Cite journal|last1=Hillman|first1=Amy J.|last2=Keim|first2=Gerald D.|date=2001-02-01|title=Shareholder value, stakeholder management, and social issues: what's the bottom line?|url= |journal=Strategic Management Journal|language=en|volume=22|issue=2|pages=125–139|doi=10.1002/1097-0266(200101)22:2<125::aid-smj150>3.0.co;2-h|issn=1097-0266}}</ref><ref>{{cite journal|last=Srivastava|first=Rajendra K|author2=Tasadduq A. Shervani|author3=Liam Fahey|year=1998|title=Market-Based Assets and Shareholder Value: A Framework for Analysis|url=https://ink.library.smu.edu.sg/lkcsb_research/1261|journal=Journal of Marketing|volume=62|issue=1|pages=2–18|doi=10.1177/002224299806200102|jstor=1251799|s2cid=51799845}}</ref>

===Increased risk===
In the shareholder value model, companies often take on much more risk than they otherwise would. The acquisition of debt makes the company unstable and at risk of [[bankruptcy]]. Plentiful debt is conducive to increasing share value because the company has greater potential to increase value when starting at a lower baseline. This however is a detrimental to the stability of the company.

====Debt financing====
{{Main|Debt financing}}
Debt financing, or the purposeful acquisition of debt, causes the debt to equity ratio of the company to rise. Without shareholder value, this would normally be considered negative because it means that the company is not making money. In the shareholder value system, high debt to equity ratios are considered an indicator that the company has confidence to make money in the future.<ref>{{cite journal|last=Lazonick|first=William|author2=Mary O'Sullivan|title=Maximizing shareholder value: a new ideology for corporate governance|journal=Economy and Society|date=2 December 2010|volume=29|issue=1|pages=13–35|doi=10.1080/030851400360541|s2cid=218508129}}</ref> Therefore, debt is not something to avoid but rather something to embrace and having debt will actually gain the company investors. Taking on large risk attracts investors and increases potential value gain, but puts the company in danger of bankruptcy and collapse.

=== Executive compensation ===
{{Main|Executive compensation}}
In order to facilitate an incentive structure that supports shareholder value, the method of executive compensation has changed toward making a large portion of [[C-suite]] pay come from stock. The reasoning behind this decision was that it would bring the interests of CEOs in line with those of shareholders.<ref name=":2">{{Cite web|last=Denning|first=Steve|title=Making Sense Of Shareholder Value: 'The World's Dumbest Idea'|url=https://www.forbes.com/sites/stevedenning/2017/07/17/making-sense-of-shareholder-value-the-worlds-dumbest-idea/|access-date=2020-12-18|website=Forbes|language=en}}</ref> As a result of this decision, executive compensation has skyrocketed, quadrupling from the rate of compensation in the early 1970s.<ref name=":3">{{Citation|last=Yang|first=Jia|title=Maximizing Shareholder Value: The Goal that Changed Corporate America|date=2014-12-31|url=http://dx.doi.org/10.7312/star17015-011|work=The Best Business Writing 2014|pages=160–170|publisher=Columbia University Press|doi=10.7312/star17015-011|isbn=978-0-231-53917-3|access-date=2020-12-18|url-access=subscription}}</ref> This change has also shifted the motivations of C-suite managers in the direction of increasing share price over everything else, leaving other goals like long-term growth and stakeholders like employees and customers behind.<ref name=":4">{{Cite journal|last=Kennedy|first=Allan|date=2000|title=The end of shareholder value|journal=RSA Journal|volume=148|pages=50–53}}</ref> [[Share repurchase|Share repurchasing]] might cause [[Incentive#Misaligned incentives|misaligned incentives]] between [[market capitalization]] and executive compensation connected to [[share price]] due to the change in number of shares.<ref name="o679">{{cite journal | last=Shilon | first=Nitzan | title=Stock Buybacks as an Executive Compensation Problem | journal=SSRN Electronic Journal | publisher=Elsevier BV | year=2020 | issn=1556-5068 | doi=10.2139/ssrn.3541993 | page=}}</ref>

===Short-term strategy===
The short-term nature of shareholder value theory is one of the features focused on by critics. They argue that this fixation on the short term leads to neglect of more profitable long-term strategies.<ref name=":5">{{Cite journal|last=Koslowski|first=Peter|date=2000|title=The Limits of Shareholder Value|journal=Journal of Business Ethics|volume=27|pages=137–148|doi=10.1023/A:1006438000855|s2cid=154136656}}</ref> In this way, shareholder value fails to attain the level of overall capital growth that might otherwise be expected. Given the emphasis on stock price inherent to shareholder value, incentives are created for corporations to inflate their stock price before its value becomes critical for assessment. One such incentive is that the compensation of executives and managers is increasingly tied to stock value through executive bonuses and stock options.<ref name=":5" /> Corporations use several gimmicks to increase stock price, perhaps the most infamous being the mass layoffs of employees which creates the appealing image of increased efficiency and lower operating costs, in turn driving up stock price.<ref name=":3" /> However, this and other such gimmicks have several negative consequences. Oftentimes, in the wake of mass layoffs, corporations have to refill some of the positions now vacant. This leads to a longer term inefficiency as new employees must be trained and the resources invested into the original employee (provided they were not rehired) are permanently lost.

A related criticism of shareholder value is the reliance on the process of assessing stock, which is itself vulnerable to manipulation and [[speculation]].<ref name=":5" /> Speculating on the firm's stock price is in the interest of managers that receive stock compensation and may therefore cause them to focus on speculating on the stock price rather than maximizing real production.<ref name=":5" />

Management experts also cite another criticism of shareholder value's short-term view, namely that it creates a corporate culture more concerned with maximizing revenue than with maintaining relationships with employees, customers, or their surrounding communities.<ref name=":4" />

=== Loss of growth and productivity ===
Business experts have criticized shareholder value for failing to materialize economic growth and increased productivity. Despite decades of research and dozens of studies, there is negligible strong evidence that shareholder value theory has produced better results for businesses (studies that did provide evidence of shareholder value being beneficial generally were not able to be replicated; Stout). Since the inception and widespread application of shareholder value theory, returns on invested capital have steadily decreased.<ref name=":2" /> One explanation for this trend is reduced investment in innovation. Studies have shown that [[publicly traded]] companies (who have a share price) invest about half as much as [[privately held companies]] in the United States.<ref name=":2" /> Even shareholders have had disappointing results with poor returns on investment and a reduction in the population of publicly traded companies by 40%.<ref name=":10">Stout, Lynn A., "The Shareholder Value Myth" (2013). Cornell Law Faculty Publications. Paper 771.</ref>

In addition to reduced growth, critics also point to reduced productivity. Shareholder value can have a negative effect on employee morale as the entire mission of the corporation becomes the generation of wealth for shareholders. Because of this reduction of motivation, corporations need to engage in more top-down and control-oriented management strategies, one such example being the massive rise in the use of [[non-compete agreement]]s. Despite such efforts (or because of them), low employee morale has negative effects on business. Less motivated employees are less energetic and produce less and are less likely to innovate.<ref name=":2" />

A further inefficiency of shareholder value is the growth of [[financialization]]. The financial industry has ballooned in size following the use of shareholder value, largely due to the outsized importance placed upon shareholders by corporations.<ref>{{Cite web|last=Ho|first=Karen|date=October 12, 2020|title=Why the Stock Market is Rising Amidst a Pandemic and Record, Racialized Inequality|url=https://americanethnologist.org/features/pandemic-diaries/introduction-intersecting-crises/why-the-stock-market-is-rising-amidst-a-pandemic-and-record-racialized-inequality|website=American Ethnological Society}}</ref><ref name=":2" /> The large financial sector is a drain on the entire United States economy, costing roughly 300 billion dollars per year.<ref name=":2" /> This is because the financial sector does not engage in actual production.