Editing Shareholder value (section)

==History==
The first modern articulation that shareholder wealth creation is the paramount interest of the management of a company was published in ''[[Fortune (magazine)|Fortune]]'' magazine in 1962 in an article by the management of a US textile company, Indian Head Mills, whose history can be traced back to the 1820s.<ref name=":11" /> The article stated that:<blockquote>The objective of our company is to increase the intrinsic value of our common stock. We are not in business to grow bigger for the sake of size, not to become more diversified, not to make the most or best of anything, not to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve any other status which has no relation to the economic use of capital. Any or all of these may be, from time to time, a means to our objective, but means and ends must never be confused. We are in business solely to improve the inherent value of the common stockholders' equity in the company.<ref>{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA5|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors |last2=Schneider |first2=Marvin |date=2017 |publisher=Springer|isbn=978-3-319-54774-9|language=en|quote=This quotation was drawn from the Indian Head Mills company manual. It was used in an article entitled 'The Chief shows them how at Indian Head'  in the May 1962 edition of ''Fortune Magazine'', (pp. 129–130), and was widely used in training material published by Marakon Associates in the 1980s and 1990s. It was reproduced in McTaggart, J. W., Kontes, P. and Mankins, M., ''The Value Imperative'', Free Press, 1994, p. 8.}}</ref></blockquote>

Economist [[Milton Friedman]] introduced the [[Friedman doctrine]] in a 1970 essay for ''The New York Times'', entitled "A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits".<ref name="Forbes-Pernicious">{{cite news|last1=Denning|first1=Steve|date=27 April 2017|title=The 'Pernicious Nonsense' Of Maximizing Shareholder Value|work=Forbes|url=https://www.forbes.com/sites/stevedenning/2017/04/27/harvard-business-review-the-pernicious-nonsense-of-maximizing-shareholder-value/#2d6fd4f071f0|accessdate=12 July 2019}}</ref> In it, he argued that a company has no [[social responsibility]] to the public or society; its only responsibility is to its [[shareholders]].<ref name="mf1970">{{cite news|last=Friedman|first=Milton|date=September 13, 1970|title=A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits|newspaper=[[The New York Times Magazine]]|url=https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html}}</ref> The Friedman doctrine was amplified after the publication of an influential 1976 business paper by finance professors [[Michael C. Jensen]] and William Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", which provided a quantitative economic rationale for maximizing shareholder value.<ref name="Forbes1">{{cite news|last1=Denning|first1=Steve|date=17 July 2017|title=Making Sense of Shareholder Value: 'The World's Dumbest Idea'|work=Forbes|url=https://www.forbes.com/sites/stevedenning/2017/07/17/making-sense-of-shareholder-value-the-worlds-dumbest-idea/|accessdate=15 July 2019}}</ref>

On August 12, 1981, [[Jack Welch]] made a speech at [[The Pierre]] Hotel in New York City called "Growing Fast in a Slow-Growth Economy", which is often acknowledged as the "dawn of the shareholder-value movement".<ref>{{Cite web |date=July 11, 2006 |title=The New Rules: Tearing up the Jack Welch playbook |url=https://money.cnn.com/magazines/fortune/fortune_archive/2006/07/24/8381625/ |url-status=dead |archive-url=https://web.archive.org/web/20060714202219/https://money.cnn.com/2006/07/10/magazines/fortune/rules.fortune/index.htm |archive-date=July 14, 2006 |access-date=2024-08-18 |website=Fortune at CNN Money}}</ref> Welch did not mention the term "shareholder value", but outlined his beliefs in selling underperforming businesses and cutting costs to increase profits faster than global economic growth.<ref name=":12">{{Cite web |date=March 12, 2009 |title=Welch condemns share price focus |url=https://www.ft.com/content/294ff1f2-0f27-11de-ba10-0000779fd2ac?nclick_check=1 |access-date=2024-08-18 |website=Financial Times |place=New York}}</ref> In the [[United Kingdom]] in 1983, Brian Pitman became [[CEO]] of [[Lloyds Bank]] and sought to clarify the governing objective for the company.<ref name=":1">{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA4|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors|last2=Schneider|first2=Marvin|publisher=Springer|year=2017|isbn=9783319547749|page=4|language=en}}</ref> The following year, he set return on equity as the key measure of financial performance and set a target for every business within the bank to achieve a return that exceeded its cost of equity.<ref>{{Cite news|last=Pitman|first=Brian|date=2003-04-01|title=Leading for Value|work=Harvard Business Review|issue=April 2003|url=https://hbr.org/2003/04/leading-for-value|access-date=2020-08-23|issn=0017-8012}}</ref>

The [[management consulting]] firms Stern Stewart,<ref>{{Cite web|date=2013-01-23|title=GSB Chicago: The Distinguished Alumnus Awards: Joel Stern|url=http://www.chicagobooth.edu/magazine/summer98/Stern.html|access-date=2021-02-25|archive-url=https://web.archive.org/web/20130123052642/http://www.chicagobooth.edu/magazine/summer98/Stern.html|archive-date=2013-01-23}}</ref> [[CRA International|Marakon Associates]],<ref name=":0">{{Cite book|last=Chandra|first=Prasanna|url=https://books.google.com/books?id=yUsGQmGfnGIC&q=marakon&pg=PA817|title=Financial Management|date=2007|publisher=Tata McGraw-Hill Education|isbn=9780070656659|page=817|language=en|quote=Marakon Associates, an international management consulting firm founded in 1978, has done pioneering work in the area of value based management.}}</ref><ref>{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA13|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors|last2=Schneider|first2=Marvin|publisher=Springer|year=2017|isbn=9783319547749|pages=5, 12–16, 24–25|language=en|quote=The shift towards this approach gained momentum with the publication of The Value Imperative by McTaggart, Kontes and Mankins in 1994. ... Peter Kontes (a co-founder of Marakon Associates and one of the originators of MFV) pointed out ... the central problem with EPS growth as standalone financial performance measure is that it can be purchased at any price. ... the same telling point that Marakon partners first made with their clients in the mid-1980s. ... Marakon Associates, the firm that first developed the plan-based approach.}}</ref> and [[L.E.K. Consulting|Alcar]] pioneered value-based management (VBM), also known as managing for value (MFV), in the 1980s based on the academic work of [[Joel Stern]], Dr. Bill Alberts, and Professor [[Alfred Rappaport (economist)|Alfred Rappaport]].<ref>{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA5|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors|last2=Schneider|first2=Marvin|publisher=Springer|year=2017|isbn=9783319547749|page=5|language=en|quote=The main advocates of shareholder wealth creation as a governing objective were value-based management consulting firms like Marakon Associates, Stern Stewart & Co, and Alcar, together with the academics that stood behind their work such as Dr Bill Alberts, Joel Stern and Professor Al Rappaport.}}</ref> In "Creating Shareholder Value: The New Standard for Business Performance", published in 1986, Rappaport  argued that "the ultimate test of corporate strategy, indeed the only reliable measure, is whether it creates economic value for shareholders".<ref name=Rappaport /> Other consulting firms including [[McKinsey & Company|McKinsey]] and [[Boston Consulting Group|BCG]] developed VBM approaches.<ref name=":01">{{Cite book|last=Chandra|first=Prasanna|url=https://books.google.com/books?id=yUsGQmGfnGIC&q=marakon&pg=PA817|title=Financial Management|date=2007|publisher=Tata McGraw-Hill Education|isbn=9780070656659|page=817|language=en}}</ref> Value-based management became prominent during the late 1980s and 1990s.<ref name=":11">{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA5|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors|last2=Schneider|first2=Marvin|publisher=Springer|year=2017|isbn=9783319547749|page=5|language=en}}</ref>

In March 2009, Welch criticized parts of the application of this concept, saying he never meant to suggest boosting a company's share price should be the main goal of executives.<ref name=":12" /> He said managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company.<ref name=":12" /> "On the face of it, shareholder value is the dumbest idea in the world," he said. "Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products."<ref name=":12" /> Welch later elaborated on this, clarifying that "my point is, increasing the value of your company in both the short and long term is an outcome of the implementation of successful strategies."<ref>''Business Week'' [https://web.archive.org/web/20090322143301/http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090316_630496.htm "Jack Welch Elaborates"] (March 16, 2009)</ref>

=== Interpretation ===
During the 1970s, there was an economic crisis caused by [[stagflation]]. The stock market had been flat for nearly 12 years and inflation levels had reached double-digits. The Japanese had taken the top spot as the dominant force in auto and high technology manufacturing, a title historically held by American companies.<ref>{{cite journal|last=Dobbin|first=Frank|author2=Jiwook Jung|title=The Misapplication of Mr. Michael Jensen: How Agency Theory Brought Down the Economy and Why it Might Again|url=http://scholar.harvard.edu/dobbin/files/the_misapplication_of_mr._michael_jensen_dobbin_and_jung.pdf|journal=Sociology of Organizations|volume=30B}}</ref> This, coupled with the economic changes noted by [[Mark Mizruchi]] and Howard Kimeldorf, brought about the question as to how to fix the current model of management. Though there were contending solutions to resolve these problems (e.g.[[Theodore Levitt]]'s focus on customer value creation and [[R. Edward Freeman|R. Edward Feeman's]] stakeholder management framework),<ref>{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA4|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors|last2=Schneider|first2=Marvin|date=2017|publisher=Springer|isbn=978-3-319-54774-9|pages=4–5|language=en}}</ref> the winner was the Agency Theory developed by [[Michael C. Jensen|Jensen]] and Meckling.

Mizruchi and Kimeldorf offer an explanation of the rise in prominence of institutional investors and securities analysts as a function of the changing political economy throughout the late 20th century. The crux of their argument is based upon one main idea. The rise in prominence of institutional investors can be credited to three significant forces, namely organized labor, the state and the banks. The roles of these three forces shifted, or were abdicated, in an effort to keep corporate abuse in check. However, "without the internal discipline provided by the banks and external discipline provided by the state and labor, the corporate world has been left to the professionals who have the ability to manipulate the vital information about corporate performance on which investors depend".<ref>{{cite journal|last=Mizruchi|first=Mark|author2=Howard Kimeldorf |title=The Historical Context of Shareholder Value Capitalism|journal=Political Power and Social Theory|volume=17|url= http://scholar.harvard.edu/files/dobbin/files/mizruchi2005a.pdf}}</ref> This allowed institutional investors and securities analysts from the outside to manipulate information for their own benefit rather than for that of the corporation as a whole.

Though Ashan and Kimeldorf (1990) admit that their analysis of what historically led to the shareholder value model is speculative, their work is well regarded and is built upon the works of some of the premier scholars in the field,{{cn|date=August 2024}} namely Frank Dobbin and Dirk Zorn.

As a result of the political and economic changes of the late 20th century, the balance of power in the economy began to shift. Today, "...power depends on the capacity of one group of business experts to alter the incentives of another, and on the capacity of one group to define the interests of another".<ref name=zornd>{{cite journal|last=Dobbin|first=Frank|author2=Dirk Zorn |title=Corporate Malfeasance and the Myth of Shareholder Value|journal=Political Power and Social Theory|volume=17|url= http://isites.harvard.edu/fs/docs/icb.topic1074562.files/Dobbin_Zorn_CorpMal.pdf}}</ref> As stated earlier, what made the shift to the shareholder value model unique was the ability of those outside the firm to influence the perceived interests of corporate managers and shareholders.

However, Dobbin and Zorn argue that those outside the firm were not operating with malicious intentions. "They conned themselves first and foremost. Takeover specialists convinced themselves that they were ousting inept CEOs. Institutional investors convinced themselves that CEOs should be paid for performance. Analysts convinced themselves that forecasts were a better metric for judging stock price than current profits".<ref name=zornd /> Overall, it was the political and economic landscape of the time that offered the perfect opportunity for professionals outside of firms to gain power and exert their influence in order to drastically change corporate strategy.

The conflation of shareholder value maximization with [[profit maximization]] has been criticized by some economists and legal scholars. For example, [[Oliver Hart (economist)|Oliver Hart]] and [[Luigi Zingales]] argue that corporate directors have a duty to maximize the ''welfare'' of shareholders, broadly construed, not just their financial interests. Many shareholders are [[prosocial]], and maximizing shareholder value may sometimes mean making business decisions that prioritize the social issues that investors care about, even at the expense of profits.<ref name="hbr-serving">{{Cite journal|url=https://hbr.org/2017/10/serving-shareholders-doesnt-mean-putting-profit-above-all-else|last1=Hart|first1=Oliver|author-link=Oliver Hart (economist)|last2=Zingales|first2=Luigi|author-link2=Luigi Zingales|title=Serving Shareholders Doesn't Mean Putting Profit Above All Else|date=2017-10-12|journal=Harvard Business Review|access-date=2024-07-02}}</ref> Likewise, [[Lynn A. Stout]] writes that shareholder value is not a singular objective, because "different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators."<ref name="nytimes-stout">{{cite web|title=Corporations Don't Have to Maximize Profits|last=Stout|first=Lynn A.|author-link=Lynn A. Stout|url=https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits|date=2015-04-16|website=The New York Times|access-date=2024-07-02}}</ref>