Editing Shareholder value (section)

=== 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>