Why has corporate governance placed so much importance on the value of shareholders? Is it that shareholders contribute the most to the corporation? Or is it that corporate stability is based on making the shareholders happy? Steven Pearlstein addresses these issues in his article How the cult of shareholder value wrecked American business.
Pearlstein analyzes the evolution of corporate governance and notes how the earliest corporations aimed to provide public support, such as building canals and roads. It wasn’t until the late 1970s and into the early 1980s that globalization and deregulation kicked in, spiking corporate profits and increased the amount of money that corporations could offer their shareholders. As a result, corporations who failed to become engulfed in the web of globalization became vulnerable to corporate takeovers. The threat of possible takeovers “imbued corporate executives and directors with a new focus on profits and share prices.”
Thus, the new corporate model was built on the notion of boosting “short-term profits and share prices” to be both competitive in the global corporate scheme and to prevent unwanted takeovers. Furthermore, this new ideology has now become institutionalized and enforced by educating business students with the mentality that short-term profits and maximizing shareholder profits contribute to a successful corporate structure.
“The real irony surrounding the focus on maximizing shareholder value is that it hasn’t, in fact, done much for shareholders.”
As corporate executives have become ingrained with this notion of maximizing shareholder profits over the past thirty years, Pearlstein notes that it has in fact harmed corporations more than it has helped them. Focusing on shareholders can cause a corporate identity crisis—trying to please the shareholders often means sacrificing the integrity and the basis of the corporation. Pearlstein points out that Steve Jobs and Apple, created more wealth for shareholders “than any corporate executive in history by putting shareholders near the bottom of his priorities.” By focusing the corporation’s energy on producing the best quality products and services, the shareholders undeniably will reap the rewards in the long run. A successful corporation means successful shareholders.
Many businesses get wrapped up in the notion that short-term success will ultimately lead to long-term success, but as we have seen, this is most often not the case. Additionally, corporate governance does not only mean focusing on the executives and ensuring that corporate compliance exists to prevent issues like price-fixing and insider trading. Corporate governance incorporates notions of customer service, and employee benefits—tangible ideas that must be addressed for long-term profits to the corporation as a whole.
See Steven Pearlstein, How the Cult of Shareholder Value Wrecked American Business, The Washington Post (Sep. 9, 2013), available at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/09/how-the-cult-of-shareholder-value-wrecked-american-busines.