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.
[6] 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.
[7] 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".
[8] 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.
[3] 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.
"[9] 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.
Though there were contending solutions to resolve these problems (e.g.Theodore Levitt's focus on customer value creation and R. Edward Feeman's stakeholder management framework),[19] the winner was the Agency Theory developed by 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.
[21] 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.
For example, 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.
[24] Agency problems arise in situations where there is a division of labor, a physical or temporal disconnect separating the two parties, or when the principal hires an agent for specialized expertise.
[30] Lastly, the shareholder value theory seeks to reform the governance of publicly owned firms in order to decrease the principal-agent information gap.
[16][34][35][36] Under this principle, senior executives should set performance targets in terms of delivering shareholder returns (stock price and dividends payments) and managing to achieve them.
Shareholder value coupled with short-termism has also been criticized as lowering the overall rate of economic growth due to reduced business capital accumulation.
Marc Benioff, CEO of Salesforce, said that "[...] the obsession with maximizing profits for shareholders has brought us: terrible economic, racial and health inequalities; the catastrophe of climate change."
The reduced benefits are attributed to the trend of the corporate world's reduction in investing in non-shareholder constituents because it is not an immediate money producer—the main goal of SV theory.
Furthermore, mass layoffs have affected companies in the home headquarters with many jobs either going overseas or being hired out to contractors from similar positions to those that were laid off for lower benefits and protections as critics and experts have noted.
[47] According to economic experts and critics alike, the downsize-and-distribute model invoked by SV theory extracts value and then further ingrains employee instability and greater income inequality.
[50] This post-war outlook is contrasted by the attitude adopted by management of modern-day corporations, which according to former WebTV CEO Randy Komisar see themselves not as institutional stewards but rather as investors themselves.
[51] This status as a shareholder comes with an assumed legal claim of all profits after contractual obligations have been fulfilled and that they have the ability to decide the structure of the corporation on the board level however they want.
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.
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.
Taking on large risk attracts investors and increases potential value gain, but puts the company in danger of bankruptcy and collapse.
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.
[45] 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.
[47] 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.
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 agreements.
The intrinsic or extrinsic worth of a business measured by a combination of financial success, usefulness to society, and satisfaction of employees, the priorities determined by the makeup of the individuals and entities that together own the shares and direct the company.
[59] Academic Pete Thomas outlines one response which sees the idea of stakeholder management as "a dangerous and illegitimate challenge to shareholder interests".
[59] Despite its high potential social benefit, this concept is difficult to implement in practice because of the difficulty of determining equivalent measures for usefulness to society and satisfaction of employees.