'Maximizing Shareholder Value': A Theory Run Amok

Abstract

The doctrine of Maximizing Shareholder Value (MSV) has been largely viewed as a definitive tool for measuring the performance of the executives of public corporations. Countless business students have been taught that, the sole goal of the firm is MSV, despite the fact that, Jack Welch called this goal the “dumbest idea in the world”. This paper reviews the literature and examines the evolution of this corporate mantra and exposes its potentially disastrous effects on shareholders, employees, customers and the nation. It concludes that, the construct of MSV is a decoy for pursuing higher share price and contends that, corporate profit-making and corporate social responsibility are not incompatible goals. Thus, it proposes that corporations should stop promoting this doctrine as a sacred objective of management and that business schools should discontinue teaching it as the optimum measure of management performance.

Keywords: Maximizing Shareholder Value, Maximizing Profit, Business Ethics, Corporate Social Responsibility

JEL Classification: A22, A23, G18, G21, G28, M14