Should the Modern Corporation Maximize Shareholder Value?

Sanjai Bhagat and R. Glenn Hubbard, "Should the modern corporation maximize shareholder value?" AEI Economic Perspectives, September 2020, https://www.aei.org/research-products/report/should-the-modern-corporation-maximize-shareholder-value/

14 Pages Posted: 13 Mar 2020 Last revised: 22 Sep 2020

See all articles by Sanjai Bhagat

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

R. Glenn Hubbard

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: September 10, 2020

Abstract

Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder value remains controversial. We argue that under certain broad assumptions, the admonition remains a good place to start. To strengthen the prospects for success of long-term shareholder value maximization, we suggest steps to align shareholder wealth maximization with stakeholder interests. First, antitrust public policies should be vigorously enforced to maintain and enhance competition in product markets and labor markets. Second, management and board compensation should be reformed to focus on creating and sustaining long-term shareholder value. Finally, and more importantly, for many of society’s serious challenges, corporations do not represent the appropriate level of action. Climate change, for example, poses significant challenges for societies and businesses. But significant changes to combat climate change require public policy changes in the United States and abroad. Turning more to corporations because the political process seems broken will not do.

Keywords: ESG, CSR, Stakeholder, stakeholders, corporate social responsibility, corporate governance, shareholder value maximization

JEL Classification: G00, G02, G3, D21, D23, K22

Suggested Citation

Bhagat, Sanjai and Hubbard, Robert Glenn, Should the Modern Corporation Maximize Shareholder Value? (September 10, 2020). Sanjai Bhagat and R. Glenn Hubbard, "Should the modern corporation maximize shareholder value?" AEI Economic Perspectives, September 2020, https://www.aei.org/research-products/report/should-the-modern-corporation-maximize-shareholder-value/ , Available at SSRN: https://ssrn.com/abstract=3548293 or http://dx.doi.org/10.2139/ssrn.3548293

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Robert Glenn Hubbard

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.gsb.columbia.edu/faculty/ghubbard

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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