From Managers to Markets: Valuation and Shareholder Wealth Maximization

Abstract

During the managerialist period, managers of large public companies were not pressured to maximize profits and had more discretion to consider the interests of stakeholders. According to the conventional story, managers began maximizing shareholder wealth as ideology changed to favor shareholders. This Article argues that a more significant cause of the decline of managerialism was a fundamental shift in the way that investors valued companies.

As public companies became larger and more complex, professional managers developed budgets and forecasts that could be used to allocate resources within internal capital markets. External capital markets began relying on such information to generate predictions of future revenue and earnings. As investors increasingly valued public companies based on such projections, it became important for managers to consistently meet market expectations. Rather than ideology, public companies generally prioritize shareholder wealth maximization because they face pressure to validate prior predictions of their financial performance.

Understanding the role of valuation in shaping the incentives of the public corporation provides a new lens for understanding corporate purpose. If the transition to shareholder wealth maximization was driven by changes in valuation, it is possible that shifts in valuation methods could result in a new managerialism where managers of some companies can make meaningful commitments to consider stakeholder interests.

Keywords: Corporate Purpose, Corporate Governance, Shareholder Wealth Maximization, Managerialism, Corporate Law, Securities Regulation