Shareholder Value and the Financial Crisis

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To what extent can the economic and financial crisis starting in 2007-8 be attributed to the flaws of the shareholder value principle of corporate governance?

Corporate governance is a critical concept in the commercial world of today with the idea originating initially from the U.S. The importance of corporate governance is made more considerable due to the increasing influence and consequences companies have on the daily lives of individuals and making up a large proportion of economic activity. Corporate governance can be shortly described as the whole framework within which companies operate. It is most likely the case that the shareholder value principle was not the only part of corporate governance which contributed to the …show more content…

So instead of managers of top corporations constantly looking to internally and externally expand they would now put more importance into decreasing the size of the company and the total number of those they employ, this in turn would result in a higher dividend to be shared among shareholders as there is one or more less wage to pay. This process started occurring in 1980 when most corporations in the U.S had adopted this new model, a consequence of this was the vast amount of jobs which had previously offered stable employment and decent pay to the economy which were now gone due to the reorganisation of the labour structures of these corporations which led to them cutting out many positions. The result for the economy may have been poor however for the corporations, after downsizing they could refocus the extra revenue towards improving the company 's stock market performance. It should be noted that the model of retain and reinvest was beneficial to multiple stakeholders, it allowed workers to gradually be paid higher wages as the company grew and solidified job security, suppliers and distributors would also gain resulting in a higher number of orders and overall lower costs charged to the company which means that consumers in the relevant market could also benefit from

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