The Shareholder Value Myth : How Putting Shareholders First Harms Investors, Corporations, And The Public Essay

The idea of shareholder primacy dominates the business world today. An article from Harvard's school of business stated that shareholder primacy is so prevalent in the business to the mistaken fact that many individuals feel as though shareholders run the company from behind the scenes.This belief drives higher ups to run public firms with the great focus on raising the stock price. In the hope of maximizing shareholder value, this executive will sell key assets, fire loyal employees, and pressure the workforce that remains. Many individual directors and executives, Such as Lynn Stout, feel uneasy about these kinds of methods, stating that "a single-minded focus on share price may not serve the interests of society, the company, or shareholders themselves." The goal of this essay shows how and why Lynn Stout among other executives of corporate entities disagree with the idea of shareholder primacy.

Dunlap focused largely and explicitly on shareholder primacy and practically lacking consideration for all other stakeholders of the firm, which reflected in his “take-no-prisoners” (case p.1) management style during his tenure as Sunbeam’s CEO. Dunlap’s goals were limited to just maximizing stockholders’ wealth by adopting fast turnaround tactics and all other salient characteristics of the very existence of corporation such as product innovation, product/service quality, employee and customer satisfaction and corporate ethics were completely neglected. Mr. Dunlap’s adaptation of shareholder-theory was based on historic view of

American corporations and American society have been under the impression that shareholder primacy— corporate managers should be focused on the shareholder’s interest to maximize shareholder value— is the way to run a corporation, however, United States corporate law does not require directors of public corporations to maximize shareholders value; it is just one possible objective. American law protects the directors’ authority to sacrifice shareholders value in the quest of other corporate goals. Directors and executives of large corporations have the right to do “what is best for the corporation in the long run” (Stout page 46) they are free to run the corporation as they please and maximizing shareholder value is not the main concern for the corporation. Stout also argues that shareholders are neither owners, nor principals, nor residual claimants of the corporation. “Corporations are independent entities that own themselves” (Stout page 52) shareholders do not own the corporation they own shares of stock, which is a contract that provides restricted rights to the corporation. The belief that shareholders are the only residual claimants is a false statement because the corporation itself is the only residual claimant and the board of directors elects what to do with the left over residual funds. Finally, Stout argues that the lack of empirical evidence

Gordon, J Lintner and J.T.S Porterfield. They believe the primary goal of a profit seeking company is to maximise shareholder wealth and in doing so believe that dividend policy has an influential role in affecting shareholders wealth. They believe that firms firstly decide upon a dividend, then secondly allocate remaining profits to internal investments and finally seek external financing to make up any remaining investment requirements. Graham and Dodd reiterate this point as they argued that a dollar of dividends has, on average, four times the impact on stock prices as a dollar of retained earnings.2

Eugene F. Brigham, Michael C. Ehrhardt. Financial Management. Theory and Practice / South-Western Thomson th Learning, 10 edition, 2010, p. 899 9 Questions of Value: Master the latest developments in value-based management, investment and regulation. Edited by Andrew Black / Prentice Hall (Financial Times), 2009, p. 289 10 In this case ROIC < WACC, that destroys value 11 Vividly described in Michael Lewis “Liar’s Poker” 12 Kenneth R. Ferris, Barbara S. Pecherot Petitt. Valuation: Avoiding the Winner’s Curse / Prentice Hall (Financial Times), 2005, p. 222 13 nd David J. Collins, Cynthia A. Montgomery. Corporate Strategy: A Resource-Based Approach / McGraw-Hill, 2 edition, 2007, p. 137 14 Richard A. Brealey, Stewart C. Myers, ibid, p. 867 15 Eugene

Today 's business world shows a huge diversification in the shareholders of one company. In most countries, each investor only holds a

Shareholder wealth is represented by the market price of a firm’s common stock. It is measured by the market value of the shareholders’ common stock holdings

1. If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Co in May 1972?

6. Indicative Reading List Core texts: • Brealey, R. Myers, S and Allen, F. (2008) Principles of Corporate Finance, (9th edn) McGraw-Hill: New York • Neale, B. & Pike, R. (2009) Corporate Finance and Investment. Decisions and Strategie,s( 6th Edition). Prentice Hall

Milton Friedman in his 1970 article titled” The social responsibility of business is to increase its profits”, argues that the main purpose of the corporation is to maximize profit for shareholders (or stockholders) as long as it is in the confines of the law. He is of the view that a business is not an individual and has no moral responsibility, therefore only the employees have a moral responsibility for the actions of the firm. The managers are viewed as agents of stockholders and have a moral obligation to manage the firm in the interest of the stockholders. It is seen as illegitimate if the shareholder money is used to contribute to charity, however if public financing is needed it is the government’s responsibly to raise such through taxation

“Building profitable businesses creates value. The board of directors and management’s primary responsibility is to increase company value and shareholder wealth. Shareholders invest in businesses seeking a significant return on their investment. They expect the reward to be appropriate for the business and financial risks of an unsure future. “Article: The Key to Creating Shareholder Value Knowledge Begins with Simple "Cigar Box" Accounting”)[2.]. The strategies and approaches employed by the company will help determine if the business has created value for the shareholder. In the case of Cadbury Schweppes, where the significant aim was to increase shareholder value, their primary aim is to focus on growth markets, improving brands and innovation in order to gain their objectives. (Source- annual report, 2000 Cadbury Schweppes)

shareholder wealth maximization paradigm and the stakeholder theory. It aims to provide a fair and

Shareholders ' wealth is basically the wealth shareholders get to accumulate from their ownership of shares in a firm. Shareholders wealth increases by any possible amount. This means that either increase in share prices that bring about capital gain or increase in dividend payments. Significant this fact, a firm can maximize shareholders wealth through this way. However, an optimal point needs to be struck as a firm needs to balance the risk and return involved. Shareholders ' wealth is also known as shareholders value.

It was concluded that: “shareholders are the only stakeholders of a corporation who, in seeking to maximise their own claim, simultaneously maximise everyone’s claim.". It was said that: to generate maximum value for shareholders-is in principle the best means also of securing overall prosperity and welfare." It is not difficult to understand that how shareholder primacy works for increasing social wealth. For example, if shareholders’ interests increase, the better payment and safer workplace will be provided to employees a good environment protection will be concerned when making business decision; and the customers will be given a lower costs and better quality products. Taking all the matters as a whole, the social wealth will be enhanced

“Corporate finance theory, teaching and the typically recommended practice at least in the US are all built on the premise that the primary goal of a corporation should be the maximization of shareholder value.”