Over the last couple of years, Steve Denning has published a series of articles at Forbes why maximizing shareholder value as the guiding principle of executives is a damaging idea. I believe he is right. To make it easier to follow the development of his thought, I have collected the main articles in this post.
It all started in November 2011 when he wrote a post about Roger Martin’s book “Fixing the Game”. The main gist is about the differentiation of the real market (what executives ought to be concerned with) and the expectations market (what they are concerned with after aligning their incentive schemes to shareholder value according to the theory of maximizing shareholder value).
His second post from June 2013 is more fundamental. It looks at what Denning believes is the origin of the maximize shareholder value doctrine: Milton Friedman’s article in the New York Times from September 1970. You can find it here. Friedman claims that
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers.
Now Denning argues that this is simply not true. Legally, an executive serves the corporation. The public, our society, granted corporations the right to be an legal entity (represented by executives), because corporations can better deliver certain products and services. Allowing to make a profit – the principle private corporations operate on – is a mean towards an end: enabling better products and services. And, according to Peter Drucker, the only reason for any corporation is to create a customer.
In his June 2014 post, Denning argues that the world’s business thought leaders, including Jack Welsh, view maximizing shareholder value as wrong. This post is based on a report from the Aspen Institute. The two main thoughts are:
- The whole debate is around the question whether a corporation is about self-interest of the owners (and aligned executives) or about adding value to those for whom work is being done.
- The Maximize Shareholder Value idea creates a trade-off between shareholder value and other stakeholders’ value. This is wrong. If a corporation truly serves its customers while treating its employees fairly, sufficient profit for shareholders will follow. In fact, creating value to customers is the only way to capture value for shareholders.
Some of my personal thoughts about the topic can be found here: