The guiding principle of business value creation is a refreshingly simple construct: companies that grow and earn a return on capital that exceeds their cost of capital create value. The financial crisis of 2007–2008 and the Great Recession that followed are only the most recent reminders that when managers, boards of directors, and investors forget this guiding principle, the consequences are disastrous—so much so, in fact, that some economists now call into question the very foundations of shareholder-oriented capitalism. Confidence in business has tumbled.
Politicians and commentators are pushing for
more regulation and fundamental changes in corporate governance. Academics and
even some business leaders have called for companies to change their focus from
increasing shareholder value to a broader focus on all stakeholders, including
customers, employees, suppliers, and local communities.
No question, the complexity of managing the
interests of myriad owners and stakeholders in a modern corporation demands
that any reform discussion begin with a large dose of humility and tolerance
for ambiguity in defining the purpose of business.
But, I believe the current debate has muddied a
fundamental truth: creating shareholder value is not the same as maximizing
short-term profits—and companies that confuse the two often put both
shareholder value and stakeholder interests at risk. Indeed, a system focused
on creating shareholder value from business isn’t the problem; short - termism
is. Great managers don’t skimp on safety, don’t make value-destroying
investments just because their peers are doing it, and don’t use accounting or
financial gimmicks to boost short-term profits, because ultimately such moves
undermine intrinsic value.
What’s needed at this time of reflection on the
virtues and vices of capitalism is a clearer definition of shareholder value
creation that can guide managers and board directors, rather than blurring
their focus with a vague stakeholder agenda. I do believe that companies are
better able to deliver long-term value to shareholders when they consider
stakeholder concerns; the key is for managers to examine those concerns
systematically for opportunities to do both.
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