The Myth of the “Shareholder Value Myth”
Posted by Marc Hodak on June 20, 2013 under Governance | 
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Lynn Stout published the The Shareholder Value Myth late last year, and it has created some stir. In the book, she blames meltdowns like Enron and disasters like BP’s Macondo on “shareholder value thinking,” and suggests that managers and directors loosen up on this obsession. I’m always surprised when people use Enron and BP–companies that miserably failed their shareholders–as examples of shareholder value thinking run amok. But Stout is a respected legal scholar, and her arguments deserve a more thorough appraisal.
Stout’s disparagement of “shareholder value” begins with the disconnect between a corporate board’s legal requirement versus its economic imperative. Contrary to popular belief, boards have no legal obligation to maximize shareholder value. The evolution of fiduciary duties plus the business judgment rule sets the legal bar far below “maximization,” which leaves directors plenty of leeway to take risks without fear of being dragged into court every time an investment fails. Stout believes, and I agree, that this legal order has served shareholders and our overall economy very well. But the reason this low legal bar works is because the board’s economic imperative is far less forgiving.
If you aren’t aiming to maximize returns to your shareholders, then you’re doing something else. There is nothing wrong with pursuing other social goals that coincide with shareholder value, but if your “success” comes at the expense of your shareholders, you will lose them. The competition for capital is fierce. It crosses industry lines and national borders. It never ebbs or wanes. There is little room for slacking off in the pursuit of shareholder value.
Stout does not so much disagree with this characterization of the shareholder value imperative as she defines it away. She asserts that “shareholder value thinking” leads to short-term behaviors and illusory results that don’t actually lead to long-term value creation. But what Stout is describing is not a goal problem; it’s a knowledge problem. The market cannot distinguish what managers claim to be a focus on shareholder value versus the reality of their behavior. If it could make that distinction, it would immediately discount sub-optimal decisions and actions into the stock price. In other words, Stout rejects management claims that their behavior actually enhances shareholder value, yet accepts their labeling of their bad behavior as “shareholder value thinking.”
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