Maximizing shareholder value and other silly ideas

This is just one of the many studies available that show that how we view or frame something can have a big impact on what we do (and how successful we are in our actions).  It is for this reason that it makes a big difference how we frame one of the key issues facing the modern corporation, namely: “what is the goal or purpose of the modern corporation?”

One view, proposed by people in Finance is that the purpose of the modern corporation is to maximize shareholder value.  Another view, coming primarily from people in Strategy is that the purpose of business is not to maximize shareholder value.  Instead, it is to create great products and services that satisfy customers’ needs and in the process improve the state of our world.  The argument is that if we focus our attention on creating superb products and services that the world needs, then as a by-product of that, we will also maximize profits.  Thus, maximizing profits is not an end in itself—it is a by-product of something else. Look, for example, at Steve Jobs. He is the one CEO that created more value for shareholders than anybody else.  Yet, he never once said that his goal is to maximize shareholder value.  No.  What he aimed to achieve was radical new products that made our life better.  As a result, we bought his products.  As a result, he made a lot of money.

People in Finance usually respond to such arguments by suggesting that while they accept the need to produce superb products and services, this should not be the focus of the corporation.  Instead, it should be a by-product of something else.  Specifically, they propose that the modern corporation should focus on maximizing shareholder value and the creation of superb products and services would follow this focus.   Therefore, the essence of the disagreement boils down to this—do we focus on producing superb products and services and as a by-product of this maximize shareholder value? OR do we focus on maximizing shareholder value and as a by-product of this produce superb products and services?

The difference may appear academic but as we saw above, how you frame something has a big impact on what people do.  Therefore, the question we need to ask ourselves is the following: “If we frame the goal of business as maximizing shareholder value, can we see managers doing things that may maximize shareholder value which are at the same time unethical and/or illegal?” (such as selling unnecessary products—say financial derivatives—to uninformed customers?) The answer to this is yes!  By contrast, “if we frame the goal of business as producing superb products and services that make the world a better place, can we see managers doing illegal and unethical things in an effort to achieve this?”  It is hard to see how!

And that is why it is important that we win the academic debate on what the Purpose of business really is.  It is not to maximize shareholder but to make the world a better place for everybody (through its products and services).  That has always been the purpose of business but somehow we lost sight of it along the way.  If we put this goal at the forefront of business, then we will succeed in focusing the attention of millions on what matters most—improving the state of our world for everybody.