What We Cover
The question, "Should managers act to maximize shareholder value?" is central to my course and is at the intersection of IBS and corporate finance. The answer I promote is yes. My conviction that maximizing shareholder value is the right corporate goal comes from the basic assumption in economics of profit maximization. However, I stress that profits are rarely maximized when customers, employees and society as a whole are unhappy with the company. Thus, I emphasize shareholder value maximization subject to the constraints of laws and ethics — and the idea that such practices as safer products, good employee benefits or protecting the environment may very well maximize shareholder value.
Why It Matters
Managers must ask themselves everyday: What is my goal? Those managers who choose not to maximize shareholder value will not be around very long. A free and competitive business environment creates jobs and opportunities, making us all better off. Those companies who cannot compete are replaced. Therefore, creating shareholder value is the way for managers, their companies and society to prosper.
Shareholder value comes from the present value of the future. Those managers who cheat or take shortcuts — even if they have yet to be discovered by the market — are destroying shareholder value, because they will eventually be caught.
Managers must recognize that maximizing shareholder value does not mean doing the wrong thing. In fact, such actions as corporate charitable giving or recalling a potentially defective product may very well be in the shareholders’ best interest. Maximizing shareholder value can also mean maximizing societal value, simultaneously doing well by the company and doing the right thing.
What Students Learn
Students learn what it means to maximize shareholder value. They drop the notion of a fundamentally evil corporation that is almost incompatible with society as a whole and replace it with the idea that companies are run by people who are very much like them. Inside a corporation making the world better is not an idealistic notion but rather something to be achieved by maximizing shareholder value. Once resources are maximized, individuals and society as a whole have the luxury of deciding how to use those resources.