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Thursday, March 23, 2017

Strategic CSR - Shareholder value

The article in the url below offers a defense of shareholder value as the orienting purpose of the firm. It is not, the author argues, that shareholder value is wrong, but it is the way it has been implemented that is at fault:
"The culprit is not shareholder value but rather corporate executives, investment managers and the business press who incorrectly believe that the governing objective of shareholder value is to boost a company's near-term stock price by meeting the market's quarterly earnings expectations. This misguided thinking has hijacked the good name of 'shareholder value'. Consequently, companies commonly 'talk' shareholder value but 'walk' quarterly earnings in their everyday operations."
Instead, the author articulates what shareholder value should look like:
"Let us be clear what managing for shareholder value really means. It means focusing on cash flow, not earnings. It means managing for the long-term, not the short-term. And it means that managers must take risk into account in their capital allocation decisions. Properly implemented, there is no better cure for short-termism than managing for shareholder value with its long-term orientation."
"Critics also contend that shareholder value encourages the exploitation of other stakeholders. Quite the opposite is true. Shareholder value companies recognise that their long-term success depends on a solid relationship with each of their stakeholders. Customers expect high-quality products and services at competitive prices. … Likewise, employees seek competitive remuneration and a satisfying work environment. … Companies risk their viability if any one stakeholder gets too much or too little for an extended period."
All of this is fine, I think, and the broad value creation process he is describing actually sounds a lot like "strategic CSR." Over the medium to long term, I agree that shareholder value can only be achieved through the creation of value for all the firm's stakeholders. The problem is that shareholder value is clearly not being implemented in the way the author advocates, which should tell him something about his underlying ideas. Whether it is simply because executive compensation plans have hijacked the focus of firms and distorted their focus on share price (which is what increases the value of stock options) or whether it is simply human nature that prevents the 'pure' implementation of shareholder value; instead of simply restating the idealistic tenets of your theory, why not just change the theory to better account for the imperfections that are clearly being identified? If shareholder value is really supposed to represent value creation for all stakeholders, then why not call it what it is – stakeholder value?
Take care
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What managers misunderstand about shareholder value
By Alfred Rappaport
August 15, 2016
Financial Times
Late Edition – Final