Shareholder Value: A Myth?

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By Virgil Scudder

How many times do we hear it said on quarterly shareholder earnings calls or investor days?  The company did this, or that, to “enhance shareholder value.”  Not infrequently the action referred to is a take-over or merger.  But, since more than half of corporate mergers fail, it’s hard to see how shareholders, especially those in for the long haul, will see their value enhanced.  The share price may temporarily go up, making top management look good on an earnings call and increase the leader’s personal compensation, but at a cost to the company’s long-term well-being.

Lynn Stout, distinguished professor of corporate and business law at Cornell University, says running a company strictly to enhance shareholder value as measured by share price is harmful to “shareholders, employees, consumers, and our communities.”

She told IR Digest last year that, “American companies are disappearing.  There are 50% fewer publicly held companies than 15 years ago.  The life expectancy of large corporations has declined from 75 years in the 1920s to 15 years today and falling.  ROI, by many measures, has seriously declined over the past 20 years.”

So, she concludes, “This says to me that embracing shareholder value has not led to better results for shareholders as a class over time.”

Stout contends that “shareholder value thinking leads management teams to focus primarily on quarterly results and discourages the type of research and development and capital investments necessary for long-term corporate health.”

The Cornell expert sees corporate compensation as a key problem, saying: “As long as 80% of executive comp is tied to stock price, it will be hard to fix.  We’ve basically aligned management incentives with activists’ interests.”

So, the bottom line for journalists and shareholders is this: the next time a corporate leader says an action will enhance shareholder value, challenge both the facts and the premise.  The key question is this: “How does what you’re doing enhance the long-term success of the company?”

The answer may tell you whether management is thinking long term or short term.