The Governing Corporate Objective
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The Governing Corporate Objective |
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In "The Governing Corporate Objective: Shareholders versus Stakeholders", James M. McTaggart and Peter W. Kontes of Marakon Associates come to the conclusion that: the governing objective for all publicly traded companies should be to maximize the value of the company for shareholders.
They reach their
conclusion in a well-written, 26 page article.
Achieving this corporate objective not only serves the interests of the company's owners but also serves the economic interests of all stakeholders over time. While this may call for some stakeholders to face economic harm in some situations, such as when a restructuring leads unavoidably to layoffs, over any reasonably long-time horizon, the economic interests of all stakeholders will be maximized only from decisions made in the interests of the shareholders.
In short: Maximizing
shareholder value is not merely the best way but is the only way to
maximize the economic interests of all stakeholders over time.
Among the many benefits conferred by adopting value maximization as the governing corporate objective, two stand out in their minds as particularly important:
1. The first
benefit of this corporate objective has to do
with decision making. Business is a game of choices. Hundreds of
decisions are made every day in large organizations that involve complex
tradeoffs between current earnings and long-term payoffs or between
maintaining profit margins and maintaining market share. All large companies
need a clear objective that can be translated into a decision criterion.
Comparing the value impact of various strategic or tactical alternatives and
choosing the option that creates the most value for shareholders is both
clear and consistent and can be made operational throughout a large, complex
company. All other criteria, such as global dominance,
earnings growth,
quality leadership and Return on Investment, will inevitably lead to either overinvestment,
profitless growth, or harmful disinvestment.
2. The second benefit of this corporate objective is the positive feedback effect that occurs when a company succeeds in making value creation a core competency. Accomplishing this typically requires new and better information and strategic analysis, coupled with changes in organizational structure and management processes, which over time produce an institutional advantage in both learning and decision making. The advantage emerges in many forms, such as a common vocabulary, consensus about goals and performance measures, higher-quality strategic plans, better and faster execution, and economically driven capital allocation. As the institutional advantage grows, the company's human and financial resources also expand, as do the strategic advantages within its business units.
This enables even greater investment in securing competitive advantage, which ultimately produces both higher cash flow for shareholders as well as the highest level of economic benefits for all stakeholders.
The Governing Corporate Objective: Shareholders versus Stakeholders makes a very good plea for shareholders interests getting precedence over other constituents, based on the presumptions of capitalism and economic value being most important.
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