The idea of maximizing shareholder value has caught the imagination of the corporate world. On the face of it, it makes sense. The true owners of a company are its shareholders. Shareholders invest in a company in the expectation of increasing returns over time. As such, they have a stake in the long run success of the organization. By maximizing shareholder returns, a company is simply giving its real owners a return that they expect and should receive. By this reasoning, any other objective would hurt the shareholders and is therefore inefficient.
There is one major problem with this argument. Value is built over time i.e. in the long run. Shareholders typically hold shares for a limited period. So most shareholders have a short term view of the company. This results in a fundamental mismatch in timing horizons. The effect is that shareholders (specially the larger ones) can pressure company management to produce immediate returns in the short run. Unfortunately, such actions often come at the expense of the long run. The result is that over time, lost value and become increasingly vulnerable to external shocks.
This vulnerability is reflected in the decreasing lifespans of companies. The repercussions of a failing company go well beyond its shareholders and employees. A very large number of people are negatively affected. One company's failure can easily set of a chain reaction. For example, suppliers to the company can also start to fail setting off chain reactions of their own. Even competitors can be negatively affected since companies within an industry have very similar supply chains. Any weakening of one supply chain can reflect onto others.
We also have to keep in mind that companies are always embedded in communities. They do not exist in a vacuum. Much of the salaries that are given to employees are spent in the local community. If these jobs vanish, the external community falls onto hard times with its attendant social problems. So focussing on shareholder value alone is doing a great disservice not just to the organization but also to its supply chain and to the larger communities in which the organization operates in.
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