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1 May 2013 CFA Institute Journal Review

Taking the Long View: The Pursuit of Shareholder Value Is Attracting Criticism—Not All of It Foolish (Digest Summary)

  1. Stuart Fujiyama, CFA

The management principle of shareholder value maximization has its drawbacks, but it also has some benefits. The author reviews the principle and suggests that there may be more effective ways to put it into practice.

What’s Inside?

At the November 2012 Global Peter Drucker Forum, several high-profile attendees—including at least one chief executive—expressed their misgivings regarding the management principle of shareholder value maximization. The author acknowledges that these critics may have a point but also cautions against discarding the principle altogether.

How Is This Article Useful to Practitioners?

The author discusses the unfortunate side effects produced by the “cult” of shareholder value: (1) share price manipulation by managers with equity-based compensation, (2) firms’ failure to invest adequately in research and innovation, and (3) short-termism within the investment community. Even in an environment that has placed an emphasis on shareholder value maximization, most managers who manipulate results are caught, companies (e.g., Amazon) continue to invest their profits for the long term, and investors continue to eagerly fund those companies as well as companies showing limited short-term profitability.

The author also indicates that short-term share performance can sometimes provide vital early warning signals (e.g., Nokia), and regular company performance checks can often provide some insight regarding longer-term health.

In the author’s opinion, critics have failed to produce a viable alternative to the clear external measure offered by a share price. Customer satisfaction, manager judgment, and the “stakeholder” model all fall short. Rather than discarding shareholder value maximization, the author suggests various ways for companies to improve its implementation. The suggestions include refraining from providing earnings guidance and placing time restrictions on executives’ share option exercises and share sales.

Abstractor’s Viewpoint

The author astutely points out that the principle of shareholder value maximization is not inherently inconsistent with taking a long-term view of corporate performance. When evaluating a company that has adopted the shareholder value principle, investment practitioners should scrutinize the mechanisms (e.g., executive compensation arrangements) through which the firm has chosen to implement the principle.

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