In the widely held corporation, the split between ownership and control is often virtually complete. Should those in control of the corporation share that traditional financial objective of those who own it—the maximization of share value?
Chester Barnard has argued that a corporation owes its existence to the consent of a number of factions. When a customer ceases to buy or the worker refuses to work, for example, the result is usually a crisis for management. Edward Banfield calls the ability of the executive to elicit cooperation “power,” or “influence,” and views executive action in terms of trading in power. Banfield’s remarks about management’s exercise of power apply a fortiori to financial power. The key to management’s power to spend is the willingness of its creditors to continue lending. Management has unused financial power whenever the corporation’s creditors consider that existing loans have not exhausted their security.
Since, in a rational market, the aggregate value of the corporate common stock equals the economic value of the corporation less the outstanding claims of creditors, the untapped borrowing power of the corporation—hence management’s power to spend—is measured by the aggregate market value of the common stock. It is doubtful whether other factions with a financial stake in the corporation will be best served by a policy of merely “satisficing” with respect to the shareholder. Those who regard share value maximization as irrelevant or immoral are forgetting that the stockholder is not merely the beneficiary of the corporation’s financial success, but also the referee who determines management’s financial power.