The “shareholder value” movement: Is it dead?

In a recent interview with the Financial Times for its series on capitalism and its future Jack Welch , the former chairman and CEO of General Electric, and the man considered to be the chief proponent of the “shareholder value” movement, said the obsession with short-term profits and share price gains that has dominated the corporate world for over 20 years was “a dumb idea”.

“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy…your main constituencies are your employees, your customers and your products.”

In his column for today’s edition of The Observer, management editor Simon Caulkin  poses the question of just how seriously this apparent volte-face is likely to be taken by those who should be taking it seriously.

As Welch rightly notes, share prices are supported by the value created in product markets by the interrelationship of employees, customers and suppliers. So why should alignment run upwards from directors to shareholders?

“My guess,” writes Gary Hamel in The Future of Management “is that … shareholders would have been better served if their chairman could have bragged about being aligned with employees and customers. It seems to me that a CEO’s first accountability should be to those who have the greatest power to create or destroy shareholder value.”

In any case, the entire notion of the shareholder has to be rethought. In an age when a listed company’s share register suffers 90% churn each year, the very concept of “the shareholder” dissolves, corporate governance expert Professor Bob Garratt told a recent meeting of the Human Capital Forum. Calling for a “cultural and behavioural transformation”, Garratt declared that the first duty of directors was not to shareholders, but to the company itself. Organisations have to move from agency theory to stewardship theory, he believes – restoring the original concept of the board’s role from the 17th century.

Earlier in his piece, Caulkin has noted even the revered Financial Times, which seemed on the surface to approve of what Welch had said, was not suggesting that that any drastic changes needed to be made in the way companies did their business.

However, while saluting Welch’s conversion, a subsequent FT editorial on “Shareholder value re-evaluated” shows how little the wheels have actually turned. Surviving the “re-evaluation” are all the structures of existing governance: companies as entities run for the benefit of shareholder-owners (even if, as Welch implies, the means are indirect, rather than direct, managing of the share price); alignment of directors and shareholders; pay to reflect performance. In short, once the crisis is over, with a tweak or two here and there, it’s safely back to business as before.


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