In 2017 may-jun HBR, an old topic was raised about whether maximizing shareholder'value is the company's ultimate objective. Shareholder value maximization is derived from agency theorey dated back to 1970's by Milton Friedman and further developed by Michel Jensen and William Meckling. The theory basically says shareholder own the company and are principals, managers are the agent of the principals and are obliged to conduct the corporation's business in accordance with shareholder's desires.
The HBR article challenges the validity of the theorey and thereof the duty of the management is to maximize shareholder value by the following reasons:
1. Leglly shareholder does not have the right of the corporation, they own shares and get benefit from corporation activities, but they don't have "dominion" over a piece of property. According to corporate law- the right to manage the business and affairs of the corporation is vested in a board of directors elected by the shareholders; the board delegate that ajthorith to corporate managers. Within this legal framework, managers and directors are fiduciaries rather than agent. Agent are obliged to carry out the wishes of a princioal, whereas a fiduciary is to exercise independent judgment on behalf of a beneficiary.
2. Today, 70% of shares are held by institution investors such as mutual funds, pension funds and insurance company etc. And another noticeable trend is the average stock holding period gets shorter and shorter. It further reduce the shareholder's "ownership" to the corporation.
3.the theory is rife with moral hazard. Shareholder bears no legal responsibility for corporation debts and acts. However, under the doctrine of maximizing shareholder value, shareholder can influence major corporate decisions.
HBR article wants to argue that ging for the shareholder value will make damages to the company's sustainable growth, the intervention behaviors like curbing the long term investment, reconstitute a company's board and change its management will crop up in order to boost the short term stock price.
From my point of view, the HBR article is right about sometimes shareholder holds short term economic objective might not be consisitent with long term health of the company, but this is not intrinsic problem surely will destroy the value of the company, the management of the company can also fall prey to short term goal if wrong incentive is given in the first place.
The key matter here is that who should play a central role in the corporate govenence? It should be shareholder centricity or management centricity? In my point of view, it is not the matter who is in the center, it is about what business goal should be placed in the center, and it must be aligned at the very beginning before other things like strategy, exceutive compensation and resource allocation to be discussed. In the end, it is the art of balance.
If the goal is not aligned among shareholders and company management, the agency problem will always exist and unsolved and unrational or unethical decision could always happen either from shareholder side or management side. Here i also want to point out that what even doesn't matter is the goal itself. That is the cornerstone to align interest, set right performance measurement and give proper compensation to the management.
Therefore wealth shareholder and health company is not necessarily opposing to each other, and they can be hand in hand if both party harmonize on overarching business goals.
