Publications
Publications
- 20 Oct 2022
4 Business Ideas That Changed the World: Shareholder Value
By: Adi Ignatius, Lynn Paine, Mihir Desai and Carola Frydman
Abstract
A roundtable conversation appraises the 50-year reign of shareholder primacy and the growing backlash against it today.
The idea that maximizing shareholder value takes legal and practical precedence above all else first came to prominence in the 1970s. The person who arguably did the most to advance the idea was the business school professor Michael Jensen, who wrote in Harvard Business Review and elsewhere that CEOs pursue their own interests at the expense of shareholders’ interests. Among other things, he argued for stock-based incentives that would neatly align CEO and shareholder interests.
Shareholder primacy rapidly became business orthodoxy. It dramatically changed how and how much executives are compensated. And it arguably distorted capitalism for a generation or more. Critics have long charged that maximizing shareholder value ultimately just encourages CEOs and shareholders to feather their own nests at the expense of everything else: jobs, wages and benefits, communities, and the environment.
The past few years have seen a backlash against shareholder capitalism and the rise of so-called stakeholder capitalism. After reigning supreme for half a century, is shareholder value maximization on its way out?
The idea that maximizing shareholder value takes legal and practical precedence above all else first came to prominence in the 1970s. The person who arguably did the most to advance the idea was the business school professor Michael Jensen, who wrote in Harvard Business Review and elsewhere that CEOs pursue their own interests at the expense of shareholders’ interests. Among other things, he argued for stock-based incentives that would neatly align CEO and shareholder interests.
Shareholder primacy rapidly became business orthodoxy. It dramatically changed how and how much executives are compensated. And it arguably distorted capitalism for a generation or more. Critics have long charged that maximizing shareholder value ultimately just encourages CEOs and shareholders to feather their own nests at the expense of everything else: jobs, wages and benefits, communities, and the environment.
The past few years have seen a backlash against shareholder capitalism and the rise of so-called stakeholder capitalism. After reigning supreme for half a century, is shareholder value maximization on its way out?
Keywords
Citation
"4 Business Ideas That Changed the World: Shareholder Value." HBR IdeaCast (podcast), Harvard Business Review Group, October 20, 2022.