management blog

A few days ago Jack Welch, a former chief executive of General Electric, told the FT: “On the face of it, shareholder value is the dumbest idea in the world.”

Although Mr Welch later elaborated on his views, saying “shareholder value is an outcome, not a strategy…I’ve always felt that way”, the remark triggered a flurry of discussion and debate – in the blogosphere and on the Letters page of the FT.

So what’s the bottom line? The FT’s management blog has invited Colin Mayer, dean of the Said business school at the university of Oxford, and Henry Mintzberg, Cleghorn professor of management studies at McGill university, Montreal, to discuss whether shareholder value is discredited.

Opening the discussion is Colin Mayer; Henry Mintzberg will respond later this week. You can post a comment on their conversation below.

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Colin Mayer: If, as Jack Welch has stated, shareholder value is “the dumbest idea in the world”, it is a dumb idea with a remarkably long, approximately 300-year, history. If only we had some bright ideas with such durability, the world would be a better place. Coming from the oldest English-speaking University with an 800-year history, I believe that longevity reveals something about the merits of governance arrangements, even if they appear puzzling to the modern eye.

Shareholder interests are currently under threat and will inevitably be reined in by strengthened regulation. Virtually every financial crisis since the South Sea Bubble (1720) has been marked by governments and regulators acting in haste and repenting at leisure. The risks are now of excessive not under-regulation and, despite its apparent failings, shareholder value should continue to play an important role going forward. Why?

One answer is that its significance is overstated. Shareholders are a dispersed group of generally uncoordinated individuals and institutions who face substantial costs in trying to intervene in corporate affairs. Corporate law deliberately limits their power to do so and where there are disputes between shareholders and directors then courts of law in general find in favour of the judgment of directors. The prevailing view is that far from there being too much shareholder interference in the running of companies, there is too little, and shareholders should be more not less actively involved in corporate governance.

Nevertheless, directors do have a fiduciary duty of loyalty and care to their shareholders. In the case of the UK and US, shareholdings are dispersed among a large number of investors whose interests are focused on financial returns. To the extent that share prices reflect future earnings then they are interested in long as well as short-run performance. But if share prices are inaccurate, fail to reflect future benefits or are subject to manipulation then the value that they place on the future is distorted.

Companies can do something about this. In many countries, ownership is much more concentrated in the hands of a small number of investors, in particular in families. These have interests in factors beyond pure financial performance, for example in the family name, their status in their local communities, and their ability to transfer the business to future generations. This has costs as well as benefits but it does mean that their time horizons and breadth of interests are generally greater than those of UK and US firms.

The main argument for the corporation is its remarkable flexibility in balancing the interests of different parties and emphasizing both non-financial as well as financial interests. In the UK and the US we have chosen a version that places particular emphasis on financial performance. But it need not, and in future is unlikely, to be so as we move away from the dispersed share structures that have created it. Far from being on its last legs, shareholder value will undergo further mutations which will reinforce rather than undermine its significance. It is a dumb idea with a great future and a distinguished past.