The Case for Maximizing Long‐Run Shareholder Value

Criticism of the shareholder model of corporate governance stems in part from misunderstanding about what shareholder wealth maximization means for the other stakeholders of public companies. The corporate goal of shareholder wealth maximization does not imply that such stakeholders “do not matter.” Managers maximize shareholder value by maximizing the total expected cash flows available to distribute to all of their stakeholders. To maximize such cash flows, managers must provide their customers with desirable goods and services at attractive prices—which in turn requires that managers attract the employees, suppliers, and financial capital needed to conduct their businesses by providing each of these groups with market‐determined returns on their contributions to firm value. In this way, successful corporations benefit all of their stakeholders, and what is good for the corporation is generally good for society. External forces such as the media and government exert considerable influence on corporate actions and, in so doing, they play a role in helping to limit negative corporate “externalities” such as pollution and climate change. But direct regulation of productive activities should be used sparingly, and subjected to ongoing cost‐benefit analysis. Government regulation replaces the collective decisions of a broad marketplace of stakeholders using their own resources to act in their own interests with decisions made by government officials with complicated incentives and using resources generated by others. More generally, government should seek to regulate corporate actions only in the limited situations in which there are no market solutions for reducing the effects of externalities. For example, government plays a critically important role in identifying and deterring corporate fraud, and in ensuring competition and a level playing field for companies and all their stakeholders.