Maximizing the Shareholder Value

A persistent tension exists concerning the proper ends of business organizations and thus the purposes that corporate managers ought to pursue in acting on behalf of the company. On the one hand, “[a] business’ objective must be met in economic terms and according to economic criteria” (Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church (2004) at §338), which seems to mean that managers should maximize shareholder value. On the other hand, “[b]usiness owners and management must not limit themselves to taking into account only the economic objectives of the company [and] the criteria of economic efficiency…. It is also their precise duty to respect concretely the human dignity of those who work within the company” (Id. at §344) and, presumably, of those who are customers, vendors, creditors, and persons who live in communities in which the business operates. This seems to mean that managers should sometimes promote the interests of such persons at the expense of shareholders. The question is thus how the ends of maximizing shareholder value and benefiting other corporate constituencies interrelate, i.e., how managers ought to balance the interests of one group against those of others. In attempting to answer this question, I begin from the working assumption that, in a good company, managers balance properly the maximization of shareholder value and the interests of other corporate constituencies. As I explain below, this assumption is actually more complex than it may seem and involves adopting a virtue-theoretic meta-ethics. I next consider, in light of the moral philosophy of St. Thomas, what precisely it means to say that a company is good, that is, that it is good qua company or a good company. With that analysis in hand, I return to the issue of how maximizing shareholder value ought be balanced against other corporate ends, and I argue that managers may pursue such ends only to the extent that actions undertaken for such ends are ultimately ordered to maximizing shareholder value. I further argue that, despite its seeming limitation on actions directed to the benefit of other corporate constituencies, this principle in fact allows wide scope for such actions. Finally, I conclude that this view establishes an intelligible relation among the various corporate ends, gives a due primacy to the end of maximizing shareholder value, and still allows managers wide latitude to treat employees and other corporate constituencies generously.