Maximizing Shareholder Value: What Are Shareholders' Interests?

Author: Scully, Maureen
Source: The Aspen Institute Center for Business Education's Corporate Governance and Accountability Project
Year: 2005

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Abstract:

This Teaching Module was prepared by Dr. Maureen Scully, Assistant Professor of Management at UMass Boston's College of Management and Consultant to the Aspen Institute Business and Society Program, as part of CasePlace.org's Corporate Governance and Accountability Project.

Maximizing shareholder value (MSV) guides many business decisions and quickly becomes part of business school students' vocabulary. It is important to understand shareholders' interests more precisely. This Teaching Module considers that shareholders might prefer maximization at the level of their portfolio or an industry, not at the individual firm level. It focuses on the underlying question: What are shareholders' interests, specifically when shareholders:
• Hold diversified portfolios?
• Hold indexed funds?
• Are also consumers and citizens?
• Have long-run as well as short-run time horizons?

Shareholder interests are typically equated with share price. This assumption may not always hold though. For example, if a firm is a takeover target and its share price spikes in the short run, that might appear to be in shareholders' interests. However, if that same takeover strategy results in the killing of an industry category, then it might not be good for shareholders with diversified portfolios. The many diversified shareholders, including large institutional investors, do not maximize their return based on the performance of a single firm; firm externalities may diminish overall portfolio performance. Even when these dynamics are understood, incentives for managers to maximize industry performance have not been employed.

Much work on business and society has considered shareholder interests in terms of how they balance with the interests of other stakeholders and whether their maximization produces societal benefit. This Teaching Module explores a new frontier in economic thinking about just what shareholder interests are and how to think about shareholders themselves as more broadly socially situated – as diversified investors and also as consumers (who have an interest in whether industry concentration drives prices up) and citizens (who have an interest in collection of government tax revenues). We thank Professor Scott Stern, of the Kellogg School at Northwestern University, for pointing us in the direction of these ideas.

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These materials could be used in courses on economics, finance, strategy, or business and society. They suggest additional questions and concepts that can be added to cases already being taught, to expand the discussion to broader business and society implications.