Leadership

Is Shareholder Value a Dumb Idea? Experts Debate

By Jessica Stillman

Updated on: March 26, 2009 / 9:00 AM EDT / MoneyWatch

The Find: Jack Welch made waves when he called shareholder value "the dumbest idea in the world;" now two eminent business professors go head to head over whether he was right.
The Source: Henry Mintzberg, a professor of management at McGill University vs. Colin Mayer, dean of the Said business school at Oxford, on the FT Management blog.

The Takeaway: A few weeks ago Jack Welch, the former CEO of GE, stirred up a storm of commentary (including from BNET's Steve Tobak) by announcing that "shareholder value is the dumbest idea in the world." Was his criticism of the supremacy of this one marker of business success valid? Mayer says no, equating the idea to the essence of capitalism and pointing to centuries of success at wealth creation, but he does admit that the concept of shareholder value â€" at least as it is understood in the US and UK â€" could do with a bit of fine tuning:

In the UK and the US we have chosen a version [of shareholder value] that places particular emphasis on financial performance. But it need not.... 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.

Not so fast, answers Mintzberg. Shareholder value may have a long history, but recent concepts of the term vary markedly from past ideas of it, and not in a good way. His argument in a nutshell: "capitalism has actually metamorphosed into shareholder value - a very peculiar interpretation of it - and economies around the world are now collapsing as a consequence." What's wrong this today's conception of the age-old idea?

Shareholder "value" is not about any basic human values; it is about maximizing the material wealth of the people who own shares in a corporation, that's all, and everyone else be damned - the workers, the communities, the environment, etc. And that maximization requires measurement. Let the numbers do the talking (and the judging).

Employee burnout, environmental degradation, even the sustainability of the corporation itself, let alone basic human decency, cannot be so readily measured, nor quite so easily attributed to their source. As a result, their negative consequences have been handed off to the rest of society as "externalities".... We are now loaded with externalities.

For our afflictions Dr. Mintzberg prescribes "renewing society, judgment, democracy, decency." Well, that should be easy then.

The Question: Whose corner are you in and why?

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