Building Shareholder Value Will Always Matter to CEOs | TiiCKER

Building Shareholder Value Will Always Matter to CEOs

The C-Suite

Mike Houston August 21, 2019

180 CEOs from major U.S. corporations, issued a statement Monday with a new definition of the “purpose of a corporation.”

The Business Roundtable, a group of chief executive officers of nearly 200 major U.S. corporations, issued a statement on Monday defining the purpose of a corporation. This statement represented a dramatic shift from the trick-down economics espoused by the likes of Milton Friedman and Carl Ichan, a time when business philosophies centered on maximizing profits and the fiduciary obligation to shareholders.

Does this statement mean CEOs no longer have a fiduciary obligation to its shareholders?

Absolutely not. It is important to remember that this “new definition” is nothing new. Going back to the late 1920s and early 1930s, Henry Ford and other entrepreneurial pioneers led the way in their belief that societies are equivalent to the sum of the decisions and transactions made by the managements of organizations.[1] Although CEOs of that time likely understood their fiduciary obligation with shareholders and the importance of generating long-term shareholder value, they also knew that there were many other factors at play. Just as the 180 CEOs outlined today, a singular focus on maximizing profits is myopic and does not create or enhance long-term stakeholder value.

What is the meaning of stakeholder value?

Stakeholder value should include management’s ability to increase sales, maximize profits and improve free cash flow. It should also include a sharper focus on ALL stakeholders – shareholders, employees, communities, the environment, suppliers, vendors, unions, etc. By investing in employees, delivering value to customers, dealing ethically with suppliers and supporting local communities, these 180 CEOs are becoming stronger corporate citizens while enhancing their company’s shareholder value.

Will this new definition lead to a spike in shareholder activism?

While it is likely too early to say for sure, this new definition will make it more difficult for CEOs to hide behind the response that they’ve chosen a particular strategy or tactic because it “maximizes shareholder value.” Senior management’s strategy must be sound in its logic and execution, but what’s more important is that the strategy must also be communicated in a way that resonates with a broader audience. Although shareholders will remain a very important audience for publicly traded companies, senior management teams will need to ensure their corporate messaging aligns with a more diverse audience.

[1] Enteman, Willard F. (1993). Managerialism : the emergence of a new ideology. Madison, Wisconsin: University of Wisconsin Press. ISBN0299139247. Managerialism rests upon the notion that ‘the society (nation) is nothing more than the summation of the decisions and transactions which have been made by the managements of the organizations.’