4 Business Ideas That Changed the World: Shareholder Value

The idea that maximizing shareholder value takes legal and
practical precedence above all else first came to prominence in the
1970s. The person who arguably did the most to advance the idea was
the business school professor Michael Jensen, who wrote in Harvard
Business Review and elsewhere that CEOs pursue their own interests
at the expense of shareholders' interests. Among other things, he
argued for stock-based incentives that would neatly align CEO and
shareholder interests. Shareholder primacy rapidly became business
orthodoxy. It dramatically changed how and how much executives are
compensated. And it arguably distorted capitalism for a generation
or more. Critics have long charged that maximizing shareholder
value ultimately just encourages CEOs and shareholders to feather
their own nests at the expense of everything else: jobs, wages and
benefits, communities, and the environment. The past few years have
seen a backlash against shareholder capitalism and the rise of
so-called stakeholder capitalism. After reigning supreme for half a
century, is shareholder value maximization on its way out? 4
Business Ideas That Changed the World is a special series from HBR
IdeaCast. Each week, an HBR editor talks to world-class scholars
and experts on the most influential ideas of HBR’s first 100 years,
such as disruptive innovation, scientific management, and emotional
intelligence. Discussing shareholder value with HBR editor in chief
Adi Ignatius are: Lynn Paine, professor at Harvard Business School
Mihir Desai, professor at Harvard Business School Carola Frydman,
professor at Kellogg School of Management Further reading: HBR: CEO
Incentives—It’s Not How Much You Pay, But How, by Michael C. Jensen
and Kevin J. Murphy New York Times: A Friedman doctrine‐- The
Social Responsibility Of Business Is to Increase Its Profits, by
Milton Friedman HBR: The Error at the Heart of Corporate
Leadership, by Joseph L. Bower and Lynn S. Paine U.S. Business
Roundtable: Statement on the Purpose of a Corporation, 2019