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Enlightened Shareholder Maximization: Is this Strategy Achievable?

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Abstract

The role of a corporation is often debated as a mutually exclusive choice between economic responsibility to shareholders and social responsibility to society. An evolving viewpoint embraces an integrated approach focused on long-term value creation for shareholders which benefits other stakeholders. Maximizing long-term shareholder value as a corporate objective can be compatible with stakeholder theory when an enlightened shareholder maximization strategy is embraced. Firms implementing an enlightened shareholder maximization strategy are expected to make decisions and use resources which achieve long-term value-creating outcomes. However, critics of enlightened shareholder maximization as a corporate goal contend this strategy conflicts with maximizing shareholder value. This study explores whether firms which embrace a balanced enlightened shareholder maximization strategy indeed create long-term value which does not sacrifice shareholder wealth.

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Notes

  1. Despite evidence that corporate legitimacy is strengthened when businesses solve social problems (Phillips 2003; Palazzo and Scherer 2006), opponents of stakeholder theory, as a business objective, contend that maximizing shareholder value must be the unambiguous corporate objective (Sundaram and Inkpen 2004).

  2. When efforts to maximize shareholders’ wealth reflect fairness, open and free competition in which no market participants are harmed, these efforts are aligned with stakeholder management views in which no harm is done to the environment, people, or society.

  3. The measures used to rank these firms include factors related to the triple bottom line (people, profit, and planet).

  4. The CR magazine’s methodology committee ranks companies in the Russell 1000 index based upon over 290 data elements in seven categories: environment, climate change, employee relations, human rights, governance, finance, and philanthropy. The methodology committee defines the relative weights for these categories. For example, the environment category may have a weight of 20 % as compared to a 12 % weight for the finance category.

  5. Both the P/E and M/B ratios are based upon accounting measures (earnings for the P/E ratio and book value for the M/B ratio) which are susceptible to manipulation. A key drawback of the P/E ratio is firms often manage earnings with accounting wizardry to make them look better than they actually are. For the M/B ratio, problems with manipulation are sometimes cited, but not as often as with the P/E ratio. However, both measures should be avoided as the sole basis for decision making.

  6. Meta-analysis of the relationship between firm performance and social measures finds various results from negative, neutral, or positive correlation with studies using intangible measures such as reputation and non-financial measures yielding stronger explanatory results (Margolis and Walsh 2001; Aguinis and Glavas 2012).

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  1. Department of Accounting and Finance, Morgan State University, Baltimore, MD, USA

    Pamela E. Queen

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Correspondence to Pamela E. Queen.

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Queen, P.E. Enlightened Shareholder Maximization: Is this Strategy Achievable?. J Bus Ethics 127, 683–694 (2015). https://doi.org/10.1007/s10551-014-2070-6

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