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The origins and early diffusion of “shareholder value” in the United States

Abstract

The shareholder value conception of the firm and its consequences for the functioning of corporations have been studied from a variety of disciplinary and theoretical perspectives. In this article we examine in more detail than has been done sofar the origins and early adoption of this particular conception. By investigating public business sources from the perspective of field theory, we argue that the rise and early diffusion of “shareholder value” are best understood as a function of the changing power relations in the economic field during the first half of the 1980s. The deep economic recession at the end of the 1970s and early 1980s led to a crisis in the prevailing management beliefs, offering newcomers the opportunity to promote alternative business strategies, among which the shareholder value conception became dominant. The sources studied indicate that the spokespersons of the new business conception were initially wealthy outsiders, corporate “raiders,” who used the economic crisis to oppose management and acquire shares in undervalued firms with the threat of restructuring and selling parts of them in the name of shareholders’ interests. Although these hostile take-overs, or threats of take-overs, were widely contested, the Reagan administration blocked regulation and stimulated the take-over market. The rivalry between “raiders” and public pension funds over the profits of these takeovers led to the founding the Council of Institutional Investors (1985), which adopted the shareholder value doctrine inaugurating the organized activism of public pension funds with regard to the management of firms. It was thus in all likelihood the competition and conflict among different groups of shareholders, primarily corporate raiders and pension funds, that triggered the shift in the balance of power between managers and shareholders. Since managers found profitable ways to adapt to the new balance of power, the shareholder value ideology spread rapidly through the economic field, becoming the dominant business model of North American firms in the second half of the 1980s.

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Fig. 1

Notes

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  4. 4.

    Number of citations of ´The Theory of the Firm´ (1976) in the Journal of Financial Economics (1976–1986) excluding self-citations:

    Jaar
      1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
    N = - - 2 - - - - 3 - 3 1

    Number of citations of ´The Theory of the Firm´ (1976) in the Journal of Financial Economics (1987–1996) without self-citations:

    Jaar
      1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
    N = 9 14 11 10 3 4 2 7 6 6
  5. 5.

    Articles mentioning the term “shareholder value” in the Harvard Business Review

    Year
      1955 1981 1986 1987 1988 1989 1990
    N = 1 1 3 2 1 3 3

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Correspondence to Johan Heilbron.

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Heilbron, J., Verheul, J. & Quak, S. The origins and early diffusion of “shareholder value” in the United States. Theor Soc 43, 1–22 (2014). https://doi.org/10.1007/s11186-013-9205-0

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Keywords

  • Shareholder value
  • Corporate raiders
  • Institutional investors
  • Field theory
  • Economic sociology