Home > Corporate Governance Theory > Economic consequences of Shareholder Value Maximization (SVM)

Economic consequences of Shareholder Value Maximization (SVM)

Insead has recently published a short article (1) in which they try to draft the economic consequences of the SVM principle first made explicit by Milton Friedman. (2)

I will here only made some brief comments on several statements that I consider not rigorously introduced.

I wouldn`t agree that what matters for macroeconomic reasons is the overall value of the firms, (this includes a price consideration in public firms, and in the case of non-public firms this price is not easily assessed)…..I would rather say the invested capital is what matters (which does not include excess cash).

The money could be invested in R&D and other capital goods, (physical or not), M&A deals or it can be given back to shareholders (for them to invest in new ventures for instance)…This is true and cannot be discarded, as they apparently do.

Inequality does not rely on Ceo pay, this is too simple, (3). And Ceo pay does not only rely on Share price either, (4).

In empirical terms the argument is only presented by them since 2008, (which cannot be considered a long enough period in my opinion; moreover, the cyclical circumstances are very relevant in this case).

They moreover argue that firms are buying back shares not only with profits but they are additionally using debt, (that is, they are rebalancing the sources of funds, which given the current price of debt is probably not such a bad idea).

Finally they get to the point: the lack of investment (by companies) is endangering economic growth; shareholders´wealth would have increased and they would be increasing liquid assets (raising the risk of financial asset bubbles) or dedicating part of the cash to non-productive issues, (real estate, leisure, etc).

The implicit theory is that executives pursue their own interest when they chase short-term profit and share price gains. But the crisis and the buyback stampede started back in 2008, and ten years later it continues; the uncertainties in global economic and political realities remain, which could also be said to be a factor that would refrain investment; firms used as examples have probably used a lot of cash to buy shares, but should they have used it for R&D activities, would the world today be the same? Gates and Jobs were entrepreneurs, not intra-preneurs; and what about the Linkedin, Facebook, Salesforce, Ebay, Amazon…..and long list of fantastic businesses that today render so many new services that have pushed productivity to new frontiers? Would you say the monies in IBM or HP would have produced this? In fact, given the results of many of their M&A transactions they should have executed much larger share buyback programs!

As nothing is completely white or black it is sure that pay programs and Corporate Governance practices need to be improved, (5) and government, shareholders, and many institutions are trying to provide their input to that end. I would insist that way instead of prohibiting or penalizing financial decisions that should be guided by (yes, disinterested) market reasons. And I would foster competition and entrepreneurial spirit and finance.


(1) The article is signed by Bob Ayres and can be found here: http://knowledge.insead.edu/blog/insead-blog/the-economic-consequences-of-shareholder-value-maximisation-5646

(2) http://www.umich.edu/~thecore/doc/Friedman.pdf

(3) Stiglitz, Joseph E., New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals: Part IV: Land and Credit (May 2015). NBER Working Paper No. w21192. Available at SSRN: https://ssrn.com/abstract=2610489

(4) “2016 Nobel Winner for Economics Says CEO Pay Contracts Are Too Complex”, at


(5) See some previous posts on Basic Topics on Corporate Governance: (i) https://joaquinbarquero.wordpress.com/2014/11/29/performance-metrics-and-long-term-alignment/ (ii) https://joaquinbarquero.wordpress.com/2015/01/17/performance-metrics-and-long-term-alignment-ii/ and (iii) https://joaquinbarquero.wordpress.com/2015/01/24/performance-metrics-and-long-term-alignment-iii/ .


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