Maximising shareholder value

Maximising shareholder value

Any sane historian would have to admit that the wealth generated from the industrial revolution has come at an environmental cost.

Forests converted to paddocks, wetlands drained for suburbs, coal mined and burnt into the atmosphere, not to mention the supply chain infrastructure criss-crossing the landscape to feed and house everyone. The more perceptive would also see the trend as ongoing, boring into the environmental fabric that delivers fundamental human services. Development has done more than create smartphones.

The entrenched requirement to maximise shareholder value — it is usually illegal for company directors not to do this — ensures resources are exploited and costs externalised. And the legality neatly justifies these outcomes.

Except that value to shareholders is time bound.

Suppose that shares in a company have generated a consistent dividend of 7% per annum for a decade. These are not spectacular returns but a solid delivery of shareholder value over time. Inexplicably over the next few years, the dividends tank and the share price goes south too. The directors pull out all the stops to maximise shareholder value and their fiscal reporting says that they have done everything possible. It’s just that they maximised a very small amount of value.

A second company returned 4% on shares over the same ten years. Not so good. However, shares continue to return 4% for the next decade and the decade after that because the directors chose not maximise value. Instead, they maximised longevity in returns. They optimised shareholder value for the long haul… and went to jail for breaking the law.

If you invested $1,000 in each company, reinvested your dividends and chose to liquidate your overall value after 30 years, which company made you the most money?


Post script — It would seem that shareholder primacy is the formal term for some of this concept and people are questioning if it should still be the purpose of corporations