At many companies, the "shareholder value" mantra is not the same as managing for shareholder value

I am a strategy consultant who has argued for the discipline of shareholder value for almost two decades now. In fact, the firm of which I am currently Chief Executive, Marakon Associates, was founded in 1978 on the principle that the governing objective of running a company is to maximize shareholder value over time. We invented the notion of "managing for shareholder value" as a discipline for running our largest public companies, and we were successful in that becoming a generally accepted mantra of any chief executive worth his or her salt. Yet it seems that the very discipline that is designed to make everyone better off has made everyone worse off, especially – and ironically – the shareholders.

So how is it that shareholders were so let down and "shareholder value" is to blame?

The answer is simple. While a few great companies have set themselves very high standards for having distinctive strategies and decision-making processes – the two critical ingredients needed to achieve and sustain outstanding performance for shareholders – many have executed the shareholder value mandate wrongly. Common mistakes include an excessive focus on share price and too little focus on growing long-term intrinsic value.¹ As one commentator put it, "By worshipping the stock price, we have lost sight of business as a profession, a profession of honor." This would explain a recurring theme within the current backlash: that shareholder value causes a damaging obsession with optimizing and manipulating short-term earnings and stock price – which for too many companies is exactly what it did do.

In the worst cases, the language of shareholder value has been used to justify exorbitant remuneration schemes and acquisitions that have enlarged the corporate power base at the expense of shareholders. This would explain a second theme: that shareholder value is rooted in greed – which it was for a handful of companies with the wrong management teams. These people "lost respect for their shareholders," as one of our clients put it, all the while using the mantra of shareholder value to justify their actions.

But it’s not just a few bad apple executives who have let down their shareholders. Many stakeholders in the capital markets, including even shareholders, are culpable as well. Many individual investors, big pension and life funds, and the sell-side brokers and analysts who advise them have played their own part. They have shown questionable judgment and in some cases questionable integrity. They have made the relationship between share price and intrinsic value a less reliable article of faith than it should be. They have focused on easily manipulated measures of performance, overreacted to news and tolerated strategies and corporate moves that simple analysis can demonstrate are value-destructive. A free-floating doubt has now worked its way into the market system, and the shareholder value mantra is much to blame.

Meanwhile, the search is on for new corporate governance processes and standards. The intention and effort behind this is laudable, but much of it is misguided. The key to protecting shareholder interests lies at least as much in making top management more accountable for growing their company’s intrinsic value as it does in making boards, auditors and other constituents "more accountable" and shareholders "more represented." The companies that have gone to the wall in the last few years never had – or totally relaxed – their standards for growing value over time. These standards are at the heart of all effective management teams.

Those companies that focus on increasing long-term value – such as BP, Berkshire Hathaway and Cardinal Health – set themselves corporate governance standards that those in search of "new" models would do well to emulate. These companies are unambiguous about the terms of the contract between the CEO and the board, and between the businesses and the CEO. The CEO is contracted to maximize long-term value growth for shareholders, and the businesses are contracted to deliver this performance in return for the funding, leadership and challenge from the CEO required to create it. Strategies, resources and performance are closely and regularly monitored against these contracts, success is well rewarded and failure has clear consequences. Nonetheless, they all have quirks in their governance that wouldn’t be acceptable to some of the crusaders out there, such as insiders on the board, complex aggregated accounts and combined chairman/CEO roles.

Many of the recent failures that crowd our headlines today and those that may yet follow were aided and abetted by a shareholder value mantra that has lost any real meaning for running a large public company. But the problem with the shareholder value backlash is that it calls into disrepute a management discipline – growing intrinsic value – that has no known rival in terms of corporate performance, long-term wealth creation and the health of the economy. As Warren Buffett says, "Intrinsic value is the only logical way to (manage) investments and businesses." It provides a true north of decision making that no alternative system has, and it provides the strongest underpinnings to the long-term health of companies and society. Since shareholders are last in line, more than satisfying them over the long term means that everyone else in the system has to be more than satisfied first.

Many regulators, governments, academics, commentators and even corporate executives will try to convince us that we need a new or better system of management and corporate governance in response to the events of the last few years. And they may even make some progress in the short term. But the discipline of focusing on long-term value growth will win out longer term, and those companies that put in place the habits and insights to do it well will be our leading companies in five to 10 years’ time.