Shareholder Theory/Shareholder Value

Shareholder theory states that the primary objective of management is to maximise shareholder value. This objective ranks in front of the interests of other corporate stakeholders, such as employees, suppliers, customers and society. Shareholder theory argues that shareholders are the ultimate owners of a corporate’s assets and thus, the priority for managers and boards is to protect and grow these assets for the benefit of shareholders. Shareholder theory assumes that shareholders value corporate assets with two measurable metrics, dividends and share price. Therefore, management should make decisions that maximise the combined value of dividends and share price increases. However, shareholder theory fails to consider that shareholders and corporates may have other objectives that are not based on financial performance. For example, as early as 1932, Berle and Means argued that corporations have a variety of purposes and interests including encouraging entrepreneurship, innovation and building communities. This wider view is gaining more traction in recent decades as evidenced by an increased interest in ethical investment funds. This suggest that shareholders and potential shareholders are not only interested in financial gains but are also interested in corporates being socially responsible (Kyriakou, 2018). It would seem, therefore, that shareholder value creation is important, however, needs to be balanced with other stakeholders’ interests. This is referred to as an enlightened approach to shareholder value maximisation.