Governance and Stakeholders

Economic models routinely assume firms maximize shareholder value; but common law legal systems only require that officers and directors pursue the interests of the corporation, leaving this ill-defined. Economic arguments for shareholder value maximization derived from shareholders’ status as residual claimants are vulnerable on several fronts. 

The most important of these, set forth in introductory finance courses, is that economic theory charges firms with undertaking all positive expected net present value (NPV) projects and no other projects. Positive expected NPVs are expected present values of quasirents, economic profits over and above the returns due shareholders and other investors.  Shareholders therefore have no obvious claim to positive expected NPVs. Schumpeter argues that these are instead entrepreneurial rents. Other stakeholders – entrepreneurial founders or CEOs, employees, employees, customers, suppliers, communities or governments - may have more defensible claims to these rents than do atomistic public shareholders.

Actual legal and contractual arrangements, including the common law concept of “the interests of the corporation” - capture this quandry but, by leaving directors to choose the lesser evil, also create scope for insider private benefits extraction. Charging listed firms' boards with maximizing shareholder value, a conceptually problematic but observable objective, could therefore be the lesser evil to the conceptually correct but unobservable charge of maximizing positive expected NPVs allocated as entrepreneurial rents to various stakeholders.