Little more than a decade ago, the US corporate world was suffering a crisis of confidence. American businesses were losing market share. Management experts vaunted the superiority of Japanese managers, with their emphasis on long-term planning and consensus. Today, the situation is reversed. Despite the ending of the long bull market and the collapse of the technology bubble, Americans retain a strong belief in the superiority of their business practices. These, we are told, have not only been responsible for the longest period of growth in US history, but also the briefest of recessions. The cause of this great turnaround can be summed up in two words: shareholder value. For the last 15 years or so, this has been the mantra for those who believe that companies should be run for the exclusive benefit of shareholders, with the interest of management aligned to shareholders through the use of stock options and similar equity-linked incentives schemes.

Following the scandal at Enron and a string of other high-profile failures, however, the idea of shareholder value has come under increasing scrutiny. Critics claim that its successes have been exaggerated and that its most obvious result has been the personal enrichment of management at the expense of the very shareholders it was supposed to benefit. Managers’ pursuit of shareholder value has been accompanied by the manipulation of earnings and other tricks which threaten to undermine the trust essential to the market system. Shareholder value can also be criticised on a theoretical level: it assumes the stock market is efficient, in the sense that share prices reveal intrinsic value, and advises managers to let those prices guide their actions. Yet market efficiency is dependent on the stock market passively reflecting value. Once the market starts determining business activities, a feedback loop has been created which can lead to instability. The boom and bust in the stock market, the rise and fall of the technology companies, the massive sums wasted during the telecoms boom and the ensuing corporate scandals have all followed more or less directly from the indiscriminate pursuit of shareholder value. It is time for the business and financial world to wake up to its shortcomings.

Shareholder value was nurtured in the free-market ideology of the 1980s. Its popularity as a management philosophy was speeded up by two developments. First, privatisation-driven in part by the need of governments to raise money and in part by ideology-required that former nationalised industries make themselves attractive to investors by improving their business returns. Secondly, the abolition of foreign exchange controls at the beginning of the decade led to the internationalistion of company financing. Since the professional investors who managed international funds were only concerned about returns to their portfolio, this promoted a gradual convergence around the idea of shareholder value. European corporate traditions-such as complex ownership structures, institutional protection from hostile takeovers, and different classes of voting and non-voting shares-were deemed inferior to the Anglo-Saxon model.

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