For almost one hundred years, many businesses have asserted that shareholders are a priority for strategic, operational and investment decisions. More than a few executives say, "The purpose of a business is to maximize shareholder wealth." Without going into the history, much of this dates back to the Dodge v. Ford Motor Company court decision in 1919. Until that time, corporations were chartered with the expectation that they were acting in the interests of the public.
This case, filed by the Dodge brothers, was whether the Ford board could make business decisions that promoted interests other than that of maximizing shareholder value. The case is often misinterpreted (and mistakenly taught in business schools) as setting a legal rule of shareholder wealth maximization.This is not what the case concluded and is not supported by empirical, logical or moral evidence. It has taken a century for business schools to recognize this mistake and start teaching that a company is obligated to maximize value to its stakeholders, including community, employees, vendors, business partners and the environment. Not all have gotten the memo but progress is evident and business school.
This is not what the case concluded and is not supported by empirical, logical or moral evidence. It has taken a century for business schools to recognize this mistake and start teaching that a company's obligation is to maximize value for it stakeholders, including community, employees, vendors, business partners and the environment. Not all have gotten the memo but progress is evident and business school.
Through the mid-twentieth century, the rise of analytics strengthened the focus on wealth simply because it was the one thig that was measured and of high interest. All of the other, often far higher, costs and impact were externalities, rarely measured and often highly undervalued. The costs of the risk, if not direct damage, like those to the environment, public health, worker safety, consumer fraud, financial misdeeds, product failure or economic risk were not included in measures of shareholder wealth - which is easy to do if you don't measure or value them. But they are no less real costs incurred but by someone other than shareholders.
This has been called "shareholder hegemony," where only profits matter above all else. This corresponds to the rise of corporate influence - and money - in political campaigns and judicial decisions favoring corporate interests.
Only when damaged parties started to demand that the companies that imposed these costs on them be held accountable has this tradition started to change. Although still in its infancy (witness the rapid growth of B Corps, which now include public companies in their ranks) there is a move for companies to include full costs in their calculations of ROI and maximize "stakeholder wealth." But in way too many companies, this desire to ignore other than shareholders and use the political and judicial process to entrench greater power in shareholder interests still is strong.
Ultimately, the desire to retain influence impacts ethical behavior, of both corporate executives and of corporations as a whole. This article dives into the issues of how we, as consultants, need to be more attuned to the ethical implications of our clients who are focused on profit above all else.
See Reinventing business "ethics": How corporate honchos gave themselves cover to be as rapacious as they wanna be.