Shareholder Value Maximization

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Fligstein and Shin’s (2007) article explores the cause-effect relationship between shareholder value strategies and profitability. I believe, however, that we can go deeper and say that this relationship illustrates human nature itself and how we, as stakeholders or managers, are actually mostly the problem if we view shareholder value maximization as the path to profitability and hence success.

We tend to follow our own interests and have a short-term focus if our capitalistic system is incentivized in such a way. The emergence of stock options has amplified this effect because quick profits have become possible, contributing to increases in share prices. Seemingly easy solutions to increase profitability, such as laying-off employees, do not deal with root causes of profitability problems and, actually, mostly backfire. In fact, when generating value for a firm, the focus should not be solely financial: a focus on ways a firm can increase emotional and social well-being in society is also needed. However, such value creation should not be based on expectations, as this tends to build bubbles where one might appear to win today but actually lose in the future.

Furthermore, we tend to follow a herd mentality and rely on false assumptions when a seemingly faulty system is widely utilized by people. We then stop questioning it until a major economic recession occurs that proves its lack of validity. If we knowingly sustain ineffectiveness, we should blame ourselves severely since ignorance does not imply innocence if educational opportunities were available.

Finally, rather than only focusing on the financial level, managers should acquire certain competencies that allow them to generate value for society which, in turn, will add value to their firm. They should find ways to balance different needs in the long-term and motivate employees through a higher calling than just increasing shareholder value.
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