Corporations Should Not Focus Solely on Maximizing Shareholder Value

Abstract: Many experts will tell you that a for-profit corporation's only goal should be to maximize shareholder value. However, in reality, companies have other obligations which stem from their social nature.
NYC's Downtown as seen from the Empire State Building (1).
A person who reads the finance section of his or her favorite news site on any given day might come away thinking that the only goal of any for-profit corporation is to maximize stockholder equity. Some articles, like this one on Yahoo Voices, explicitly state that a company "should always strive to maximize shareholder wealth." Other stories implicitly suggest the same thing when they focus almost solely on a company's success or failure in improving its bottom line. Per articles like this one in the Huffington Post, any other goal, such as providing excellent customer service, is only legitimate in so far as it helps the corporation maximize profits. While this is an important goal, it should not be the only one.

If for-profit companies were independent actors, they would be justified in focusing exclusively on maximizing shareholder value. However, as an article from Corporate Governance notes, corporations, like people, are social entities that depend on others to help them achieve their goals. As such, they have obligations to their communities, which develop from these relationships. For instance, companies are fictitious creations that depend on society to legitimize their existence and to provide them with rights. Most Americans would probably agree that, in return, these corporations should obey whatever laws are promulgated by the communities they serve even if adherence to these rules limits their profit potential. Additionally, as outlined in the Corporate Governance article, companies also depend on their communities for workers, customers, and goodwill, among other things. Many theorists assert that, due to these relationships, corporations have an obligation to give something back to these localities.

Our society also espouses the belief that corporations have some obligations to their employees. At heart, a company is a community which is inhabited and maintained by its employees. These individuals should have certain rights that are part and parcel of their membership in a corporate culture. As such, company executives have legal obligations to create a workplace that is free from sexual harassment, to pay their employees what is owed, etc. More generally, these executives should also try to create a corporate ethos that centers on treating employees with dignity and respect even when not legally required to do it. Many large corporations, such as Dow Jones & Company and IBM, recognize this fact and commit themselves to ensuring this type of corporate culture.

Of course, as The CQ Researcher Blog notes, a corporation who invests in its community and treats its employees well often reaps financial benefits from these actions. A thriving locality can purchase more goods; happy employees will work harder. However, I would argue that companies' responsibilities extend to both groups even if there is no financial gain.

Companies do not operate in vacuums. They have obligations to their communities as well as to their workers, which derive from their mutual relationships. As such, a corporation's key goal might be to increase shareholder wealth; however, that should not be its sole purpose.

1. Photographer: Marlith
    Date: April 4, 2008
    Title/Description: NYC's Downtown as seen from the Empire State Building
    Location/Permission: Wikimedia Commons - GNU Free Documentation License, Version 1.2
    (click on the title for photo, credits, and permissions).

-- Anthony Hopper

#business #finance #ethics #corporations #stocks #US

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