COMMENT A palace revolution in the realm of business is toppling the dictatorship of shareholder value maximisation as the sole guiding principle for corporate action. As so often with regicide, many of the knives are in the hands of the old regime’s own henchmen. Jack Welch, the former General Electric chief executive who ushered in the reign of shareholder value maximisation a quarter-century ago, told the Financial Times last week that “shareholder value is the dumbest idea in the world”. But this revolution will not eat its own children – not Mr Welch, and more importantly not shareholders at large, who rather stand to benefit from being less fetishised.
In capitalism, private companies fulfil the social function of providing goods and services people want by competing for consumers’ purchases. Companies that compete well – whose products consumers choose – are rewarded with profits. Since profits ultimately redound to the owners’ advantage, holding managers accountable to shareholders best ensures that companies remain profitable and keep their products attractive to customers.
