The Social Value of Shareholder Value
Article first published online: 14 MAR 2014
© 2014 John Wiley & Sons Ltd
Corporate Governance: An International Review
Special Issue: National Governance Bundles
Volume 22, Issue 3, pages 185–193, May 2014
How to Cite
Morck, R. (2014), The Social Value of Shareholder Value. Corporate Governance: An International Review, 22: 185–193. doi: 10.1111/corg.12063
- Issue published online: 29 APR 2014
- Article first published online: 14 MAR 2014
- Bank of Canada
- Corporate Governance;
- Corporate Governance Theories;
- Shareholder Value;
- Firm-Level Governance Outcomes;
- National-level Governance Outcomes
Can maximizing shareholder value maximize social value?
If good corporate governance is defined as maximizing a firm's contribution to overall social welfare, shareholder valuation maximization can achieve this only if capital markets are functionally efficient, a concept quite distinct from the definitions of market efficiency usually found in finance textbooks. Functional efficient capital markets allocate capital to its highest value uses subject to achieving tolerable success toward other social goals, such as equality or environmental standards.
Pressing top managers to maximize shareholder valuation is of questionable social value if share prices are either informationally inefficient (noisy) or informationally efficient but functionally inefficient (share prices faithfully reflect fundamental values, which depend on political lobbying, gaming complex regulations, etc., more than genuine productivity growth).
Shareholder valuation, if surrounded by institutions that foster functional efficiency, is a readily observable, legally useful, and socially defensible barometer of corporate governance. The efficacy of corporate governance institutions associated with shareholder value thus depends on the bundle of political economy institutions that promote functional efficiency.