Maximize This!

Posted on Feb 24, 2012 | 12 Comments

According to Fortune, CEOs are getting talkative these days—about politics, about high unemployment, about same-sex marriage. Of course, shareholders don’t hire them to spout off and cause trouble.

And shareholders come first. Or is it that they came first?

Fortune suggests that thoughts about maximizing shareholder value could be changing. “Perhaps some CEOs have begun to question the prioritization of shareholder value over the company’s defining values,” the magazine avers.

Starbucks, it notes, already seems to be going in that direction. “Delivering long-term shareholder value is essential, but companies can and should hold themselves to higher standards of achievement,” the coffee purveyor told Fortune.

Peter Drucker thought a lot about this issue. In Management Challenges For the 21st Centuryhe noted that in the 1920s “the prevailing theorem, however fuzzy, held that business should be run for a balance of interests—customers, employees, shareholders and so on.” That created too little accountability, however, and things changed. By the late 20th century, there had been a “dramatic shift to the predominance of the ‘shareholder interest.’”

But this, Drucker said, was no good, either. In fact, it might even be worse.

It invited short-term thinking (a subject we’ve explored before). And, as Drucker warned in Post-Capitalist Society, it could mean “damaging, if not destroying, the wealth-producing capacity of the business.” Maximizing shareholder value, he added, could also alienate the company’s most vital employees, its knowledge workers, who wouldn’t be “motivated to work to make a speculator rich.”

Photo source: Flickr Commons

The companies that did it right were to be found in Germany and Japan, Drucker believed. “They do not attempt to maximize shareholder value or the short-term interest of any one of the enterprise’s ‘stakeholders,’” Drucker wrote in Managing for the Future. “Rather, they maximize the wealth-producing capacity of the enterprise.” [Italics Drucker’s]

Drucker continued: “It is this objective that integrates short-term and long-term results and that ties the operational dimensions of business performance—market standing, innovation, productivity and people and their development—with financial needs and financial results. It is also this objective on which all constituencies depend for the satisfaction of their expectations and objectives, whether shareholders, customers or employees.”

What do you think: Should shareholders always come first, or is another model preferable? Why?


  1. Horst Lehrheuer
    February 24, 2012

    As a former high-tech CEO and COO, traditionally I’d say – right on, Peter Drucker! However, from my point of view today I prefer: enterprises are to optimize their wellbeing-producing capacity and outcomes (financially, socially, and ecologically, and health) for all stakeholders – now and in the future!

    No doubt, that’s a daunting task (besides there is no one right way), especially in a society that is and in business enterprises that are so strongly driven by the idea of shareholder-primacy these days. Furthermore, corporations and its executives hardly have the “right tools” (e.g. as far as thinking, management and leadership methods) for this task today, despite advances such as B-Corporations in the US. We must brake the mold of our conventional thinking if we want to see any noticeable change.

  2. Alba Patricia Valencia
    February 24, 2012

    We must recognize the dynamic approach that has life. If the market, we are not prisoners of the circumstances.

    Ability of social adaptation and empathy are a set of social skills necessary to create you going out. The courage to act materializing our insatiable desires and learn from failures how does get better.

    Nosotros debemos reconocer el enfoque dinámico que tiene la vida. Si el mercado evoluciona, no somos prisioneros de las circunstancias.

    La capacidad de adaptación social y la empatía son un conjunto de habilidades sociales necesarias para crear tus salidas. La osadía para actuar materializando nuestros deseos insaciables y aprender de los fallos la manera de lograr hacerlos mejor.

  3. William Patrick Leeonar
    February 24, 2012

    The single minded pursuit of short term shareholder return often leads to Enron and the other well publicized disasters. In the aftermath, the Iron Law of Social Responsibility catches up and adds costs to the good guys and the remaining bad ones. Stakeholder representation on boards can provide a conscience.

  4. Jack Bergstrand
    February 25, 2012

    There is a spiritual term “near enemy,” which is a quality that can masquerade as the original, but is not the original. It’s a concept that is thousands of years old. This is what “shareholder value” has become relative to the interests of owners. Yesterday’s owners thought differently than today’s shareholders because today’s shareholders are mainly share traders. You own a share for $50, I buy it because I think it can be $55, and then I sell it to someone who thinks it will reach $60. Today’s transactions, by and large, have little to do with thinking like owners. And that’s the problem. Shareholder value isn’t shareholder value at all in today’s Wall Street / E*Trade world. It’s more like playing roulette in Las Vegas than it is like owning a company. As a result, those stakeholders who are most important get hurt the most. Once again, Peter Drucker got it right.

    • Mike Grayson
      February 25, 2012

      Jack, I responded before reading your comment, and when i read it, I realized that you are right. Shareholders of today, aren’t really owners, they are gamblers. They have little or no interest in operation of a company, other than for the stock to go up.

      Thanks for the insight. I have to admit that I was approaching the question with “old school” thinking.

    • Greg Zerovnik
      February 25, 2012

      Jack, you have hit the nail right on the head! The whole transactional, speculative nature of investing these days is the rot at the core of our system. Geert Hofstede’s work on national culture, replicated many times in the literature, clearly shows that Westerners tend to be more short-term focused than Asian cultures. Also, Asian firms tend to have ownership more concentrated than we do, which means that managers and owners often have family ties, which both reduces the demand for short-term profit-taking while allowing majority shareholders to tell dissidents to go fly a kite if they don’t like their quarterly dividend check or an anemic rise in share price. The Confucian ideal, in fact, makes for a longer-term view. Naturally, this comes with its own set of problems, including a lack of responsiveness to employee and customer interests. Somewhere, somehow, a balance needs to be struck.

      Phi Kotler’s new book, Marketing 3.0, with two Indonesian colleagues, does a fine job of setting out sound business reasons for adopting a more socially responsible mindset for businesses. Simply put, more consumers are demanding CSR, and if your firm doesn’t provide this more values-based approach to doing business, your competition will.

  5. Mike Grayson
    February 25, 2012

    Your article brings up several different issues. Should the CEO of a publicly owned company, who is “employed” to manage that company, make political comments, or get the company involved in issues such same sex marriage? I think Peter Drucker would have responded with a resounding “no”.

    Should shareholders always come first? Since shareholders are owners of a company, you must ask if the owners are responsible for treating their employees fairly, and being responsible members of the community? The answer is yes. Since the CEO is employed by the sharesholders, he or she, has a responsibility for not only financial results, but employee development, innovation, and market standing.

    The model offered by Peter Drucker is the best one, don’t manage for the short–term, maximize the long term wealth producing capacity of the organization.

  6. Wale Bamiro
    February 26, 2012

    I will want to quote Jack – “once again, Peter Drucker got it right’. This approach of ‘wealth creating capacity of the enterprise’ shifts the CEO and other executives responsibilities from transient shareholders to other ‘real’ stakeholders.

    Capacity of the enterprise is derived from the employees, the environment in which it operates, customers, and suppliers- these are the real stakeholders of the firm

  7. The Feedback | The Drucker Exchange
    February 28, 2012

    [...] come first? Last week, in a blog post addressing the maximization-of-shareholder-value model, we noted that Peter Drucker preferred an approach that places the “wealth-producing capacity” of a [...]

  8. Letter from Claremont: Mar-Apr 2012 | The Drucker Institute
    March 1, 2012

    [...] Take last Friday’s post from our blog, the Drucker Exchange, which explored whether the era of ”maximizing shareholder value” may be coming to an end. By some accounts, this was our most popular post in a long time, ringing up 1,397 views, according to Google Analytics. It also generated a not-too-shabby 98 tweets, Twitter showed. [...]

  9. Human Behavior | Pearltrees
    March 1, 2012

    [...] Illustration credit: Goncalo Viana The companies that did it right were to be found in Germany and Japan, Drucker believed. “They do not attempt to maximize shareholder value or the short-term interest of any one of the enterprise’s ‘stakeholders,’” Drucker wrote in Managing for the Future . “Rather, they maximize the wealth-producing capacity of the enterprise .” [Italics Drucker’s] Maximize This! | The Drucker Exchange [...]

  10. Eight is Enough | The Drucker Exchange | Daily Blog by The Drucker Institute
    September 24, 2012

    [...] was adamant that business should be about much more than that and, as we’ve discussed, lamented the primacy of shareholders when he encountered it. Indeed, Drucker felt that a mission [...]


Leave a Reply