Bower and Paine (2017) argue that the obsession with maximizing shareholder value reflects ‘a failure at the heart of corporate leadership’. Do you agree or disagree with their position? Outline and discuss their arguments drawing on relevant theoretical approaches to shareholder value.

According to (Bower, 2017) an ‘an obscure palm of self-interest’ moves to produce an inclusive atmosphere in the optimal interests of ‘the many,’ i.e. this is everyone acts to maximise his endeavours. The process of striking a correct balance between individual interests and the standard/ greater good poses a challenge to economic development. For this reason, all stakeholders must understand that the common good is to be achieved by individually accepting to enhance individual interests. Despite the straightforwardness of this statement, the corporate world has had a significant problem in drawing the right balance around the common good and the particular benefits. This deliberation has elicited the rise of two contending patterns of thought which are the stakeholder and the shareholder school of thought.  

These divergent schools of thought have been derived from separate ideologies and consists different arguments of establishing the ultimate theoretical framework behind the corporate objective. There still exists no consensus among scholars with regards to the two theoretical models. This paper considers a substitute theory of corporate governance that surpasses the classical shareholder stakeholder polarity. This substitute theory of business governance is known as the ‘enlightened shareholder value’ methodology (Jensen, 2000).

This ‘enlightened shareholder value’ methodology tries to draw a balance between company stakeholders’ welfare and the shareholders’ primacy. Effective CSR administration is in line with stockholder value maximization aim. However, attending much broader welfare can be the tactic to long-run financial success. This paper shall start via scrutinising the contextual of the proposed method, its origins and goals. In the same way, this paper will also attend to the disquiets and criticism that have been forwarded by the proponents of both the shareholder and stakeholder model. It will go on to examine how the enlightened shareholders’ value will provide a link to the different and polarised theories.  It will also evaluate whether it can be able to stimulate the accomplishment of the optimum performance and answerable management goal of modern companies (Froud, 2006).

The main focus steering the present and future discussion is on whether this enlightened view of shareholders value can solve the ongoing challenge and if not whether it will serve an essential goal of shaping this discussion in the future. The problem is to stabilize competing welfare of the firm’s shareholders in a bid to maintain the firm’s lane of triumph and sustainability. If the boards of management wish to see a successful transition of corporate governance, they should be willing to oversee a change of the existing corporate legislation.  

Shareholders prevalence and wealth maximisation. (Lazonick et al, 2010), the only prevailing model in the Anglo-Saxon dispensation was the shareholder value theory. It represents an outdated version of the corporate goal. The limelight of stockholder theory discussion is bestowed on the stockholders’ welfare, and the solitary goal of firms is only restricted to the intensification of shareholders’ prosperity. The main concerns underlying this suggestion lies in the understanding that stockholders are the proprietors of the firm and since they are the providers of assets, they are the outstanding demanders. The unpaid claimants bare a significant prize in how the firm functions, incoming benefits if the firm’s prosperities upsurge. Similarly, they will also agonise deficits in case the firm doesn’t become successful or becomes bankrupt (Smith, 2017; Froud et al., 2010).

The dispensation following the great depression of 1930 in the USA was conclusive for the supremacy to the stockholder value model. This period also featured the beginning of infinite discussions concerning the regulation of firms (Stockhammer, 2005). In 1930, Merrick Dodd and Adolf Berle had a tough interchange of opinions on the topic of company goals. (Tse, 2011) reinforced that the authorities bestowed to the directors are to be used for the sole advantage of the shareholders. This contention has since become famous, succeeding the start of the conception of the distinction between control and ownership (Lezonick, 2010). According to the organisation association the shareholders (who act as the leaders) agent decision-making power of the firm’s industry to the managers (representatives), to enable them to manage the firm on their (the stockholders) behalf. The proprietors of the firm successfully submit the governance of the firm to the managers, who have more skills, experience, and efficiency and thus more suited to roll down the firm’s approach and realise the firm’s goals.

Extrapolating the concept of differentiating of control and ownership, the stockholder value theory positioned shareholders’ interests ahead of any other stakeholders, who might influence or be influenced by the company’s conduct. Firms needed to be managed in a way that can maximise their intrinsic value ‘through dynamic and industrious effective’ (Roche, 20177). The equivalent ‘goals’ have also been reinforced several ages later by the Nobel Star victor, Milton Friedman (1970), who stressed that maximizing the firms’ profits was the only communal obligation of the firm. Even though Milton wasn’t denoting income in the view of short-run income, it has since been often quoted as an ally of profit maximisation as the chief goal of firms. He was backing up a more complicated method of profit intensification, i.e. supporting up Berle’s agency model: ‘Firm managers, as long as they operate within the rules, have errands in their firm’s actions apart from making as much cash for their shareholders as possible’ (Jensen 2008; Bevan 2014). According to Berle, stockholders bear the valid and only the claim to the firm’s income, not only since they are the proprietors in an outdated property view, but also since they represent to some degree the interests of the overall public.

The enlightened Shareholder Value. Since the theory was developed, it has fascinated numerous followers, and its acceptance got to extraordinarily great levels. Around 2001 it was declared that Anglo-American firm’s domination method grounded on stockholder predominance had prospered and European shareholder schemes were agreeing with the Anglo-American way (Hansmann et al., 2001). The satire of this history is that shortly after these reports, a couple of company’s failures and shames in many places of the Atlantic proved that the structure was not perfect. The reproaches came at the onset of the current millennium and were coupled with the collapse of leading banks, like Northern Rock based in the United Kingdom and the Lehmann Bros in the United States (Keay 2011). This apprehension had disappeared, as the trend that had initially been affected firms were now intensifying to financial and lending institutions.

A significant variation, of course, was just obligatory, since company governance systems and economic rules were under the inspection of all these fiascos. The drawbacks resulting from the overhyped Anglo-American scheme started becoming profound. Most  Financiers and shareholders started losing their faith in this scheme, and the need for stringent improvements became necessary. The Come up of and the evolution of the shareholder theory. Jensen was among the first scholars who pinpointed the problem and went beyond mere polarisation of the two approaches that existed to come up with an enlightened stakeholder’s theory. At first glance, it appeared as if he attempted to merge the two theories in a trial to eradicate the underlying drawbacks of the two approaches. Taking a critical look, it seemed Jensen did not dismiss the value intensification goal as the main aim of contemporary corporations. Still, he acknowledged that firms couldn’t make the most of their value without necessarily taking decent care of their shareholders.

According to (Jensen, 2001), “value of working in the field of economics and finance indicates that social wellbeing is maximized if and only if companies in an economy maximise total company value”. Managers cannot ignore stakeholders any more. The era of stringent compliance with the biased principle of indisputably sponsoring shareholders’ interests is long overdue. The relations that exist between the companies and their stakeholders exceed just the concise contractual agreement.  The ability to create and maintain those relations within the network of stakeholders is one of the decisive features for long-run endurance and triumph of each and each firm (Morsing, 2006).

Jensen’s approach noticeably tried to strikes a perfect equilibrium between stakeholder management and shareholder’s primacy.  His insight of corporate goals made use of Friedman’s views as a preliminary basis but also blended these views with those of Freeman about economics and ethics. Specifically, Friedman’s purpose of a firm was to use its funds to carry out activities which maximised profits for as long as the firm acted within the guidelines of the game. (Friedman, 2006) defined the instructions of the game as the firms functioning in a setting of free and open competition which does not have dishonesty or fraud. This Enlightened theory added one additional aspect in commercial activities, the ethical element.

Stakeholder theory supporters see an ethical aspect to commercial activities because the business ‘is instilled or entrenched with ethical conventions, insinuations, and inferences’ (Carroll 2000). (Freeman et al., 2006), standards are unavoidably and agreeably viewed as s fragment of carrying out commerce. This rubbishes the claims that economics and ethics can be detached. Thus, the progressive approach tries to repel the disagreement elicited by the stockholder value model that firms’ directors should be disallowed from pursuing ethical objectives at the cost of financial success because this is the only impartial purpose of the firm (Branco and Rodrigues 2007). Firms are not probable to substitute the governments or NGOs enterprise the part of sponsors of CSR. Nevertheless, being publically accountable and ethically upright does not refute the responsibility to exploit stockholder value. In the same era, John Kay underlined the necessity of a fundamental revolution not just in firms’ goal but also in the marketplace acts and guideline of business.

More specific, (Brickley et al., 2002) discussed mounting naturally all-encompassing capitalism ‘in which stock markets are systems for funding and refunding firms rather than manic gaming club; in which investors and employees have the shared goals of nourishing clients and outstripping economic goods; in which the business guideline is intended to be enforced on the marginal behaviour which many people adopted naturally’. The burning question was if this aspiring notion could be converted into an applicable method, suited to direct contemporary companies outside the maze of shames and short-lived approaches.

The enlightened value intensification model fascinated substantial consideration in the educational and the corporate world. (Brickley et al., 2002) braced this approach specifying that “generating shareholder prosperity involves assigning resources to all areas that influence the process of shareholder value generation, but only to the level at which the incomes from such expenditures do not exceed their further costs.” Being at the centre of consideration permitted Jensen’s model to progress and advance swiftly. The aftermath of all this discussion was the liberal stockholder value theory (ESV). This period was seen appropriate for the new model, as it could assert sovereignty over the two previous methods. The Enlightened shareholder value theory was an amalgam approach, which, was retentive of the shareholder prevalence theory, focused on the long run and promoted the interests for all the participants (Fisher 2009). Primarily, it was viewed as being just being a replica of a stockholder centred having an ESG pink on top.

They enlightened Shareholder Value. Consequently, it got offered as the intermediate standing between the two extremes (Ajjibo, 2014), the new third technique to company goals and the demonstration of the unbiased stable conciliation amid the two poles. Lastly, it was documented that this ESV approach ‘kills two bird with one stone because participants got more deliberation while the stockholders upheld the profit intensification objective and still held the managers responsibly (Kiarie 2006). The ESV notion was cautiously advanced as an amalgam, but an independent method.

It did not endeavour to fill the cracks of the preceding models, but to propose a diverse opportunity to company directors. The ESV wanted to fetch the company goal discussion in the 21st century, by an advanced procedure. It was conservative of the foundation of the stockholder value model, maintained the traditional technique of carrying out commerce, and furthered a fresh aspect, the deliberation of stakeholder interests. The ESV cheered long-sightedness while viewing the firm’s matters. There lacked another way to stabilize the completing welfare of various participants but via comprehensive deliberation of all the issues that influence the firm’s long term performance and affluence, stressing the significance of reliance and sustainability. In simple terms, ESV was seen as providing an essential development (Roche, 2017).

The emphasis on stockholders’ welfare and value intensification was enormously hard to change rapidly. Thus, the new method was still beached squarely around the stockholder value model, which stresses on financial effectiveness and shareholder prosperity intensification (Ho 2010). Nevertheless, it is more progressive than its precursor, as income intensification is the evidence that a firm is well run, not its crucial goal. Income is the consequence of an accurate application of the ESV model, not the superseding drive. Firms should act to generate value, not only for the stockholders but also for all the other stakeholders. Since stockholders characterise one amongst many stakeholder assemblies (Keay 2011), .2 Multiplicity states that not any stakeholder setting has precedence over the other group and needs managers to participate in a harmonizing application to consider all the diverse groups and not just the stockholders (Keay, 2011).

From this point of reasoning, there’s a slight deviation from the stakeholder value approach in that directors aren’t anticipated to participate in running needs, interests and views of the stakeholders of the company (Friedman and Miles, 2006). Current firms, particularly the MNCs, are thought of as such persuasive social players whose actions substantially influence society. It, therefore, goes without saying that the most appropriate model of handling the query of company objectives ought to be a model which replicates the prevailing socio-economic realism of the corporate community and not just a hypothetical one which hard to put in a drill. The ESV theory appears like the lost linkage between financial and company organisation.

Soon after some time, the enthusiasm surrounding ESV eloped, and the flip side of it got discovered.  The ESV had certain drawbacks, which couldn’t be merely overlooked. The ESV strategy did adopt not only the merits to each model but also their demerits. It wasn’t undoubtedly vibrant how the ESV strategy characterizes an enhanced tactic, as opposed to stakeholder and shareholder styles. Firstly, the ESV theory was disapproved for proceeding to be stockholder biased. The stockholders’ welfare still held prevalence provided the managers acted in a way that would be guaranteed the triumph of the company for the common good of all stakeholders. Managers needed to contemplate various issues in an attempt to device the best way to accomplish this obligation however the end goal seemed to shareholder-centric. Unavoidably, apprehensions have been articulated concerning the effectiveness underlying this new model. Also, the degree to which it protects the other stakeholder groups has been a subject of criticism.

Furthermore, similar to the instance of the stakeholder value method, ESV lacked exactness because it did not offer direction to managers on how to harmonize the welfare of the firm’s diverse stakeholders. More also, the problem of implementation became another substantial drawback of this methodology. Explicitly, the ESV failed to impose the responsibility of managers to stakeholders this therefore left stakeholders with less or no ways of seeking redress in an event where their interests were overlooked.

These flaws relating to the new theory were relatively severe, and it is not astonishing that they have been inferred as the indicators of its disappointment to be viewed as a technique of going towards concerning the firm’s drive (Mudawi, 2018). Such condemnation was real and justified, however instead of discarding all the new suggestions, maybe it would be wise to stay positive and emphasis on subsidising to the development of this newly proposed theory. Company directors and managers weren’t primarily in contrast to the ESV model they had no antagonisms to the transition of course towards long-sightedness and illumination.

Scholes (2008) research done in the Financial Times of Europe’s best-esteemed firms revealed that CEOs thought that one of the characteristics of a reputable firm was the aptitude to make sure that there was a harmony of the interests of stakeholder assemblies. The main question was how this was stabilising would be practical, limiting stakeholder assemblages and conflicts of interest dissatisfaction of specific while protecting the stockholders confident that the triumph of the firm is correctly supported?  (Gleadle, 2014) argued that the majority of managers regard themselves as answerable to more than one.

This paperwork deliberates the obsession in maximising the stockholder value by evaluating the drawbacks of the two divergent theories that is the shareholders and stakeholders model. It also suggests an enlightened shareholder approach, which was put forward by Jensen to enhance the drawbacks of the two methods. It goes on to explain the resultant detects that followed as a result of adopting the enlightened shareholder’s theory.


Ajibo, C.C., 2014. A critique of enlightened shareholder value: Revisiting the shareholder primacy theory. Birkbeck L. Rev.2, p.37.

Bevan, D., 2014. Debates and reasoning in business and professional ethics: an appreciation of Steve Williams. Business and Professional Ethics Journal33(2/3), pp.191-203.

Bower, J. L. and Paine, L. S. (2017) ‘The error at the heart of corporate leadership’, Harvard Business Review May-June

Carroll, A.B., 2000. Ethical challenges for business in the new millennium: Corporate social responsibility and models of management morality. Business Ethics Quarterly10(1), pp.33-42.

Rodríguez Bolívar, M.P., Garde Sánchez, R. and Lopez Hernández, A.M., 2015. Managers as drivers of CSR in state-owned enterprises. Journal of Environmental Planning and Management58(5), pp.777-801.

Brickley, J.A., Smith Jr, C.W. and Zimmerman, J.L., 2002. Business ethics and organizational architecture. Journal of Banking & Finance26(9), pp.1821-1835.

Fisher, D., 2009. The Enlightened Shareholder: Leaving Stakeholders in the Dark–Will Section 172 (1) of the Companies Act 2006 Make Directors Consider the Impact of their Decisions on Third Parties? Since s. 172 (1) of the Companies Act 2006, directors have a duty to consider third party interests when promoting business success. This article argues the provision poses little threat to those chasing quick profits, while seemingly enshrining shareholder value in statute. Nevertheless it is also strongly normative and…. International Company and Commercial Law Review20(1), p.10.

Friedman, A.L. and Miles, S., 2006. Stakeholders: Theory and practice. Oxford University Press on Demand.

Froud, J., Haslam, C., Johal, S. and Williams, K. (2010) ‘Shareholder value and financialisation: Consultancy promises, management moves’, Economy and Society 29(1): 80-110.

Froud, J., Johal, S., Leaver, A. and Williams, K. (2006) Financialization and Strategy: Narrative and Numbers, ‘Ch. 3 Shareholder value: The intrusion of the capital market’, pp. 36-64.

Gleadle, P., Parris, S., Shipman, A. and Simonetti, R. (2014) ‘Restructuring and innovation in pharmaceuticals: The impact of financialisation’, Critical Perspectives on Accounting 25(1): 78-91

Ho, V.H., 2010. Enlightened shareholder value: Corporate governance beyond the shareholder-stakeholder divide. J. Corp. L.36, p.59.

Jensen, M. C. (2000) ‘Value maximisation and stakeholder theory’, Harvard Business School July 24

Jensen, M. C. and Meckling, W. H. (1976) ‘Theory of the firm: Managerial behaviour, agency costs and ownership structure’, Journal of Financial Economics 3: 305-360.

Johnson, G., Scholes, K. and Whittington, R., 2008. Exploring Corporate Strategy. Financial Times Prentice Hall.

Lazonick, W. and O’Sullivan, M. (2010) ‘Maximising shareholder value: A new ideology for corporate governance’, Economy and Society 29(1): 13-35.

Lazonick, W., Hopkins, M. and Jacobson, K. (2016) ‘What we learn about inequality from Carl Icahn’s $2 billion Apple “no brainer”, Institute for New Economic Thinking June 6 

Morsing, M., 2006. Corporate social responsibility as strategic auto‐communication: on the role of external stakeholders for member identification. Business Ethics: A European Review15(2), pp.171-182.

Keay, A., 2011. Moving towards stakeholderism? Constituency statutes, enlightened shareholder value, and more: much ado about little? European Business Law Review22(1), pp.1-49.

Mudawi, D., Mustafa, O. and Timan, D., 2018. Does the Concept of Enlightened Shareholder Value Succeed in Bridging the Gap between the Shareholders and Stakeholders Value Theories? Business and Economic Research8(2), pp.56-70.

Roche, C. (2017) ‘Let’s talk about “Maximising shareholder value”‘, Blog Post February 8

Johnson, G., Scholes, K. and Whittington, R., 2008. Exploring Corporate Strategy. Financial Times Prentice Hall.

Smith, Y. (2014) ‘The Myth of Maximising Shareholder Value’ Naked Capitalism blog post-

Stockhammer, E. (2005) ‘Shareholder value orientation and the investment-profit puzzle’, Journal of Post-Keynesian Economics 28(2): 193-215.

Stout, L. The Myth of Shareholder Value (Berrett-Koehler Publishers, Inc.) Introduction: “The dumbest idea in the world’, pp. 1-12 and Ch. 2: ‘How shareholder primacy gets corporate law wrong’, pp. 24-32.

Tse, T. (2011) ‘Shareholder and stakeholder theory: after the financial crisis’, Qualitative Research in Financial Markets 3(1): 51-63.

Leave a Reply

Your email address will not be published. Required fields are marked *