ABOUT THIS EPISODE
Should companies exist solely to make their shareholders richer? For decades, the idea of shareholder value has dominated corporate management, but I argue that this approach has fundamentally misunderstood what makes businesses successful.
In this Understanding Economics video, I explain what shareholder value means, where the idea came from, and why putting shareholders first can damage businesses, workers and society.
In 1970, economist Milton Friedman argued that companies should prioritise making profits for their shareholders. This idea became central to neoliberal economic thinking and helped transform how major corporations were managed.
Around the same time, economist Eugene Fama developed the efficient market hypothesis, encouraging the belief that share prices accurately reflect the value of companies. Together, these ideas helped make profits and rising share prices the dominant measures of corporate success.
But does a rising share price really mean a company is doing well?
I examine how the pursuit of shareholder value can encourage businesses to cut jobs, suppress wages, reduce investment and buy back their own shares to boost financial returns. These decisions may benefit shareholders in the short term while weakening the businesses they own.
I also explain why shareholders are not the only people responsible for creating a company’s wealth. Workers, customers, suppliers, governments and communities all contribute to business success, yet shareholders are often given priority when the rewards are distributed.
UK company law recognises some of these wider responsibilities. Section 172 of the Companies Act 2006 requires directors to consider employees, suppliers, customers, communities and the environment, although shareholder interests remain central.
Drawing on my experience as a chartered accountant who has advised hundreds of businesses, I argue that successful companies prioritise providing useful products and services, treating workers fairly, maintaining good supplier relationships and respecting the environment.
Profit matters, but it should be the consequence of running a successful business rather than its sole purpose.
Companies should exist to meet people’s needs and contribute to society. Shareholders deserve fair treatment, but so does everyone else who makes business success possible.
It’s time to rethink shareholder value and ask what companies should really be for.
