The Broad Effects of Shareholder Value Maximization Theory

Abstract

The thesis is written about shareholder value maximization theory, and its effects on organizations in the US. The theory has had an impact with the support of regulatory changes on companies’ ways of management. Changes enforced by the theory have made companies in the US more focused on creating short-term value, with the emphasis on shareholders’ interests particularly. Shareholders’ interests often differ from what is the best for companies’ long-term success. The conflict between interests between long-term and short-term value seeking has been “fixed” by aligning executives’ salaries to the stock price. However, the change in aligning the interests between stakeholders has made the issue in companies arguably worse. Executives are more incentivized to create short-term value due to their own interests and see their companies’ assets, such as employees, factories, and R&D, as expenses. The issue is especially meaningful in industries such as pharmaceuticals where the performance depends on R&D. In the pharmaceutical industry, where creating cures for diseases and saving human lives is at the very core of business, the focus on short-term investments harms the future. It is illustrative of a widespread problem in the US economy where companies are focusing on creating impressive expectations regarding the stock market, yet little improvements in the real market performance.