The Social Value of Shareholder Value

• Author: Randall Morck
• Date: 01 May 2014
• DOI: http://doi.org/10.1111/corg.12063
• Published date: 01 May 2014

The Social Value of Shareholder Value

Randall Morck*

ABSTRACT

Manuscript Type: Perspective

Research Question/Issue: Can maximizing shareholder value maximize social value?

Research Findings/Insights: 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.

Theoretical/Academic Implications: 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).

Practitioner/Policy Implications: 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 associatedwith shareholder value thus depends on the bundle of political economy institutions that

promote functional eff‌iciency.

Keywords: Corporate Governance, Corporate Governance Theories, Shareholder Value, Firm-Level Governance Out-

comes, National-level Governance Outcomes

THE EVOLUTION OF INSTITUTIONS

The collapse of Marxism-Leninism towards the close

of the twentieth century ended most of the world’s

various experiments with totalitarian political economy

systems. The few remaining counterexamples – China’sstate

capitalism and Iran’s clericofascism – are eerily reminiscent

of the interwar Italianand Austrian totalitarian experiments,

respectively, that were interrupted by World War II (Morck

& Yeung,2010). Neither looks likely to overturn Fukuyama’s

(1992) null hypothesis that we have reached “the end of

history” in the very restricted sense that some mixture of

capitalism and social democracy is almost surelythe best we

can do.

Under that null hypothesis, the institutions loosely

referred to as corporate governance loom large because they

determine who controls the economy’s capital and, there-

fore, whose interests capital advances. The world is conduct-

ing a marvelous randomized experiment, in which different

countries try different bundles of institutions. Much history

is likely still needed to reveal which bundle works best. The

winner, variously emulated or modif‌ied, will shape the

future. But determining the winner requires a measure of

success.

SHAREHOLDER VALUATION AS A

MEASURE OF SUCCESS

Financial economics nominates shareholder valuations.

Higher valuations, mainstream f‌inance holds, mean that

capital is allocated in ways that generate more value. Finance

comes to this admittedly rather peculiar conclusion because

it relies on the eff‌icient markets hypothesis (Fama, 1970): Share-

holders’ valuation of a f‌irm’s stock ref‌lects, by and large, the

actual underlying value per share of its capital as thatcapital

is being used. If investors expect the f‌irm’s capital to be used

in more valuable ways, then its share price rises.

The obvious objection here is that public shareholders

may not accurately perceive the true value of the company’s

capital. Indeed, f‌inancial bubbles and crashes leave the

hypothesis patently implausible to many. Why then does

f‌inance persist with it?

*Address for correspondence: Randall Morck, Alberta School of Business, University

ofAlberta, Edmonton, AB, Canada T6G 2R6. Tel:780-492-5683; E-mail: randall.morck@

ualberta.ca

185

Corporate Governance: An International Review, 2014, 22(3): 185–193

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12063