Lazonick, o'Sullivan 2000 - Maximising Shareholder Value

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  • This article was downloaded by: [Kingston University Library]On: 13 April 2014, At: 11:01Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number:1072954 Registered office: Mortimer House, 37-41 MortimerStreet, London W1T 3JH, UK

    Economy and SocietyPublication details, includinginstructions for authors and subscriptioninformation:http://www.tandfonline.com/loi/reso20

    Maximizing shareholdervalue: a new ideologyfor corporategovernanceWilliam Lazonick & Mary O'SullivanPublished online: 02 Dec 2010.

    To cite this article: William Lazonick & Mary O'Sullivan (2000) Maximizingshareholder value: a new ideology for corporate governance, Economyand Society, 29:1, 13-35

    To link to this article: http://dx.doi.org/10.1080/030851400360541

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  • Maximizing shareholdervalue: a new ideology forcorporate governance

    William Lazonick and Mary OSullivan

    Abstract

    The decade-long boom in the US stock market and the more recent boom in the USeconomy have fostered widespread belief in the economic bene ts of the maximiz-ation of shareholder value as a principle of corporate governance. In this paper, weprovide an historical analysis of the rise of shareholder value as a principle of corpor-ate governance in the United States, tracing the transformation of US corporate strat-egy from an orientation towards retention of corporate earnings and reinvestment incorporate growth through the 1970s to one of downsizing of corporate labour forcesand distribution of corporate earnings to shareholders over the past two decades. Wethen consider the recent performance of the US economy, and raise questions aboutthe relation between the maximization of shareholder value and the sustainability ofeconomic prosperity.

    Keywords: shareholder value; corporate governance; corporate strategy; US economy.

    Introduction

    Over the past two decades the ideology of shareholder value has becomeentrenched as a principle of corporate governance among companies based inthe United States and Britain. Over the past two or three years, the rhetoric ofshareholder value has become prominent in the corporate governance debates inEuropean nations such as Germany, France and Sweden. Within the past year,

    Copyright 2000 Taylor & Francis Ltd 0308-5147

    Economy and Society Volume 29 Number 1 February 2000: 1335

    William Lazonick and Mary OSullivan, INSEAD, Boulevard de Constance, 77305Fontainebleau Cedex, France. E-mail: William.Lazonick@insead.fr;Mary.O.Sullivan@insead.fr

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  • the arguments for maximizing shareholder value have even achieved promi-nence in Japan. In 1999 the OECD issued a document, The OECD Principles ofCorporate Governance, that emphasizes that corporations should be run, rst andforemost, in the interests of shareholders (OECD 1999).

    But what does maximizing shareholder value mean? Is it an appropriate prin-ciple for the governance of corporations in the advanced economies in thetwenty- rst century? Does the implementation of this principle improve thecompetitive performance of corporate enterprises? Would the reform of thecontinental European and Japanese systems of corporate governance based onthe principle of maximizing shareholder value bring sustainable prosperity tothese economies?

    In the so-called Anglo-Saxon economies of the United States and Britain, theexclusive focus of corporations on shareholder value is a relatively recentphenomenon, having risen to prominence in the 1980s as part and parcel of theReaganite and Thatcherite revolutions. The decade-long boom in the US stockmarket and the more recent boom in the US economy have impressed Europeanand Japanese corporate executives with the potential of shareholder value as aprinciple of corporate governance, while American institutional investors,investment bankers and management consultants have incessantly promoted thevirtues of the approach in Europe and Japan.

    There is, however, in both Europe and Japan, considerable misinformationabout why shareholder value has become so prominent in the governance of UScorporations over the past two decades and the actual impact of its implemen-tation on the performance of US corporations and the US economy. Therefore,as a precondition for considering the arguments for maximizing shareholdervalue in those nations in which it is not yet an entrenched principle of corpor-ate governance, it is imperative that we understand the evolution and impact ofthe quest for shareholder value in the United States over the past two decades.Such is the purpose of this paper.

    The origins of s`hareholder value

    The arguments in support of governing corporations to create shareholder valuecame into their own in the United States in the 1980s. As has been the casethroughout the twentieth century, in the 1980s a relatively small number of giantcorporations, employing tens or even hundreds of thousands of people domi-nated the economy of the United States. On the basis of capabilities that hadbeen accumulated over decades, these corporations generated huge revenues.They allocated these revenues according to a corporate governance principle thatwe call retain and reinvest. These corporations tended to retain both the moneythat they earned and the people whom they employed, and they reinvested inphysical capital and complementary human resources. Retentions in the formsof earnings and capital consumption allowances provided the nancial foun-dations for corporate growth, while the building of managerial organizations to

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  • develop and utilize productive resources enabled investments in plant, equip-ment and personnel to succeed (Ciccolo and Baum 1985; Hall 1994; Corbett andJenkinson 1996).

    In the 1960s and 1970s, however, the principle of retain and reinvest beganrunning into problems for two reasons, one having to do with the growth of thecorporation and the other having to do with the rise of new competitors.Through internal growth and through merger and acquisition, corporationsgrew too big with too many divisions in too many different types of businesses.The central offices of these corporations were too far from the actual processesthat developed and utilized productive resources to make informed investmentdecisions about how corporate resources and returns should be allocated toenable strategies based on retain and reinvest to succeed. The massive expan-sion of corporations that had occurred during the 1960s resulted in poor per-formance in the 1970s, an outcome that was exacerbated by an unstablemacroeconomic environment and by the rise of new international competition,especially from Japan (Lazonick and OSullivan 1997; OSullivan 2000: ch. 4).

    Japanese competition was, of course, particularly formidable in the mass-production industries of automobiles, consumer electronics and in the machin-ery and electronic sectors that supplied capital goods to these consumer durableindustries. Yet these had been industries and sectors in which US companies hadpreviously been the world leaders and that had been central to the prosperity ofthe US economy since the 1920s.1 Japan was able to challenge the United Statesin these industries because its manufacturing corporations innovated throughthe development and utilization of integrated skill bases that were broader anddeeper than those in which their American competitors had invested (Lazonick1998). Compared with American practice, Japanese skill bases integrated thecapabilities of people with a broader array of functional specialties and a deeperarray of hierarchical responsibilities into processes of organizational learning. Inparticular, the hierarchical integration of Japanese skill bases extended from themanagerial organization to shop- oor production workers and subsidiary rmsthat served as suppliers and distributors. In contrast, US companies tended touse their managerial organizations to develop and utilize technologies that wouldenable them to dispense with shop- oor skills so that hourly productionworkers could not exercise control over the conditions of wor