The Shareholder Value Revolution

My dissertation blends intellectual and business history to explain why American businesses chose to endorse the idea that corporations existed primarily to maximize the value of their shareholders’ investments during the final decades of the twentieth century. Shareholder value maximization was not just a financial strategy that corporate leaders adopted, it was an entirely different way of understanding what a corporation was and what its place in society should be. This new way of understanding the corporation was the product of decades of research in financial economics. Financial economists argued that corporations owed nothing to society beyond the maximization of shareholder value and that managers should focus on boosting their firms’ stock price above all else. In the 1980s and 1990s, activist investors, management consultants, legal theorists, and financial economists themselves used these ideas to justify hostile takeovers of businesses with low stock prices and to pressure managers to restructure their businesses around the promotion of shareholder value. Through an examination of these consultants’ methods and the theory behind them, this dissertation demonstrates how ideas in favor of shareholder value maximization redefined fundamental business concepts such as profit and value. This process of redefinition transformed actions once seen as signs of corporate failure like layoffs and divestitures into signs that managers were willing to make the difficult choices needed to redirect corporate funds away from workers and “unproductive” investment and to shareholders. Consultants and academics also encouraged companies’ boards of directors to grant top executives compensation in the form of stock options to encourage managers to engage in the often-painful sorts of restructurings needed to maximize shareholder value. Thanks to boards’ generosity with these stock options, executives were able to take home unprecedentedly large levels of compensation during the late 1980s and the 1990s, while being incentivized to shed their obligations to workers and to maximize value for shareholders. The root of contemporary concerns about economic inequality and a slowdown in economic growth trace back to these decisions that executives made to embrace shareholder value maximization