With the recent passing of Jack Welch, GE’s iconic CEO, I wanted to highlight a moment in his career when he made a rare shift in his otherwise outspoken business philosophy.  In March 12th 2009 interview with FT Jack denounced the business objective of “maximizing shareholder value” bluntly, stating “on the face of it, shareholder value is the dumbest idea in the world”.  Shareholder value initially posted impressive results in the 90’s but by the new millennium something was amiss. I believe that declaring shareholder value as the singular objective of business operations resulted in deteriorating investment in the American economy, the negative results of which are evident in our post-pandemic economy.  

This revelation by Jack Welch came as surprise because he was the high priest of maximizing shareholder value during the 1990’s.  I attended countless GE finance meetings and Crotonville training sessions where the objective of shareholder value was hammered home.   So if according to Welch shareholder value is a dumb idea how was the concept able to captivate corporate business culture?  In his book, Fixing the Game, Roger Martin traces the genesis of shareholder value theory to a paper published in the 1976 Journal of Financial Economics entitled “Theory of the Firm:  Managerial Behavior, Agency Costs and Ownership Structure”.  The concept was simple, offer business management equity as incentive compensation so their actions will be more closely aligned with, and reward, shareholders.  This concept had intuitive logic and a somewhat altruistic appeal – pay for performance. 

But a concept will remain just a concept unless it receives promotion.  In business there is always a sideline legion of academics, consultants and compensation experts ready to pounce on the next big thing – and get well paid for it.  If you print or promote an idea enough times the theory will take on its own momentum and eventually becomes accepted knowledge.  These agents of promotion created a Kool-Aid mix of shareholder value theory with equity-based compensation, handing it out to HR departments, board members, stock analysts and of course corporate management.  Equity-for-performance became the tip of the spear for the maximizing shareholder value theory. 

The theory of shareholder value turned corporate strategy into a blunt instrument that spawned right-sizing, financial engineering, wasteful mergers, production out-sourcing, plan, use of non-GAAP measures, evaporating quality, reduced innovation, R&D, etc.  The real damage inflicted by shareholder value took place behind closed doors when equity-grants made the jump to include corporate board members.  This compromised corporate governance and caused boards to lose objectivity and directly contributed to the corporate nuttiness that still continues today.  Even today in our post-pandemic economy shareholder value theory drove the cash burning financial alchemy of corporations issuing massive amounts of debt for share re-purchase programs and mathematically boost earnings per share.  What was left behind was the customer and employee, and ironically eventually investors, as corporate leadership cut expense budgets, searched for synergies and stopped investing.