CORPORATE GOALS AND MANAGERIAL INCENTIVES

This note provides students with a range of perspectives on corporate goals, who
determines them, and why. An important issue is when and whether corporate goals – no
matter who determines them – are more likely to reflect the interests of the firm’s share-
holders or its senior managers, and the consequences of this.
Goals of the Corporate Firm
What are the primary goals of a corporation? It is impossible to give a definitive
answer to this question because the corporation is an artificial being, not a natural person.
It exists as a legal entity, separate and distinct from the individual members of the firm.
Therefore, to infer what the corporation’s goals are, it is necessary to identify precisely
who controls the corporation. We shall start by considering the “set-of-contracts” view-
point, which suggests that the corporate firm will attempt to maximize its shareholders’
wealth if the appropriate contracts are in place and enforced.
Agency Costs and the Set-of-Contracts Perspective
The corporation can be viewed as a complicated set of contracting relationships
among individuals – a legal contrivance that serves as the nexus for these contracting
relationships. The corporation is not an individual, but rather a means of bringing the
conflicting goals of individuals into an equilibrium within a framework of contracts. The
set-of-contracts theory of the firm was propounded by M. C. Jensen and W. Meckling
in “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,”
(Journal of Financial Economics 3 (1976)). Under this theory, the firm is envisioned
essentially as a set of contracts. One of the contract claims is a residual claim (equity) on
the firm’s assets and cash flows. The equity contract is defined as a principal-agent
relationship. The members of the management team are the agents, and the equity invest-
ors (shareholders) are the principals. It is assumed that the two groups, if left alone, will
each attempt to act in its own self-interest – creating the potential for a conflict between
shareholders and managers. Shareholders are assumed to be unanimous in defining their
self-interest to be their own wealth maximization.
Shareholders, however, can discourage the managers from diverging from the
shareholders’ interests by devising appropriate incentives for mgrs and then monitoring
their behavior. Unfortunately, doing so is complicated and costly. The costs of resolving
the conflicts of interest between managers and shareholders are called agency costs.
These costs include the shareholders’ monitoring costs and the incentive fees paid to the
managers. It is assumed (perhaps naively) that contracts can be devised that will provide
the mgrs with effective incentives to maximize shareholders’ wealth. Thus, agency prob-
lems do not mean that firms will not act in the best interests of their shareholders, only
that it is costly to make them do so. However, agency problems can never be perfectly
solved, and managers may not always act in the best interests of shareholders. Residual
costs are the wealth loses that shareholders absorb on account of the non-share-value-
maximizing behavior and actions of the managers of their firms.
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Managerial Goals
The goals of corporate managers are often different from those of their firm’s
shareholders. What will managers maximize if they are left to pursue their own goals
rather than shareholders’ goals? Oliver Williamson proposes the notion of expense
preference.1 He argues that managers obtain value from certain kinds of expenses –
company cars, office furniture, office location, and funds for discretionary investment –
that managers value beyond their corporate productivity.
Gordon Donaldson conducted a series of interviews with the chief executives of
several large companies.2 From these, he concluded that managers are influenced by three
underlying motivations in defining the corporate mission:
(1) Survival. Organizational survival means that management must always command
sufficient resources to support the firm’s activities.
(2) Independence. This is the freedom to make decisions and take actions without
encountering the veto of external parties or having to depend on
outside financial markets.
(3) Self-sufficiency. Managers do not want to depend on external parties.
These motivations lead to what Donaldson concludes is the basic financial objective of
managers: the maximization of corporate wealth. Corporate wealth is that wealth over
which management has effective control, and it is closely associated with corporate
growth and corporate size. Corporate wealth is not necessarily shareholder wealth.
Corporate wealth tends to lead to increased growth by providing funds for growth and
limiting the extent to which equity is raised. Increased growth and size are not
necessarily the same thing as, and often erode, increased shareholder wealth.
Separation of Ownership and Control
A striking feature of most large US corps is the diffusion of ownership among
thousands of investors. Many people argue, as a result, that shareholders, as a group, do
not control the corporation. They argue that shareholder ownership is too diffuse and
fragmented for effective control of management. While this argument is certainly worth
considering, it is less true in Canada, and in developing economies, than in the US. In the
US, over 75% of the 500 largest firms are widely held, whereas, in Canada, less than 40%
of the largest 100 firms are widely held. Many domestically-owned Canadian firms have
controlling shareholders. One study found that among the firms covered by the TSX
Index, only 47% didn’t have a controlling shareholder. In some cases, control is main-
tained through the use of dual-class or enhanced voting rights shares. (Nevertheless,
controlling agency costs through re-examining the rules of corporate governance is of
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1
O. Williamson, “Managerial Discretion and Business Behavior,” American Economic Review 53 (1963).
2
G. Donaldson, Managing Corporate Wealth: The Operations of a Comprehensive Financial Goals System (New York:
Praeger, 1984).
considerable and growing interest in Canada.) In developing countries, most major firms
are either family owned/controlled or have an external controlling shareholder.
One of the most important advantages of the corporate form of business organiza-
tion is that it allows the ownership of shares to be transferred. The resulting diffuse own-
ership in large, widely-held corporations, however, brings with it the possible separation of
the firm’s legal ownership from its effective control. This possibility raises an important
question: Who controls the firm?
For many widely-held corporations, it has been alleged – since the publication of
The Modern Corporation and Private Property by US economists, Adolf A. Berle and
Gardiner C. Means, in 1932 – that a cadre of professional managers has come to control
Corporate America and that the de facto separation between legal ownership (by distant,
dispersed, and unorganized shareholders) and effective managerial control has undermin-
ed the rationale for believing that shareholder interests (including share-price maximiza-
tion) are the primary effective goals guiding corporate decisions and actions. In their
book, Berle and Means also warned of the concentration of economic power brought on
by the rise of large corporations and the emergence of a powerful class of professional
managers, insulated from the pressure not only of stockholders, but of the larger public as
well. In the tradition of Thomas Jefferson, Berle and Means warned that the rise of
managerial control and unchecked corporate power had potentially serious consequences
for the democratic character of the US.

Do Shareholders Control Managerial Behavior?

The claim that managers can ignore the interests of shareholders is deduced from
the fact that ownership in large firms is widely dispersed and that managers control the
information flow to shareholders. As a result, it is often claimed that shareholders –
individually or collectively – can exercise little control over mgrs. While there is some
merit in this argument, it is too simplistic. The extent to which shareholders can control
mgrs depends on (a) the costs of monitoring mgt, (b) the costs of implementing control
devices, and (c) the benefits of control. Shareholders have several control devices (of
varying effectiveness) to bond mgt to the self-interest of shareholders.
(1) Shareholders determine the membership of the board of directors by voting. Thus,
shareholders control the directors, who in turn select the mgt team. Nevertheless,
entrenched mgt possess many tools to hijack the director-selection process.
(2) Contracts with management and arrangements for compensation, such as bonuses and
stock option plans, can in theory be designed so that mgt has an incentive to pursue
shareholders’ goals. Similarly, managers may be given loans to buy the firm’s shares.
(3) If the price of a firm’s shares drops too low because of poor management, the firm
may be acquired by a group of shareholders, by another firm, or by an individual.
This is called a takeover. In a takeover, the top managers of the acquired firm may
find themselves out of a job. This possibility pressures mgt to make decisions in the
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 shareholders’ interests. Fear of a takeover gives managers an incentive to take actions
that will maximize stock prices.
(4) Competition in the managerial labour market may force managers to perform in the
best interest of shareholders. Otherwise, they will be replaced. Firms willing to pay the
most will lure good managers. These are likely to be firms that compensate managers
based on the value they create.
The available evidence and theory largely support the idea of shareholder control.
However, there is little doubt that, at times, firms pursue managerial goals at the expense
of their shareholders. The next 2 pages will reveal how a firm’s investment and financing
policies can be shaped to enhance the personal interests and effective control of senior
managers when shareholder oversight is weak.
Situations Where Managerial Motivations or Self-Interest May Lead to Investments
That Are Inappropriate or Excessive From a Shareholder-Wealth-Maxn Perspective
(1) The pursuit of greater managerial salaries, power, prestige, and perks may motivate
investments for the sake of growth and greater firm size, even if these investments do
not enhance firm market value (MV) or shareholder wealth. This motivation explains
why many mergers/acquisitions turn out to diminish the wealth of the aggressor firm’s
shareholders – e.g., Quaker Oats’ 1994 acquisition of Snapple; Carly Fiorina/Hewlett-
Packard’s 2001 acquisition of Compaq; Microsoft’s 2013 acquisition of Nokia’s
smartphone business.
(2) A desire to provide promotion and job-enrichment opportunities for senior managers
may motivate non-MV-enhancing investments and acquisitions.
(3) A desire to reduce the risk to mgrs’/the CEO’s “human capital” (which is concentra-
ted in the fates of their firms) may motivate diversifying investments which, while
they may reduce profit volatility and bankruptcy risk, may also erode the MV of their
firm. Shareholders, of course, can reduce these risks – without mgt’s help – by
diversifying their portfolios.
(4) Acquisitions may be undertaken, independent of their valuation consequences, so that
CEOs can move out of poor-performing businesses into ones where their prospects for
“looking good” are better – e.g., DH Corp’s 2015 acquisition of Fundtech, and
Enbridge’s 2016 merger with Spectra Energy.
(5) Marketing-oriented managers – rewarded throughout their careers for sales growth
and market-share maximization – may make excessive and costly investments in
inventories and accounts receivable (A/Rs) to attract and retain more customers.
(6) In order to shield themselves from having to go to the capital markets to raise funds –
hence having to justify their investment plans to investors – managers may keep
(invest in) excessive cash balances when their firms are flush, and not distribute the
excess cash to shareholders.
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(7) Some acquisitions may be motivated by the managers’/CEO’s desire to preserve their
jobs by making it more difficult for their firms to be taken over.
Classic examples: Consumers’ Gas-Hiram Walker 1980 merger to create a “fish too
big to be swallowed”; Union Gas’ purchase of Burns Foods in the face of Unicorp’s
takeover bid in 1985 to make Union “too ugly to be taken over” (neither worked).
(8) CEOs may invest – and perhaps “squander” – a firm’s “free cash flow”, rather than
distribute it to shareholders (a) because they may take a paternalistic attitude toward
their firm’s shareholders or (b) for fear of showing signs of weakness by implicitly
acknowledging their failure to find MV-enhancing investments. BCE’s behavior in the
1990s is a good example of this.
(9) The pursuit of greater job satisfaction may lead to investments designed to put the
firm on the frontiers of technological excellence, whether or not they enhance MV.
(10) CEOs may engage in value-destroying investments in order to preserve/defend their
personal self-images – classic example: Disney’s Michael Eisner’s purchase of Capi-
tal Cities ABC within a month of Time-Warner’s purchase of Turner Broadcasting,
so Eisner could continue to boast that he headed the world’s largest media empire.
(11) CEOs may over-estimate their abilities to improve the performance at acquired firms
and thus make over-priced investments that lower MVs for their firm’s shareholders
– e.g., Barrick Gold’s chairman Peter Munk’s $7.3 billion purchase of Equinox
Minerals in 2011.
Situations When a Concern for Preserving CEO/Mgr’l Control and Job Security
Will Dictate Financing Choices That May Not Necessarily Maximize Mkt Values
(1) If the CEO and senior mgrs are concerned about preserving/increasing their mgr’l
control and decision-making autonomy, then (i) financing new acquisitions with debt
or (ii) increasing the firm’s debt-leverage ratio by issuing debt and using the proceeds
to buy back outsiders’ equity may enhance mgr’l control in 4 ways.
Using debt…
(a) avoids dilution of managers’ equity stakes in the firm, or decreases the share of
votes held by passive outsiders who might tender to a takeover raider’s offer;
(b) uses up some of the firm’s unused debt-carrying capacity → reducing the
attractiveness of the company as a takeover target by reducing the extent to which
a raider can finance a takeover by borrowing against the firm’s assets;
(c) reduces the disclosure requirements since no new equity is being issued or
exchanged; and
(d) enables raising funds to make a large one-time dividend payout to “bribe” share-
holders to acquiesce to some management proposal that might not otherwise be in
the best interest of shareholders, such as approving a “shareholder rights plan”
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 (a.k.a. “poison pill”) to ward off takeover raiders and preserve the jobs of the
existing CEO/senior management team.
– classic example: INCO’s (now VALE’s) 1988 manoeuvre to issue $500 MM of
debt to fund a special, one-time $500 MM dividend payment to its shareholders,
conditional on their approval of mgt’s poison pill proposal; although institutional
investors objected, INCO’s small shareholders were successfully bribed with their
own money.

(2) On the other hand, using debt financing (or drawing down on cash resources) may
also undermine CEO/senior manager control and operating autonomy in some circum-
stances. Examples of how an increased debt-leverage ratio can threaten or undercut
managerial control include:
(a) increased probability of bankruptcy → loss of control to bankers or other creditors;
(b) increasingly-restrictive loan covenants, as debt ratio ↑;
(c) reduced financing flexibility to respond to future investment opp’ties and
unexpected shocks;
(d) as debt is used to repurchase shares, then the total MV of the remaining shares ↓
→ reduction in the amount of money a takeover raider has to raise to make his
takeover bid; and
(e) a high debt-leverage ratio may jeopardize commercial relationships with customers
and/or suppliers, if the firm is experiencing financial distress.

(3) Since there are strong arguments for and against the use of excessive debt financing
as a means of preserving or increasing CEO/managerial control and autonomy, the
relationship between owner-control and financing policy boils down to an empirical
question; the tendency is for studies to show…
(a) higher % managerial/insider share ownership → higher debt-leverage ratios; and
(b) higher % mgr’l/insider share ownership→preference for debt-financed, cash offers
(versus share-exchange offers) to consummate M&As, all other things considered.

Share Buybacks and Shareholder Value Creation

There is a paradoxical relationship between a firm’s use of share buybacks –
ostensibly to “juice up” its share price for investors and the value of its senior mgrs’ stock
options in the short run by increasing its earnings-per-share (EPS) thru reducing the
number of shares outstanding – and the firm’s creation of shareholder wealth in the long
run. To be clear, there is no controversy over a firm’s returning money to its shareholders
through dividends and/or share buybacks when the firm does not otherwise have enough
sufficiently-attractive investment opp’ties toward which to deploy its excess capital – this
is the standard finance prescription for share value maximization.
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 The paradox and associated controversy arise, however, when firms that should be
able to generate numerous attractive real investment opp’ties – and thus grow their firms’
real earning power sustainably into the future – choose instead to devote a disproportion-
ate amount of their “free cash flow” to buying back their own shares. It is in this situation
that analysts find a direct conflict between the short run interests of stock-option-incented
senior mgrs and the long run interests of their shareholders, as well as their non-senior-
mgt employees and other stakeholders.
Three examples will illustrate the point. In his October 20th, 2014, New York
Times article entitled “The Truth Hidden by IBM’s Buybacks”, Andrew Ross Sorkin
reveals that – despite its constant rhetoric about focusing on “shareholder value” – the
modest 60% appreciation in IBM’s share price between 2000 and 2013 was primarily due
to fin’l engineering rather than astute capital spending. During this period, IBM spent
about $108 Bn on buying back its own shares and paid out $30 Bn in dividends, much of
this financed by loading up on debt. It spent just $59 Bn on its own businesses through
capital expenditures and $32 Bn on acquisitions. What has been the longer-run effect of
this relative lack of real investment? While the buybacks and dividend pymts managed to
keep the activists and vocal hedge-fund managers at bay and helped IBM’s CEO meet
some of her bonus-compensation metrics, IBM’s revenues did not grow between 2008
and 2012 and they have declined every year since then. Moreover, IBM’s total net earn-
ings (as opposed to its EPS) fell by more than 30% between 2012 and 2016 and its mid-
2017 share price was 23% lower than its 2012-average level. While many of its high-tech
peers invested heavily in moving their operations into the cloud and satisfying the
burgeoning demand for mobile communications, IBM’s investment was starved of the
funds needed to position it for the future and its ability to grow its shareholders’ wealth
going forward was seriously impaired.
The pharmaceutical industry – recently accused of price gouging by politicians of
all stripes – has long claimed that it needed high drug prices to afford to do the risky and
expensive R&D to discover and develop new drugs. A study by the Academic-Industry
Research Network has effectively destroyed this myth. The study found that in the 10
years between 2005 and 2014, the 19 pharmaceutical firms in the S&P 500 Index distrib-
uted, in aggregate, 97% of their net income to shareholders through buybacks and divid-
ends. If the industry had not succumbed to the cult of shareholder value maximization
and stock-price-based executive compensation, then there would have been lots of “free
cash flow” to fund extensive R&D programs without resorting to drug-price gouging.
Gilead Sciences is the poster child for this deceit. Gilead claims to be a “research-based
pharmaceutical company” and charges sky-high prices for its hep C treatments, ostensib-
ly necessary to fund its R&D. However, in 2014, its CEO John Martin received 97% of
his total compensation of $193 million from stock-based pay. In the two years prior to
mid-2017, the S&P 500 index rose by more than 16%, while Gilead’s stock price fell by
more than 40% in response to its pricing scandal – so neither Gilead’s shareholders or its
customers have benefitted from the its stock buy-back policy and need to fund R&D from
high drug prices rather than retained profits.
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 More recently, America’s airlines received massive government bailouts in 2020
despite generating over $49 billion in free cash flow during the previous decade. The
reason they were not able to tap these funds once Covid-19 crushed their business was
not because they had been investing in new aircraft, better service, or higher employee
wages, but because they had spent $47 billion on stock buybacks during the decade.
Some corporate executives justify buybacks as a natural consequence of the capitalist
system, but this defence ignores the fact that, when their firms experience a crisis, they
invariably run to the government for a bailout. In other words, when times are good,
these firms are capitalist and privatize their gains, but when times turn bad, they become
socialist and expect public taxpayers to restore them to solvency.
In summary, corporate share buybacks are fertile territory for finding and
exploring the conflict between shareholder and managerial goals, especially as they
impact the ability to generate sustainable long-term wealth creation for shareholders.

The Goals and Culture of Firms Controlled by Founding Families

During 2014, family-controlled firms made up 19% of the world’s 500 largest
firms in terms of sales (the Fortune Global 500), up from 15% in 2005, according to
McKinsey consultants who define such firms as ones whose founders or their families
have the biggest share stake, of at least 18%, and the power to appoint the firm’s CEO.
While this increase is attributable to the rapid growth of developing countries where
family ownership is the norm among major businesses, among the American firms in the
Fortune Global 500, 15% were still family firms in 2014, only slightly less than in 2005.
These findings run counter to the expectations of mgt experts from a half century earlier
who predicted that family firms would fade from the scene because of the greater ability
of professionally-run firms to raise capital and attract top talent. Furthermore, a 2020
study by National Bank of Canada found that, between 2005 and 2020, family controlled
firms in Canada achieved superior stock-return performance than their publicly-held
cousins, and were more likely to be led by female executives.
While there will always be a high proportion of family-controlled entities within
the small and medium-sized business categories, the persistence of family control in
larger firms is attributed to a number of factors. First, markets and regulators have been
surprisingly accommodative in letting families retain a significant degree of voting con-
trol (e.g., through special classes of shares) despite selling large share stakes to outside
investors. Mark Zuckerberg’s retention of control after Facebook went public is a case in
point. More recently, Shopify’s Board granted CEO Tobias Lutke a special “founder
share” giving him, his family, and their affiliates 40% of the total voting power at the
company despite owning a much smaller percentage of the firm’s shares.
Second, in some cases the founder was a supremely talented entrepreneur, and his
or her capabilities and policies are mirrored by succeeding generations. Third, family
firms tend to take a longer-term perspective than non-family public firms whose mgrs are
obsessed with meeting the demands of investors to maximize short-term profits or meet-
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ing the needs of private equity firms for higher share prices so they can exit with a big
capital gain. Fourth, family firms are less likely to load up on debt and then fail when
interest rates rise or operating profits come up short. A reluctance to borrow may limit
growth in good times, but make family firms more resilient in bad times. Fifth, studies
have shown that family firms have better labour relations. This may be because family
mgrs have more credibility with workers who see their long run future better aligned with
long-sighted family owners than with professional mgrs who may be gone in a few years.
Sixth, some research has shown that family firms exhibit a superior corporate culture to
their non-family peers. Finally, survey evidence suggests that the presence of a founding
family has a positive impact on a firm’s trustworthiness image relative to other firms.
There are, of course, risks to the continuing success of family-controlled firms,
esp. if succession is contested or the succeeding generations mess with the original
“secret sauce”. These firms may also have trouble attracting and retaining talented senior
mgrs if the founding family members meddle too much with their decisions.
Nevertheless, the above discussion makes clear that the overall corporate goals of
family firms may differ systematically from those of other firms. Primarily, of course,
family firms will place a greater emphasis in maintaining share-ownership control as a
top priority, along with preserving managerial operating autonomy. They may also put
greater weight on preserving their employees’ welfare and shielding them from some of
the vicissitudes of the economic cycle. They will also likely place a greater priority on
maintaining the firm’s founder-created image/reputation that has underpinned the firm’s
prior success. Finally, consistent with their long-term perspective, family firms may be
less inclined to take big risks in their investment and financing decisions.
The Determination of Corporate Goals
Harvard’s Gordon Donaldson (Winnipeg born) has studied corporate goal
determination and concluded that:
“To be effective, managers have to be responsible to multiple constituencies. This
is reflected in multiple fin’l goals, of which the enhancement of the shareholders’ interest
is only one part – and not necessarily the dominant part. Moreover, the fin’l interests of
the various constituencies are not necessarily in agreement; indeed, they may be latently
or actively in conflict. The power of each constituency lies in its ability to withhold
resources critical to the accomplishment of the business mission; its relative dominance at
any given time depends on which resource is critical.” The implications of this insight
are:
I. For young, growing firms with more ideas than money, Donaldson found that their
fin’l goals are set by the capital markets and shareholders whose fin’l contributions and
satisfied expectations are essential to the launching and success of these firms.

II. For older, larger, more mature firms, then, who sets their effective fin’l goals?
 10
(a) Donaldson found that, in the short run, the demands of the production/marketing
strategy within the particular product market are likely to override immediate
shareholder interests, if there is a conflict between them. In particular, shareholder
influence will be less important if the firm can finance its growth from retained
earnings and debt alone. Even takeovers are less of a threat to the dominance of the
production/marketing strategy because any new owners are likely to be constrained in
their goal choice, in the short run, by the requirements of product markets and the
preservation of competitive position or long run survival, although raiders are less
constrained by the organizational structure and corp. culture.
(b) In the long run, however, Donaldson found management has more goal-setting
discretion, which it implements by its choice of constituencies served and markets
entered, and via new appointees to the firm’s board of directors.
Hence, mgt’s freedom to choose its own financial goals is not the “inalienable right”
commonly believed. In reality, the near-term fin’l goals of the mature enterprise are largely
set for, and not by, mgt – rather by the constituencies those mgrs serve. To the extent that
management choice plays a part, it is past, not present, decisions which count. In the long
run, mgrs choose goals by choosing constituencies but, at any given time, they are largely
the captives of past choices. For this reason, the range of discretion available to mgt is quite
narrow. Moreover, many observers suggest that the goal-dictating power of institutional
investors (perhaps too short-sighted) and private equity firms is increasing over time (more
about this shortly) – further constraining the goal-setting discretion of mgrs.
If Donaldson is correct in his assessment of the determinants of corporate goals, and
the firm recognizes that there are a variety of constituencies whose interests have to be
accounted for in order to ensure that the firm is able to pursue its mission successfully, then
the roles that the firm’s CEO and CFO should play, are:

the CEO: - identify and acknowledge the diverse interests across constituencies
- negotiate the optimum balance of goal achievement among constituencies
- foster communication and co-operation among constituencies

the CFO: - to provide the CEO with 2 types of information; namely …

(1) the CFO should “price” policy choices in terms of their sacrifice of goal achieve-
ment for the various constituencies (esp. bankers and shareholders).
(e.g., does an investment opportunity exceed the firm’s hurdle rate or not? Or how
does the environmental impact/carbon footprint vary across different investments?)
(2) The CFO should determine whether a set of goals is mutually consistent and
financially feasible in the long run, given the dual constraints of:
(a) the corporation’s organizational structure and culture, and
(b) the requirements and expectations of the external capital markets.
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MAXIMIZING SHAREHOLDER VALUE IS A “DUMB IDEA”
In his recently published book entitled “Fixing the Game: Bubbles, Crashes, and
What Capitalism Can Learn from the NFL”, Roger Martin, then Dean of the University
of Toronto’s Rotman School of Management, decries and repudiates the notion that
“shareholder value maximization” should be one of the goals – let alone the primary goal
or purpose – of a corporate organization. Martin’s assessment mirrors the view of Jack
Welch, the legendary CEO of GE, who, in an interview on 12 March 2009, stated that
“On the face of it, shareholder value is the dumbest idea in the world”.
Now, to be clear, Roger Martin does not think that it is a bad thing if corporate
shareholders find that their wealth has increased through the appreciation in the prices of
their shares. Rather, what he asserts – and employs ample logic and numerous examples
to affirm – is that when corporations elevate shareholder value maximization to be the
primary raison d’être of corporate existence and managerial effort, then shareholders
actually suffer lower returns on their investments over time…hence, marching behind the
“shareholder value maximization” banner is a “dumb idea” from the perspective of share-
holders. Moreover, in Martin’s view, not only do shareholders suffer, but the company’s
customers and employees are also short-changed, the economy and society at large will
fail to reach their full potential, and, ultimately, social validation of capitalism will be
undermined (as we have witnessed during the “Occupy Wall Street” movement).
Martin places most of the blame for the disconnect between the share-value-maxi-
mization goal and its achievement on the fact that share prices are based on expectations
about a company’s future sales and earnings – and particularly on whether these will or
will not “beat” consensus estimates for these often-fuzzy, and heavily-managed, account-
ting artifacts – while the real value of a firm’s contribution to society is measured in
terms of the satisfaction of its customers’ needs, the ingenuity and productivity of its
employees, and the quantity and quality of the real goods and services it produces. It is
success in making these real contributions to society – rather than chasing share prices –
that will eventually be rewarded in terms of share-value appreciation, Martin believes, à
la Apple’s ubiquitous product innovations and consequent rise in market value.
The problem has been exacerbated, since the early 1980s, by the rise of senior-
executive compensation packages based on stock options and phantom-share allocations
– paradoxically designed to align senior manager interests with those of shareholders –
which have focused CEOs and senior mgrs on managing and manipulating expectations
in the stock market and pandering to the short-term and self-serving demands of institu-
tional investors and hedge fund mgrs, rather than attending to their customers’ interests
and managing the real-world aspects of their businesses. Too often, when CEOs detected
a divergence between investors’ expectations for their firm and how its performance was
shaping up in the real world, these CEOs turned their primary attention – not to the hard,
but societally-vital, job of fixing their firms’ problems in the real world – but rather to
managing external perceptions of their firms by employing “creative accounting”
schemes to cover up corporate failings (e.g., Nortel, Sunbeam) or exaggerate corporate
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performance (e.g., Enron, Worldcom, Livent), or, more blatantly, backdating their stock-
option awards, all in an effort to “juice up” their stock-based compensation. It is not
surprising then, Martin concludes, that the business world is plagued by continuing
scandals and wide-spread evidence of corporate fraud and deception. Nor should it be
surprising that Wall and Bay Street executives ignored their clients’ best interests and
created and marketed toxic financial products that resulted in the 2007-2009 worldwide
financial-market meltdown.
In Martin’s view, unless the perverse concern of CEOs with the mercurial world of
accounting machinations and stock market expectations is replaced by a return to a focus
on a firm’s real-world achievements – by pulling down the misguided “share value maxi-
mization” standard and revising incentive compensation schemes – Western capitalism
will eventually collapse.
The Business Roundtable Statement of the Purpose of a Corporation.

Under increasing pressure from institutional investors and the world’s largest asset mgrs
(e.g., Larry Fink of Blackrock Inc.), the Business Roundtable – a lobbying group made
up of the CEOs of more than 200 large US corporations – promulgated in 2019 the
following “Statement of the Purpose of a Corporation”, which apparently repudiated
shareholder primacy and was intended to usher in a world of “stakeholder capitalism”.
“Americans deserve an economy that allows each person to succeed through hard work
and creativity and to lead a life of meaning and dignity. We believe the free-market
system is the best means of generating good jobs, a strong and sustainable economy,
innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and
providing essential goods and services. Businesses make and sell consumer products;
manufacture equipment and vehicles; support the national defense; grow and produce
food; provide health care; generate and deliver energy; and offer financial, communi-
cations and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a
fundamental commitment to all of our stakeholders. We commit to:
 Delivering value to our customers. We will further the tradition of American
companies leading the way in meeting or exceeding customer expectations.
 Investing in our employees. This starts with compensating them fairly and provid-
ing important benefits. It also includes supporting them through training and
education that help develop new skills for a rapidly changing world. We foster
diversity and inclusion, dignity and respect.
 Dealing fairly and ethically with our suppliers. We are dedicated to serving as
good partners to the other co’s, large and small, that help us meet our missions.
 13
 Supporting the communities in which we work. We respect the people in our
communities and protect the environment by embracing sustainable practices
across our businesses.
 Generating long-term value for shareholders, who provide the capital that allows
companies to invest, grow and innovate. We are committed to transparency and
effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the
future success of our companies, our communities and our country.”
Pushing back against critics of the environmental, social, and governance (ESG)
movement he champions, Larry Fink asserted, early in 2022, that ESG is at the core of
stakeholder capitalism, or “profit with purpose”. He stated “stakeholder capitalism is not
about politics. It is not a social or ideological agenda. It is not ‘woke’. It is capitalism,
driven by mutually beneficial relationships between you and the employees, customers,
suppliers, and communities your company relies on to prosper. This is the power of
capitalism.” So why is it only now that “stakeholder capitalism” has gone mainstream?
First it must be said that many business leaders and academics – such as Harvard’s
Michael Porter – have espoused for decades a more expansive form of capitalism than the
Chicago model espoused by Milton Friedman. In 1962, in Capitalism and Freedom,
influential economist and libertarian philosopher Milton Friedman wrote, “There is one
and only one social responsibility of business – to use its resources and engage in activ-
ties designed to increase its profits [and market value] so long as it stays within the rules
of the game.” Determining the “rules of the game” was the government’s responsibility.
If society wanted to protect the environment, then it was up to their elected representa-
tives to enact and enforce the appropriate environmental regulations – which businesses
would then be obliged to follow.
As many observers/authors have pointed out since, the problem with this argument
is that, as corporations have become larger and more politically-powerful – through, for
example, their unlimited donations to political action committees (“super PACs”) enabled
by the US Supreme Court’s 2010 Citizens United v Federal Election Commission ruling
– it is now these large corporations who are effectively writing the “rules of the game” in
ways that best serve their interests, and not necessarily those of society as a whole, by
means of their comprehensive capture of the political process in the US, UK, and Canada.
So, in this environment of donation-dependent politicians and often paralyzed
political processes, many social and climate justice activists have realized that appealing
to governments alone to solve the major issues of our age (climate change, income/wealth
inequality, social justice for all) is not going to be sufficient. We now realize that we need
to change how corporations – the entities that are effectively writing the rules – see them-
selves and the roles they will need to play to ensure social justice and prosperity for all.
 14
Prior to 2008 in Canada, legal precedents and business elites tended to reinforce
the notion that a corporation’s primary, over-arching duty was to serve its shareholders’
interests. For example, the 1994 TSX report entitled Where Were the Directors? Guide-
lines for Improved Corporate Governance in Canada stated that “the principal objective
of the direction and management of a business is to enhance shareholder value [in which]
directors have only one constituency and that is the corporation and its shareholders gen-
erally”. Then, however, with the Supreme Court of Canada’s 2008 decision in the BCE
Inc. v 1976 Debentureholders case, the Court held that the best interests of [Canadian]
corporations must account for the interests of the corporation’s stakeholders, and not just
the shareholders – clearing the way for a more expansive view of the mission and role of
business corporations in Canada.
In the US, on the other hand, there is still little legal recognition of “stakeholder
capitalism”, and businesses are regularly sued successfully by disgruntled shareholders
for doing anything that does not seek to maximize the economic value of the “for-profit
corporation” for its shareholders. Activist investors, especially, have frequently unseated
the CEOs of firms that adopted stakeholder-friendly policies without ensuring that their
firms’ financial performance at least equaled that of their industry peers (e.g., in 2021,
Danone’s Board sacked Emmanuel Faber, its progressive CEO, because Danone’s results
lagged behind those of Nestle and Unilever). So, to enable some businesses to promote
socially-beneficial activities without risking a legal or activist-investor challenge, many
US states have enacted legislation to create a new kind of corporation – a “benefit corpor-
ation”, or B-Corp – that explicitly allows those firms to serve the public good as well as
make a profit. As Alex Ross states in his 2021 book The Raging 2020s: Companies,
Countries, People – and the Fight for Our Future, “the legal purpose of a benefit corpor-
ation designation is to provide cover for board members and executives to make decis-
ions that may not maximize shareholder value over the short term, but create [long run]
public benefit and sustainable value in addition to generating profits.” In May 2020, BC
became the first Canadian province to enact legislation to explicitly recognize and protect
benefit corporations aiming to introduce and follow corporate social-responsibility poli-
cies that might have short-term negative impacts on shareholder wealth maximization.
Numerous surveys show that there is widespread support among both investors and
the general public for holding companies accountable for acting in environmentally and
socially responsible ways, even if there is no legal imperative for them to do so. This is
the point of view that Professor Cannon will take in Comm 323, especially when discuss-
ing the overall corporate goals of the firm’s featured in his case studies.
Moreover, when we discuss in class how and where CEOs and senior managers
have acted in their own interests to the detriment of the short or long-term interests of
their firms’ shareholders and share-value maximization, CEOs acting in environmentally
and socially responsible ways will not be seen as antithetical to the interests of the firm’s
shareholders or, of course, society as a whole.