Governance as sustainability from maximization to optimization of shareholder wealth

Abstract

Business corporations are expected to make profits for their ownershareholders,consistently and infinitely if possible. That is one of the major attractions of the corporate format. Unlike humans, corporations once created are assured of perpetual succession unless there is some invasive intervention by the state, the shareholders or the creditors to wind up the entity under certain specified circumstances. Share owners, directors, and managers may change from time to time, but the corporation as an entity survives these changes. Returns to the shareholders accrue in the form of cash dividends from time to time. Any appreciation of the market value of their shareholdings are reflected by stock prices in case of publicly traded companies and by expert valuations in case of other non-traded companies. In either case such gains can be realized only when the fractional owner of the corporation exits by selling his interest, or when in the event of winding up, shareholders receive their proportion of the realized value of the business and its assets after meeting all other obligations. How should (or do) corporations create sustainable value on an ongoing basis, year after year and not in fits and starts, is the focus of this paper. When some seemingly unattractive compromises (from the shareholders’ viewpoint) are made at present to sustain longer term profitability of the company, we face the dilemma of whether such actions are justified from a shareholder wealth creation viewpoint. Enlightened and leadership corporations around the world have found that winning the profitability war is a more attractive and justifiable proposition even if in the process some battles were to be apparently “lost”. In this paper these initiatives are termed as efforts towards optimizing as opposed to maximizing shareholder wealth and value. The discussion is organised in two parts: the first provides a brief summary of the theoretical underpinnings of the widely held views on shareholder wealth maximisation and juxtaposes some of the contrarian arguments militating against them; the second offers a managerial and governance perspective of how shareholders’ interests are best protected and sustained over the longer term.