Why Shareholder Value is a Reasonable Measure but a Poor Target
Abstract: The mantra of the modern CEO is “creating shareholder value.” But too many mistakenly make this a fixed target and are then dragged into making short-term decisions that disrupt the longer-term wealth-creating capacity of their businesses. “Mortgaging the future to pay for the present” is one way of putting it. The root of the problem is using shareholder value as a target rather than a measure (and even as a measure it is imperfect as around 70 percent of share price movements are driven by factors outside an individual company’s control). Thus leaders can make promises and announcements to the market that send strong “buy” messages to investors (thus driving up the share price) but then have to deliver on those promises. To fail is for the CEO to suffer ignominy and, in some cases, losing his or her job. This paper suggests that shareholder value be kept as a longer-term measure and that the real goal should be to consistently beat your peers. After all, that’s how the market judges your performance.