Shareholder Value and the Financial Crisis
To what extent can the economic and financial crisis starting in 2007-8 be attributed to the flaws of the shareholder value principle of corporate governance?
Intro
Corporate governance is a critical concept in the commercial world of today with the idea originating initially from the U.S. The importance of corporate governance is made more considerable due to the increasing influence and consequences companies have on the daily lives of individuals and making up a large proportion of economic activity. Corporate governance can be shortly described as the whole framework within which companies operate. It is most likely the case that the shareholder value principle was not the only part of corporate governance which contributed to the financial crisis and other factors will also be discussed as the recession was a result of a contribution from many aspects of corporate governance and not only the shareholder value principle. Shareholder value can be referred to as shareholder wealth maximisation. This essentially means that directors have a main goal to direct the company in a way to ensure that the maximum wealth possible is generated for the shareholders. This gives the pure incentive to managers to do what is necessary to improve the shareholders wealth. With this incentive it can be determined therefore that the activities of the managers and operations of the company are centred around the needs and demands of the shareholder leaving any other responsibility as a secondary objective.
Main
The ideology of shareholder value has become a staple for corporate governance established first by companies in the U.S and the UK in the 1980 's/90 's and was later accepted among European nations in the late 90 's. The sole focus on shareholder value was helped into prominence in the U.S by the election of Ronald Reagan and in the UK by the election of Margaret Thatcher. Executives and managers from Europe and Japan have been greatly impressed by the performance
Intro
Corporate governance is a critical concept in the commercial world of today with the idea originating initially from the U.S. The importance of corporate governance is made more considerable due to the increasing influence and consequences companies have on the daily lives of individuals and making up a large proportion of economic activity. Corporate governance can be shortly described as the whole framework within which companies operate. It is most likely the case that the shareholder value principle was not the only part of corporate governance which contributed to the financial crisis and other factors will also be discussed as the recession was a result of a contribution from many aspects of corporate governance and not only the shareholder value principle. Shareholder value can be referred to as shareholder wealth maximisation. This essentially means that directors have a main goal to direct the company in a way to ensure that the maximum wealth possible is generated for the shareholders. This gives the pure incentive to managers to do what is necessary to improve the shareholders wealth. With this incentive it can be determined therefore that the activities of the managers and operations of the company are centred around the needs and demands of the shareholder leaving any other responsibility as a secondary objective.
Main
The ideology of shareholder value has become a staple for corporate governance established first by companies in the U.S and the UK in the 1980 's/90 's and was later accepted among European nations in the late 90 's. The sole focus on shareholder value was helped into prominence in the U.S by the election of Ronald Reagan and in the UK by the election of Margaret Thatcher. Executives and managers from Europe and Japan have been greatly impressed by the performance
Bibliography: Richard Straub. (2012). Shareholder Value – a theory that changed the course of history – for the better or the worse?. Available: http://www.druckerforum.org/blog/?p=139. Last accessed 07/08/2013. Simon Deakin. (2010). CORPORATE GOVERNANCE AND FINANCIAL CRISIS IN THE LONG RUN. Centre for Business Research, University of Cambridge Working Paper. 417 William Lazonick & Mary O 'Sullivan (2000): Maximizing shareholder value: a new ideology for corporate governance, Economy and Society, 29:1, 13-35 William Milberg (2008): Shifting sources and uses of profits: sustaining US financialization with global value chains, Economy and Society, 37:3, 420-451 Wei Xiong. (2012). Bubbles, Crises, and Heterogeneous Beliefs. In: Jean-Pierre Fouque and Joe Langsam Handbook for Systemic Risk. Princeton: Princeton University.