Shareholder Value Maximization: A Dangerous Myth - The Case of Valeant
This article analyzes the danger of the 'shareholder value maximization' concept behind Valeant's governance difficulties. Chairman Pearson insists on this goal, but governance expert Hugh Arnold points out that the law does not require companies to maximize shareholder wealth; this is merely management's interpretation. The article argues that shareholder value should be a byproduct of excellent management, not an ultimate goal.
What do you think of the following excerpt? The board of directors has significant influence in shaping the tone and culture of an organization, not to mention executive compensation packages. Pearson, who also served as chairman of Valeant, has stated that the company's responsibility is to maximize shareholder value. (Last year, he told Canadian Business: "The basic strategy is to create value for shareholders. Shareholders are the owners of the company.") However, in the absence of a strong and independent board, this philosophy can lead to the organization falling apart. Hugh Arnold, a governance expert and professor of organizational behavior at the Rotman School of Management, points out that companies should not focus solely on stock prices. He believes that the board should have restrained Pearson. "The goal of directors is to protect the best interests of the company," Arnold said. "No legal document stipulates that a company's obligation is to maximize shareholder wealth. This is merely an interpretation by management, and some boards have accepted this notion, believing that the stakeholder group they need to focus on is the shareholders." Source: http://www.canadianbusiness.com/companies-and-industries/why-the-trouble-at-valeant-starts-with-its-board-of-directors/
My final conclusion is that increasing shareholder value or wealth is a result or byproduct, not a goal. I am certain that this contradicts what we, as finance professionals, were taught in school. Most of us still hold a goal-oriented mindset of maximizing shareholder value.