Shareholder Wealth Maximization and Social Welfare: A Utilitarian Critique

Abstract

Many scholars and managers endorse the idea that the primary purpose of the firm is to make money for its owners. This shareholder wealth maximization objective is justified on the grounds that it maximizes social welfare. In this article, the first of a two-part set, we argue that, although this shareholder primacy model may have been appropriate in an earlier era, it no longer is, given our current state of economic and social affairs. To make our case, we employ a utilitarian moral standard and examine the apparent logical sequence behind the link between shareholder wealth maximization and social welfare. Upon close empirical and conceptual scrutiny, we find that utilitarian criteria do not support the shareholder model; that is, shareholder wealth maximization is only weakly linked to social welfare maximization. In view of the dubious validity of this sequential argument, we outline some of the features of a superior corporate objective-a variant of normative stakeholder theory. In the second article, we will advance and defend our preferred alternative and then discuss some institutional arrangements under which it could be implemented.KEY WORDS: shareholder wealth maximization (SWM), corporate objective function, normative corporate governance, utilitarianism, social welfare "If you will pardon me for being personal, it makes a great difference in my attitude toward my job as an executive officer of the General Electric Company whether I am a trustee of the institution or an attorney for the investor. If I am a trustee, who are the beneficiaries of the trust? To whom do I owe my obligations?"-Owen D. Young, former Chairman of GE (Dodd, 1932(Dodd, : 1154 T HE ISSUE ARTICULATED BY MR. YOUNG decades ago is still relevant today and is one that a considerable number of scholars have devoted themselves to, not in terms of particular companies, but for corporations in general. This article addresses the underlying question, one that lies at the very core of corporate governance for both practicing managers and business scholars: what should be the objective of corporations in a market capitalist economy? Put somewhat differently, what should managers, who govern these firms, strive to achieve?https://www.cambridge.org/core/terms. https://doi.org/10.5840/beq201323215Downloaded from https://www.cambridge.org/core. IP address: 52.183.12.225, on 28 Apr 2019 at 03:44:10, subject to the Cambridge Core terms of use, available at Business Ethics QuarterlyWe aim to answer these questions in two separate articles. This first article will demonstrate the weaknesses of the conventional corporate objective-shareholder wealth maximization (SWM)-from a utilitarian perspective. It will focus on the apparent logic behind SWM as part of a set of institutions intended to produce maximal social welfare, the ultimate goal of utilitarian moral thought. After finding each of the four interconnected arguments that make up that logic quite weak, we suggest a path toward a credible alternative corporate objective. The second ...

Stakeholder Relationships and Social Welfare: A Behavioral Theory of Contributions to Joint Value Creation

“…Many stakeholder theorists have argued that community-like relationships lead to more cooperation from stakeholders than do transactional relationships (e.g., Bosse et al, 2009;Brickson, 2007;Harrison et al, 2010;Jones, 1995;Jones & Felps, 2013a;Scott & Lane, 2000). Empirical evidence supports this argument for joint value creation.…”

“…Instead, stakeholder scholars have argued that stakeholder cooperation is the engine of social welfare (Freeman, 1984(Freeman, , 2000Jones, 1995;Jones & Felps, 2013a;Phillips, 2003). Stakeholder theory's emphasis on cooperative relationships is especially relevant in the case of joint value creation, because the public good dilemma that is inherent in situations of high task and outcome interdependence is exacerbated when stakeholders frame their relationships in terms of MP.…”

“…The intentions we ascribe to others matter a lot in explaining our willingness to cooperate (Hoffman, Yoeli, & Nowak, 2015), and, as already suggested in relation to instrumental morality (Jones, 1995;Jones & Felps, 2013a), decisions and practices that would normally trigger stakeholders to frame their relationships as CS will not have this effect if stakeholders interpret them as being driven by a motive associated with another model. Furthermore, some decisions and practices could trigger different relational models depending on the intentions behind their choice.…”

“…The 6 It is how stakeholders interpret the firm's behavior that affects stakeholders' behaviors. So instrumental morality will not pay off if stakeholders perceive that the firm's behavior is not driven by morality concerns but is purely instrumental in the pursuit of the firm's personal interests (Jones, 1995;Jones & Felps, 2013a). stakeholder literature has already integrated some of these ideas (e.g., Bridoux & Stoelhorst, 2014;Cording, Harrison, Hoskisson, & Jonsen, 2014).…”

“…Bowles, 2008). Another reason is that MP relationships may work quite well in situations where parties are only engaging in arm's-length market exchange, rather than producing or innovating together, or where value creation is characterized by low task and outcome interdependence (Jones & Felps, 2013a).…”