We live in an age of competing economic narratives. President Biden tells the story that a $1.9 trillion stimulus bill will help the economy, while Republicans tell the story that the bill is too big and will cause inflation. As the Nobel-prize winning economist, Robert Shiller, points out his wonderful book, Narrative Economics (Yale, 2019), mega-narratives drive public discourse and our lives. Nowhere is this more true than in management, which for the last hundred years has been driven by competing mega-narratives.
The Mega-Narrative Of Maximizing Shareholder Value
For most of the last fifty years, big corporations were driven by the mega-narrative that maximizing shareholder value would not only make corporations more prosperous. It would also create optimal economic benefits for workers, customers and society at large. This mega-narrative was not based on facts, statistics or serious economic reasoning.
It was a fabulous narrative concocted by a trio of academic economists, Milton Friedman, Michael Jensen and William Meckling, back in the 1970s. It began with an Friedman’s inflammatory article in the New York Times in 1970, “The Social Responsibility Of Business Is to Increase Its Profits”. It was supported by the tortured reasoning of the famous, but unread, article by Jensen and Meckling in 1976, “Theory of the Firm”.
The narrative gathered further steam with Jensen’s 1990 article in Harvard Business Review, which put forward the fantasy that if executives would lavish themselves with stock options to ensure a tight focus on shareholder value, they themselves would change from being bureaucrats to become bold entrepreneurs. Executives were happy to oblige by giving themselves the stock options, although no explosion of entrepreneurship has been visible. In effect, the floodgates of executive compensation opened. Maximizing shareholder value became the official gospel of American business with the formal pronouncement of the Business Roundtable (BRT) in 1997.
In the first two decades of the 21st century, the mega-narrative of shareholder value became the driving force in American business. Yet it also received increasingly severe critiques, as reality intruded into fantasy of supposedly optimal societal benefits flowing from the embrace of that narrative. Even ifs one-time hero, former GE CEO, Jack Welch, called “the dumbest idea in the world.”
Evidence increasingly showed that the narrative of maximizing shareholder value was leading to growing inequality, rampant short-termism, and—paradoxically—the loss of long-term shareholder value. The shift of productivity gains away from workers to shareholders after 1970, as shown above in Figure 1, was particularly striking.
Finally, in August 2019, big-business CEOs could no longer take the political heat. Shareholder value was renounced by the CEOs of more than 200 of the largest corporations who signed a new formal declaration of the BRT. The new declaration foreshadowed a supposed return to an older mega-narrative stakeholder capitalism—an approach that had already been tried and discredited in the mid-20th century.
In the period since the 2019 declaration was issued, research by Harvard Law Professor Lucian Bebchuk and his colleagues have been unable to detect evidence of any significant change in corporate behavior. Few of the signatory CEOs obtained the approval of their boards to sign the announcement. Bebchuk concludes that shareholder value remains the guiding narrative for most big business. In effect, the declaration was done “mostly for show.” Shareholder…