In 1962, renowned economist Milton Friedman said, “There is one and only one social responsibility of business— . . . to increase its profits.”1 We all know where that line of thinking got us.
Jack Welch was seen as the paragon of generating shareholder value. He produced a steady march of profit increases that led to a $484 billion market valuation for General Electric when he stepped down as CEO in 2001, after a 20-year stretch in the top job for the company, which had a $14 billion market valuation when he began. But even Welch said, in 2009, that “shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy. . . . Managers and investors should not set share price increases as their overarching goal.”2
The focus on shareholder value has led to distortions, such as a huge increase in CEO pay relative to that of lower-level employees; CEOs reaped the reward from options that were designed to give them incentives to increase the stock price but that often made them rich regardless of how the company fared or how much credit they could claim—boards typically didn’t want to disappoint their CEO once the prospect of huge stock gains had been put on the table. The emphasis on shareholder value also contributed to scandals such as those at Enron and WorldCom, where senior executives tried to feed the beast that is the stock market long after the underlying businesses failed to justify a lofty valuation.
The emphasis ...