Shifting Perspectives: From Shareholder to Stakeholder Capitalism

The idea that maximizing shareholder value takes legal and practical precedence above all else first came to prominence in the 1970s. The person who arguably did the most to advance the idea was the business school professor Michael Jensen, who wrote in Harvard Business Review and elsewhere that CEOs pursue their own interests at the expense of shareholders’ interests. Among other things, he argued for stock-based incentives that would neatly align CEO and shareholder interests.

Shareholder primacy rapidly became business orthodoxy. It dramatically changed how and how much executives are compensated. And it arguably distorted capitalism for a generation or more. Critics have long charged that maximizing shareholder value ultimately just encourages CEOs and shareholders to feather their own nests at the expense of everything else: jobs, wages and benefits, communities, and the environment.

The past few years have seen a backlash against shareholder capitalism and the rise of so-called stakeholder capitalism. After reigning supreme for half a century, is shareholder value maximization on its way out?

4 Business Ideas That Changed the World is a special series from HBR IdeaCast. Each week, an HBR editor talks to world-class scholars and experts on the most influential ideas of HBR’s first 100 years, such as disruptive innovation, scientific management, and emotional intelligence.

Discussing shareholder value with HBR editor in chief Adi Ignatius are:

• Lynn Paine, professor at Harvard Business School
• Mihir Desai, professor at Harvard Business School
• Carola Frydman, professor at Kellogg School of Management

Further reading:

• HBR: CEO Incentives—It’s Not How Much You Pay, But How, by Michael C. Jensen and Kevin J. Murphy
• New York Times: A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits, by Milton Friedman
• HBR: The Error at the Heart of Corporate Leadership, by Joseph L. Bower and Lynn S. Paine
• U.S. Business Roundtable: Statement on the Purpose of a Corporation, 2019