Idea in Brief
The big idea: It’s time to discard the popular belief that corporations must focus first and foremost on maximizing value for shareholders. That idea is inherently, and tragically, flawed.
The argument: It’s impossible to continually increase shareholder value, because stock prices are driven by shareholders’ expectations about the future, which cannot be raised indefinitely.
What the data show: The focus on shareholder value hasn’t done shareholders any favors. They have actually earned lower returns since corporations adopted it as their guiding principle.
A better approach: Make customer value the top priority, as Johnson & Johnson and Procter & Gamble have done. These two companies have generated shareholder returns that are at least as high as, if not higher than, those of leading shareholder-focused companies.
Modern capitalism can be broken down into two major eras . The first, managerial capitalism, began in 1932 and was defined by the then radical notion that firms ought to have professional management. The second, shareholder value capitalism, began in 1976. Its governing premise is that the purpose of every corporation should be to maximize shareholders’ wealth. If firms pursue this goal, the thinking goes, both shareholders and society will benefit. This is a tragically flawed premise, and it is time we abandoned it and made the shift to a third era: customer-driven capitalism .