When considering the future of shareholder value, we have to look at the history. You have to go back to the dark economic times of the 1970s – a period of global stagnation. Open the pages of The New York Times and you’ll find an essay by a certain Milton Friedman titled ‘The Social Responsibility of Business is to Increase its Profits’. Economist Friedman effectively said that an organisation should show no regard or responsibility for anything other than its shareholders.
As often happens with unpopular new concepts, it took a few years for other voices to echo Friedman’s doctrine, and it was not until the 1980s that the pursuit of shareholder value at any cost became the new purpose for doing business.
And it worked. Shareholders made fortunes, and stock exchanges from New York to London to Tokyo all benefitted – right up to the 2008 financial crisis which pulled the plug on Gordon Gecko’s ‘greed is good’ mantra.
Or did it? Has the relentless pursuit of shareholder value at all costs gone out of fashion in the face of sustainability and societal pressures? And what difference does it make if you are a company based in Denver, Dusseldorf, Dubai or New Delhi?
One fact is certain – you cannot ignore the importance of shareholder value in the APAC region.
According to the latest available data from the World Bank (which is admittedly a couple of years old but important for context), the market capitalisation of domestic listed companies in China – the regional leader – is US$12.21 trillion.
While China’s total may be dwarfed by the likes of the US (US$40.72 trillion), it is way ahead in APAC and ANZ. Japan’s listed companies market cap comes in at US$6.72 trillion, India has US$2.6 trillion, and South Korea US$2.18 trillion. In ANZ, Australia sits on US$1.72 trillion, and New Zealand on US$132 billion.
This highlights disparity around the world, with some countries having more of a focus on government- or family-owned large businesses, making the idea of shareholder value in those countries less significant.
The very concept of ‘value’ also varies regionally, so what do CEOs need to know about the changing nature of shareholder value?
Shareholder value as important today as ever
“Different corporate governance systems, legal frameworks, and cultural norms exist across regions globally,” says Barbara Spitzer, Founder and CEO at Two Rivers Partners and a former senior executive at Accenture.
“The prominent stakeholder model in Europe and Japan sees corporations as social institutions responsible for stakeholders, including employees, customers, suppliers, and the local community, not just shareholders.
“Japanese firms often focus on long-term stability and growth, sometimes at the expense of short-term profits. Shareholder value is essential, but it's balanced against the interests of other stakeholders.
“Swinging in the opposite direction is what we see in China, where corporations often follow a state capitalism model, where the government plays a decisive role in the economy. These companies may prioritise national economic goals, such as employment, social stability, or strategic industrial growth, over immediate shareholder value.”
Harry Turner, founder of The Sovereign Investor says that shareholder value may be more relevant today than ever – especially with an ageing population to consider. As Baby Boomers enter retirement and live longer, it will become increasingly critical for the private sector to generate enough wealth to support this demographic.
By focusing on shareholder value, corporates alleviate this problem in two ways. Firstly, the more money they make, the more they contribute to government tax revenues, which helps fund state pensions. Secondly, the more shareholder value they create, the more likely their share prices rise too, which directly benefits savers who own financial assets in their retirement portfolio.
“Japan is a perfect case in point of this right now,” says Turner. “The Japanese government has explicitly stated their concerns about its ageing population and the associated pension liabilities. As such, they have instructed the Tokyo Stock Exchange (TSE) to put pressure on companies trading below book value to improve shareholder returns or risk being delisted.
“This has sparked a wave of corporate governance reforms at companies that have long been criticised for allocating capital inefficiently, operating under stodgy conglomerate structures with complex cross-shareholdings, and generally running the company for corporate insiders as opposed to shareholders.”
According to the WHO, 30% of Japan’s population are already over 60 years old. Globally, by 2030, 1 in 6 people will be over 60. By 2050, there will be more than 2 billion people aged over 60.
Shareholder value should be main focus for CEOs
When it comes to shareholder value, Craig Bouchard wrote the book – literally. His New York Times Best Seller ‘The Caterpillar Way. Lessons in Leadership, Growth and Shareholder Value’ may have been written a decade ago, but “shareholder value will always be considered relevant, especially in our highly competitive investment arena,” the Founder and Executive Chairman of Ecolution kWh tells Business Chief.
“Exceeding shareholder expectations is the single most important performance indicator to attracting and retaining professional investors.”
When comparing the approach taken in Asia versus the US/UK, Bouchard says companies and families of companies in APAC have closer relations with each other and with the government.
“They tend to be more focused on stable employment for workers, key customer relationships or keiretsu type relationships,” he says. “Short-term gains are less important. These types of companies look to the development of the community and society in addition to bottom line results. Access to capital from their stakeholders is less volatile.”
While Bouchard says that shareholder value should absolutely still be the main focus for CEOs, he believes that most leaders are getting it wrong, and that there should be a greater focus on allocating capital correctly.
“Even in the Fortune 500, I give a grade C to over half of the CEOs I’ve observed or studied,” declares Bouchard.
How CEOs can deliver shareholder value
There are lots of financial, strategic, operational, governance and transformational levers COEs can use. As a human capital strategist, Spitzer says CEO skills are crucial. She says the non-technical shareholder value capabilities CEOs require are:
- 360-degree view of strategy that includes both the normal stuff (value drivers, markets, customers, competitors, products and services, financials, and risk) and the new stuff (human capital, environmental, societal, and governance)
- Purpose-informed capital allocation and financial planning viewed that considers the impact investment decisions have on people and the planet, alongside profit
- Ethical integrity and the ability to establish trust and credibility by exhibiting high standards and responsible leadership
- Stakeholder engagement with a keen ability to listen, empathise, communicate, build relationships, and understand diverse perspectives
- Adaptive leadership to navigate change, embrace innovation, drive transformation, and guide teams through uncertainty; being open to new ideas, willing to challenge the status quo, and capable of making tough decisions
- Understanding the ROI of diversity and inclusion and promoting a culture that values and respects differences
- Continuous learning to stay on top of industry trends, regulatory changes, and best practices
“In addition, CEOs need fluency in cybersecurity, artificial intelligence, digital transformation, human capital management, and environmental, social, and governance (ESG), which present significant competitive, reputational, and financial threats,” adds Spitzer.
The reasons for continuing to pursue shareholder value are clear, but leaders also need to marry this with responsible business practices, otherwise they risk losing out to more agile and enlightened organisations.
“I truly believe we are witnessing the force of business used for positive change in the world,” says Spitzer.
“I believe that corporations are, and can be, drivers of the systemic change needed to not only create commerce, support capitalism, and build wealth, but to also make the world a more just, safe, healthy, and welcoming place.”
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