Innovative Enterprise and Shareholder Value

This essay invokes the theory of innovative enterprise to analyze the relation between value creation and value extraction in the evolution of the corporate economy.  Beginning with a managerial, as distinct from financial, explanation for the separation of ownership and control in the US corporation a century ago, I focus on why and how a “retain-and-reinvest” corporate resource-allocation regime has been a necessary condition for innovative enterprise in the US economy. On that basis, I demonstrate that the ideology that the economy will achieve superior performance if business enterprises “maximize shareholder value” (MSV) is a theory of value extraction that promotes a “downsize-and-distribute” allocation regime and that results in employment instability and income inequity. In this paper, I root out the fundamental flaws in MSV as put forth by agency theorists. Like the neoclassical theory of the market economy in which it is rooted, MSV lacks a theory of innovative enterprise, and hence cannot explain how, through the investment strategies and organizational structures of its major business enterprises, a national economy might achieve stable and equitable economic growth. Indeed, as  I show, in practice, through massive distributions of corporate cash, as buybacks and dividends to shareholders, who are value extractors but not value creators, MSV has inflicted great damage on the US economy – a lesson that should not be lost on corporate economies in other parts of the world.