Rarely has a phrase buzzed so persistently as shareholder value. And rarely have buzzwords been so fuzzy. As that well known CEO, Humpty Dumpty, said, ‘When I use a word, it means just what I choose it to mean – neither more nor less.’
In the interests of better informed IR, we checked dictionaries from the Oxford English to Barron’s Guide to Financial Terms, and drew a complete blank. So we decided we’d better see if we could deduce its meaning from usage and origins.
Trawling the databases, we found the first recorded usage of the buzz phrase, as ‘shareholders’ value,’ in 1983 by First Boston analyst Martin Romm, quoted in Finance World. As though amazed at its own temerity, the phrase disappeared like a butterfly in a chrysalis only to resurface in 1986 in the Financial Times in a reference to Mellon Bank’s ‘much-voiced commitment to building shareholder value.’
It bubbled around scoring rare appearances in print until 1994 when it surged to the lips and word-processors of the investment community in a big way. Already, in the first four months of 1997 it has adorned a record number of articles.
As Euphemism
Over the years, shareholder value has been brandished to justify both mergers and demergers. Often it simply means stock price. In 1989, in the Journal of Commerce, Larry Kaufman cited ‘enhanced shareholder values, as buy-backs that increase the price of a smaller stock supply are euphemistically known.’
The social context is somewhat shady. Also in 1989, we find the phrase being used by Robert Lenzner in the Boston Globe, invoking Larry the Liquidator – hero of Other People’s Money, the play that made Wall Streeters into playgoers: ‘In the real world, maximizing profits seems to have given way to maximizing shareholder value, the new corporate standard,’ he wrote.
As Populism
Lenzner quoted Columbia Law School professor Louis Lowenstein: ‘Maximizing shareholder values is a kind of populism for capitalists. Taken to its extreme, it means that any company whose shares fall below a certain value should be taken over or pulled apart and liquidated like so much scrap metal. This thinking will turn America into a bunch of poor companies with too much debt over the long run.’
Lenzner went on to quote Howard Stein, chairman of Dreyfus Corp: ‘This new God – maximization of shareholder value – I don’t know how we can get it to end until it’s run its course. You don’t get rid of a God until the God crashes.’
However the phrase obviously meant something different for the Economist at the end of 1991, when it declared that earnings per share was ‘the most popular measure of shareholder value.’
By 1994, it was on board in Directors & Boards, which declared that ‘the most important governance issue today is corporate performance as it relates to shareholder value.’
Across the Atlantic, Lloyds Bank chairman Brian Pitman discovered that shareholder value was so tangible it was ‘being destroyed at an alarming rate.’
Pitman was described as having ‘a hunger for shareholder value,’ in an article in the Journal of Business Strategy, which uses the phrase no less than eight times. That’s more mentions than it had altogether until 1992.
Whatever it is, by last year it had invaded Germany, where according to DPA wires Daimler Benz was ‘the very champion of the shareholder value cause.’
This April, in the Financial Times, ICI’s past commitment to ‘being the world’s leading chemical company,’ was sniffily compared with its new post-Zeneca objective ‘to maximize value for our shareholders.’
As Exhortation
Perhaps aware of its vagueness, company executives have used the phrase in numerous speeches to analysts and stockholders. But only recently has it begun to appear in corporate filings. However the SEC could not help us with a definition when we called. The Association of Investment Management & Research thought our quest intriguing, but was no wiser.
So we took the opportunity of a panel on Corporate Governance at Fordham Law School to corner the participants on a succinct definition. Pfizer VP Terence Gallagher, for example, cites a ‘shareholder value concept that says you maximize the profits for your shareholders,’ but then describes ‘the stakeholder concept of shareholder value,’ which he says ‘includes being responsive to the community, being responsive to the environment.’
TIAA-Cref’s assistant VP Richard Schlefer takes the straight road. ‘I vote for the stock price as the best proxy for shareholder value,’ he says. ‘If a stock is properly priced by the market, that price really should reflect the company’s environmental posture and its potential environment liabilities, its labor relations and potential work stoppages, products that it’s developing, and all kinds of things.’
Our advice is, be like Humpty Dumpty – but let everyone else know what you mean when you use shareholder value.
Nanditha Rodrigo added research value to this article.
