Public corporations are businesses that choose to sell shares of stock to the public to raise money and finance growth. The executive board members and high-level managers that run corporations often focus on increasing "shareholder value," which describes the return shareholders derive from their investment. Maximizing shareholder value is achieved by increasing a stock's price over time and by increasing dividends. The focus of corporations on maximizing shareholder value is often criticized because it potentially can have several negative consequences.
Bad Business Practices
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One potential drawback of the tendency of corporations to focus on maximizing shareholder value is that it can lead to poor or unsustainable business practices. For example, leading up to the global recession that began in the late 2000s, many financial institutions in the U.S. gave mortgages to borrowers who had poor credit in the hopes of making as much profit as possible. While such practices may have led to short-term gains, the resulting mass defaults and foreclosures eventually forced banks to absorb huge losses. In some cases, businesses partake in illegal or unethical activities, such as falsifying financial information, in order to boost shareholder value. Excessive focus on shareholder value is commonly cited as a factor that contributed to the recession that began in late 2007, which some have called the "Great Recession."
Forgetting About the Customer
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Corporations that concentrate on maximizing shareholder value might lose focus on what customers want, or might do things that are not optimal for consumers. For instance, a corporation might choose to cut production costs by using lower-quality parts in its products. While this might boost profits and the price of its stock, it is bad for consumers. Over time, this can tarnish the reputation of the company and its products, resulting in the opposite of the intended effect by lowering the value of its stock.
Employment and Outsourcing
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Another negative consequence of shareholder value maximization is that it can hurt employees. The lower a corporation's costs, the more profit it stands to make if its total revenue is constant, so corporations can benefit from cutting employee benefits and wages. If domestic labor is not cheap enough or not productive enough, businesses can outsource labor to foreign workers who are willing to work for lower wages.
Corporate Involvement in Politics
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Government regulations and taxes can reduce shareholder value. As result, corporations often contribute money to help certain politicians or political parties, and lobby politicians in an effort to get the government to pass legislation that is favorable to them. Since corporations often have huge amounts of money at their disposal, they can be far more influential than any single voter. Politicians are sometimes criticized for acting in the best interests of corporations rather than in the best interests of citizens.
