Creating value

It is now almost universally recognized in business literature that the ultimate objective of all financial decisions—and indeed, of all strategic management decisions—is to create value. In the English-speaking countries, this is explicitly seen as value for the common shareholders. In legal terms, this was never in doubt. The shareholders are the legal owners of the company. They provide its permanent capital funds. In a liquidation, they have only a residual claim on assets, and they have a claim on the company’s earnings only after all other claimants have been satisfied

Other providers of funds are lenders, who take a limited risk for a limited return. The shareholders take unlimited risks and commit their funds without safeguards. In return, they have the right to nominate a board of directors to supervise the company’s operation and ensure that it is managed in their interest. Dissenting voices are suggesting that equal weight should be given to the claims of other stakeholders—employees, suppliers, customers, lenders, the local community, and even society at large. In practice, the two approaches can be harmonized. Paying due consideration to other stakeholders’ needs and interests is both a moral responsibility and good business sense, and it is unlikely that value can be maximized in the long run if such considerations are ignored.