Does Shareholder Value Require a Revival of Corporate Culture?

Bachelor Thesis, 2012

51 Pages, Grade: 5 von 5



Abstract - English

Abstract - German

Abstract - Italian

1 Introduction

2 Shareholder value
2.1 History of shareholder value
2.2 Main points of critique
2.3 Analysis of the concept
2.4 Shareholder value - a mistaken principle?
2.5 Value-investing
2.6 Corporate executives - transgressors or pursued?
2.7 The Enron-case

3 Corporate culture
3.1 Corporate culture as solution to the dilemma
3.2 Differences between countries
3.3 German corporate culture as key to sustainability?
3.4 Common objectives as fundament of corporate culture
3.5 Can classical corporate culture be re-established?
3.6 Comparison: corporate culture - corporate identity
3.7 Which kind of value gets created?
3.8 Limitations of models

4 Conclusion

5 References



In recent years the problems created by shareholder value as a principle of corporate governance became topic of broad discussions. This thesis tries to answer the question if corporate culture could be able to prevent the problems and risks that emerge by shareholder value. In a first step the concepts of shareholder value and corporate culture are analyzed and defined in detail. For the purpose of this thesis the phenomenon of value is explained as sustainable long-term profit for investors. Secondly, the problems of shareholder value as a principle of corporate governance is examined and it is shown that the main issue in this context is the lack of mutual trust between interest groups within corporations and the moral dilemma resulting from this.

Thereafter by comparing corporate culture in different countries it is demonstrated that the German approach in corporate culture is the most convenient in order to create mutual trust. Nevertheless the results of this thesis yield that corporate culture has to be developed over time and cannot be introduced a priori by imposing a new corporate identity. In order to create a strong corporate culture which could solve the moral dilemma an environment of mutual trust between employees, executive officers and shareholders has to be established.

Finally it has to be taken into consideration, that for the purpose of this thesis the concepts of shareholder value and corporate culture are conceived as models; nonetheless the definition of models is merely theoretical and therefore controversial. The discussion of the definition of the models of shareholder value, stakeholder value and corporate culture conducted in this thesis should also be interpreted as an input to the controversy about the usefulness of models in scientific research papers.


In den letzten Jahren gab es eine breite Diskussion zu den Problemen, die durch den shareholder value Ansatz als Prinzip zur Unternehmensführung entstanden sind. Diese Arbeit versucht die Frage zu beantworten, ob die klassische Unternehmenskultur die Probleme und Risiken die durch genanntenn Ansatz entstanden sind, abzumildern beziehungsweise zu verhindern sind. Als erster Schritt werden die Konzepte des shareholder value und der Unternehmenskultur analysiert und bis ins Detail definiert. Für den Zweck dieser Arbeit wird der Begriff “Wert” als nachhaltiger und langfristiger Profit für Investoren angesehen. In einem zweiten Schritt werden die Probleme des shareholder value in der Unternehmensführung untersucht, und es wird gezeigt, dass das Hauptproblem im schwelenden Misstrauen zwischen den Interessensgruppen in Unternehmen und dem daraus resultierenden moralischen Dilemma liegt.

Anschließend wird durch den Vergleich der Unternehmenskulturen in verschiedenen Ländern gezeigt, dass der deutsche Ansatz der Unternehmenskultur der geeignetste ist, um das schweelende Misstrauen zu überwinden. Dennoch zeigen die Ergebnisse dieser Arbeit, dass echte Unternehmenskultur einem langfristigen Entwicklungsprozess unterliegen muss und nicht durch das Aufzwingen einer neuen corporate identity (Unternehmensidentität) a priori eingeführt werden kann. Um eine starke Unternehmenskultur zu erreichen, die das beschriebene moralische Dilemma überwinden kann, muss ein Umfeld des gegenseitigen Vertrauens zwischen Geschäftsführung, Arbeitnehmern und Investoren geschaffen werden.

Für den Zweck dieser Arbeit wurden die Konzepte des shareholder value und der Unternehmenskultur als Modelle definiert, obwohl solche Modelle generell theoretisch und deshalb auch umstritten sind. Die Diskussion der Definition der Modelle des shareholder value, stakeholder value und der Unternehmenskultur, die in dieser Arbeit beleuchtet werden, sollten als Beitrag zu der Debatte über die Nützlichkeit von Modellen in wissenschaftlichen Untersuchungen gesehen werden.


Negli ultimi anni la centralità della massimizzazione dello shareholder value come strumento di corporate governance è stata molto dibattuta in letteratura. Questa tesi si pone l’obiettivo centrale di cercare di rispondere alla domanda concernente la possibilità che la cultura aziendale (in seguito riferito come corporate culture) possa prevenire i problemi e i rischi che emergono dal concetto di shareholder value. Inizialmente sono illustrati nel dettaglio i concetti di shareholder value e di corporate culture. Per lo scopo della presente tesi value sarà definito come profitto sostenibile di lungo termine per gli investitori. In secondo luogo saranno esaminati i problemi derivanti dalla visione dello shareholder value come principio cardine per la gestione di un’impresa e sarà evidenziato come il principale ostacolo al corretto funzionamento della teoria in questione risieda nella mancanza di fiducia tra i vari portatori d’interessi all’interno dell’impresa e il dilemma morale risultante.

Viene poi presentato un paragone tra i differenti approcci alla cultura aziendale che si sono affermati nei vari paesi. Alla luce dell’analisi l’approccio tedesco è quello che maggiormente riesce a creare fiducia reciproca. Ciò nonostante i risultati della tesi mostrano come la cultura aziendale debba essere sviluppata con il tempo e non possa invece essere calata dall’alto attraverso l’imposizione di una nuova corporate identity. Al fine di creare una forte corporate culture che possa risolvere il problema morale sopra citato è necessario lo sviluppo e la massimizzazione della fiducia tra collaboratori, personale direttivo e azionisti.

In conclusione, deve essere tenuto in considerazione che per i fini della presente tesi, il concetto di shareholder value così come quello di corporate culture sono trattati come modello. Le definizioni proposte sono quindi solamente teoriche e sono possibili interpretazioni alternative. La discussione sulla definizione dei modelli dello shareholder value, stakeholder value e della corporate culture deve essere interpretata come spunto aggiuntivo per l’analisi dei differenti approcci sulla utilità di modelli teorici ai fini di ricerca scientifica oggi presenti.


After the financial crisis in 2007 the confidence of investors in asset markets diminished and consequently the world’s economy is now more aware of the risks of financial markets going out of control. The recession resulting from the subprime crisis changed our economy drastically; this will be explained in detail in the course of this paper. Many economists advocate stricter regulations of financial markets, but historical data and evidence show that in a global economy markets cannot be completely regulated because of the competition between countries and their diverging individual interests.

Being probably one of the causes of this worldwide crisis the concept of shareholder value as a form of corporate governance became one of the main topics of discussion in economic, political and financial circles. If the focus of the majority of companies is set mainly on acquiring short-term profits in order to persuade potential shareholders to invest, as a result the sustainability of the whole economy gets into risk. Therefore new ways of thinking have to be developed in order to change the focus of companies from the short-term into the long-term perspectives.

However reading attentively several articles and books of economics literature concerning the origin and development of the last economic crisis I realized that there still exists a well-known concept which could be helpful in this situation. The name of this often misunderstood concept is corporate culture. It is mentioned only narrowly in modern business literature, although it was one of the fundamental factors which led to the European social market economy’s success. Nowadays corporate culture is mostly seen as an instrument of public relations, but the true orientation of the concept towards creation of stakeholder value got lost by most of the big players. A revival of this old concept could nevertheless be the key to improve the sustainability of our world’s economy and to make it more resistant to exaggerated speculation and the emergence of bubbles.

The aim of this thesis is to analyze if a revival of the concept of corporate culture is needed in order to keep our economy sustainable, even if companies keep acting after the rules of maximization of shareholder value. My main research goals are to find out if corporate culture is still - and again - adaptable to our fast moving globalized economy and if it’s compatible with the current definition of shareholder value.

According to this perspective the following treatise is sub-divided in four sections: in the beginning I am going to investigate the development and the advances and disadvantages of shareholder value. In a second step I shall try to find a concrete definition of corporate culture and in the third part I will trace the question if these concepts could be able to create a synergetic effect and thus a win-win situation for share- and stakeholders or if they are fundamentally contradicting. In the final part I am going to examine the impact which such a revival of corporate culture could have on corporations.


In the first part of this thesis the concept of shareholder value will be analyzed in detail in order to gain the necessary definitions and information to answer the main question if it requires a revival of corporate culture. Firstly the development of shareholder value will be illustrated based upon the history of the concept. As a second step the main points of critique to this concept will be depicted, before in the next step the analysis will come back to the definition of the concept and its application in the real world’s economy nowadays analyzing.

Furthermore the concept of value investing invented by Jack Graham and developed by Warren Buffet will be used to show the importance of long-term profitability and sustainability for the single shareholders of companies in order to gain value. To complete the illustration of the concept of shareholder value, by means of a case study, the main dilemma of the approach will be pointed out.


First of all the maximization of shareholder value as form of corporate governance has to be analyzed as such, beginning with a short historical overview of its development. According to William Lazonick (2008), shareholder value as a core principle of corporate governance has been known in the Anglo-Saxon economies since Thatcherism in Britain and Reaganism in the United States during the 1980’s. Being the first to explain the shareholder value strategy in his speak "Growing Fast in a Slow-Growth Economy" in 1981 (Guerrera, 2009) the former CEO of General Electric Jack Welch, is considered as to be the father of this concept.

Impressed by the bullish movement of the U.S. stock exchanges, most big European and Japanese private corporations subsequently adopted this type of corporate governance in the late 1990’s with the aim to increase their efficiency. Investment Bankers and leading Managers promoted the principle of shareholder value as the most successful style of corporate governance, even the OECD (Lazonick, 2008) published a paper where it claims that the increase in shareholder value should be the most important target for all corporations listed on the stock exchange.

Lazonick (2008) gives an excellent overview of the historical development of the shareholder value concept; he analyzes the evolution and impact of this concept over the past two decades in the United States. Since the beginning of the twentieth century the U.S. economy was dominated by a small number of big companies which were able to create huge financial revenues. These big players invested their profits mainly in physical and human capital; new plants were built or acquired and new skilled workers were hired. Nowadays we refer to this strategy of corporate governance as “retain and invest”. Using the “retain and invest” strategy corporations were able to exploit large economies of scale and scope with the consequence of an immense economic growth. However in order to pursue their principle of “retain and invest” companies had to expand to different sectors and enter into new markets because their key-markets had been saturated.

This expansion of business activity led to new problems. The biggest drawback of “retain and invest” consisted in the fact that it was no more possible for companies to focus their decision-making process on industries where they had their specific experience and “know how”, thus it was hard for firms to be innovative and flexible. Moreover it became nearly impossible to make well informed investment decisions where to invest the large financial profits in, because the lack of expertise in the new sector led to comparative disadvantages. Furthermore companies experienced huge logistical problems; the main offices of the corporations were too far away from the different production plants - a situation which led to new problems in the managing process. To analyze this more deeply would go beyond the scope of this paper. Summing up we can say, that managers faced different new problems and, being inexperienced, were compelled to make uninformed decisions. As a result they accepted low-margin and low- growth units in their corporations in order to fulfill the “retain and invest” strategy.

The pre-mentioned so-called father of the shareholder value movement Jack Welsh (Guerrera, 2009) argued that a corporation should cut costs aggressively and sell or close every low-performing business unit immediately. The overreaching goal of a company should be to increase its share price and to at least meet quarterly profit expectations. Under his regime from 1981 to 2001, the market capitalization of General Electric rose from 13 billion US-Dollars to over 400 billion (Guerrera, 2009).

Virtually all economists at that time expected that managerial control over the allocation of resources was less efficient than the ‘invisible hand' of the market (Smith, 1776), and therefore managers were supposed to act as agents of the shareholders and their performance should be measured considering the performance of the stocks of their companies (Lazonick, 2008). Later on in this thesis, the idea of an ‘invisible hand' which leads the market will be picked up again at several points. This concept, which was firstly mentioned as “agency theory” was the birth of the idea of maximizing shareholder value as universal remedy against individual errors of managers and as a booster of economic growth.


Nowadays the idea of shareholder value as a key principle in corporate governance is highly disputed, mainly because in the last decade the world financial markets experienced two major crises, which were analyzed by the media constantly and were blamed party on shareholder value. The first one in 2001 when the so-called “Internet-bubble” exploded and the Dow Jones Industrial Average stock index fell by nearly 50%. Secondly in 2007 when the “Subprime crisis” led to the failure of some major banks, the world stock indexes lost not only more than 50% of their value but also the confidence of all kind of investors. While the Internet-bubble affected mainly the so-called “new market”, the subprime crisis led to a harsh downfall of stocks which were considered as secure investments. Later on in this paper the connection between shareholder value and the subprime crisis will be explained more in detail. But one indication may already be provided, that is that different agents in the market today argue that the shareholder value movement can be seen as the activator of these two major economic crises.

Even the militant advocate of the shareholder value concept Jack Welsh stated recently, that shareholder value was the dumbest idea of the world (Guerrera, 2009). He rejects prior ideas completely and argues that in the 1990’s this concept was viable because of the particular economic situation of that time. Back then the economic growth was so strong, that even a wrong concept was able to lead to success, whereas nowadays the situation has changed and the shareholder value approach proved to be wrong. But even before Welsh’s insight, voices had been raised against this concept.

One of the biggest castigators of shareholder value is the Swiss management consultant and university professor Fremund Malik. Malik (2001) argues that the idea of maximizing shareholder value is destructive for companies and therefore also contra- productive for its shareholders. The anchorage on the value of a companies’ stock as only criterion for decision-making forces managers to take decisions which go against the long- term interest of their business, which is, according to Malik (2001), the reason for long- term failures of many corporations. Malik (2001) states that the financial markets are only interested in the current stock value of a company; because they do not include into their analyses important factors such as customer retention, employee loyalty and innovation. Even if this argument can be considered to be weak, because even imperfectly informed investors try to include these factors at least partially in their investment decisions, there are many examples of firms which faced exactly this problem, which will be analyzed more deeply thereafter.

An illuminative example for the lack of long-term prospective in companies is examined by Peter Noll, who is concerned with the behavior and career-path of top- managers in major corporations. Noll (1991) argues that senior managers of leading U.S. automobile companies act against their self-interest, if they proceed innovatively and invest into new technologies, because investments into new products induce short-time losses before they amortize. Normally this procedure takes at least five years, so that in this period stocks will go down and the manager risks losing his reputation and even his job. Moreover senior managers are on average over 50 years old, so most of them are planning on retiring and consequently will be in charge of the company anymore when their innovative investments become profitable. Finally it will be his successor who will earn the good reputation for that work. Noll (1991) sees this dilemma which exists between personal and company interest as the main reason why the big American automobile firms failed to maintain their dominant market position against Japanese producers. In the course of this thesis, this affirmation will be analyzed more in detail using a case study on the development of the Japanese company Toyota and the US- American General Motors Company.

Returning to Malik (2001), he finds that in major rankings corporate governments of companies are rated upon the quality of their boards of directors; in fact, in these rankings, quality is defined as the commitment of the directors to the shareholder value approach. Therefore in 2001, US-corporations have been rated higher than their European pendants, even if the so-called Corporate America, which is an expression mainly used as a synonym for the world of companies and big businesses in the US, was in a desolate condition. Malik (2005) argues that the reason for this is that US-companies have to sugarcoat their financial statements in order to preserve and increase the value of their stocks. As a result they cannot react properly to changes in the market environment, because that would cause shareholders to doubt the effectiveness of their investment. Already in 2005 Malik predicted that the economy of the United States was on the way to create a huge regression for the whole world. With the financial crisis of 2007 his prediction became true.

Malik (2001) also argued that shareholder value has been misunderstood by corporations and politicians because in the long term shareholder value in reality leads to a decrease in the value for shareholders and this is obviously against the self-interest both of corporations and of their shareholders. If Malik is right with his analysis than shareholder value in the long-term leads to a lose-lose situation for every agent in the market. So this strategy stands in opposite of corporate governance which follows a perceptive logic of economic phenomena.

Like mentioned previously in this thesis, according to Adam Smith (1776) the market is able to regulate itself supported by an invisible hand. But this is true only if every agent acts respectively to his reasonable self-interest:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

Therefore the concept of shareholder value contradicts the fundamental condition for free markets to work. The whole political economy starts from the assumption of a homo oeconomicus, a human being without family, history and gender who acts only according to his genuine self-interest. Logically this homo oeconomicus in the real world does not exist but he can be considered as an approximation of the average agent in the market. Now, if agents stop acting according to their just mentioned self-interest, even if they think they do, all economic policies based on a free market will become contraproductive because they are based upon wrong assumption.

In conclusion if Malik is right and shareholder value in the long-term is against the fundamental self-interest of every agent in the market, than this could be the reason of market failures resulting in economic crises and this could therefore be the main reason for the mentioned probability of misunderstanding the concept of shareholder value. To examine if our current understanding of shareholder value is wrong or not, the concept has to be indicated deeply part by part. Later on in this thesis, possible solutions of the dilemma caused by shareholder value will be analyzed and the ideas of Malik and Welsh will be encountered and analyzed again using a new intellectual framework.


To understand the concept of shareholder value more in depth, firstly the word itself has to be analyzed. The traditional definition of the term shareholder is straight forward; everyone who owns a share of a company is considered a shareholder. On the other hand the definition of the word value is not as evident. Looking the word up on the Oxford dictionary (2010) value is defined as “ the regard that something is held to deserve; the importance, worth, or usefulness of something ” . Starting from this broad definition it can be started to look for a more specific characterization, for this purpose the business dictionary (2010) can be used in order to find an economical interpretation of the term value.

“ Worth of all the benefits and rights arising from ownership. Two types of economic value are (1) the utility of a good or service, and (2) power of a good or service to command other goods, services, or money, in voluntary exchange. ”

It can be found immediately, that the two definitions are very close to each other, the only difference can be found in the fact that in the economical definition the words: worth, importance and usefulness are replaced by the more technical term utility. Utility is considered as “ the state of being useful, profitable, or beneficial ” Oxford (2010). Before the investigation into the exact meaning of these words is continued, it can be concluded from the mentioned information that the term value describes the general usefulness of an object, concept, an idea or a person.

But this general definition is not sufficiently precise to understand the special concept of the definition of value for a person who holds a share of a company. One of the most interesting philosophical approaches on value is Max Scheler’s (1957); he argues that, if we define the word “is” as a concept of existence, the answer to the question what value is has to be that “value does not exist”.

According to Scheler (1957), it is not possible to assign a definition to the concept of value, because it has no ontological status. This would lead to the conclusion that value can be determined only by the setting and accepting of norms. If there would be no metaphysical definition of value, than shareholder value would simply be the monetary value of a stock expressed in currency. Consequently this pragmatic approach is not easy to attack because it is nearly impossible to prove the metaphysical existence of value as an independent phenomenon.

On the other hand Friedrich Nietzsche (1883) argues, that value is not a term of economics or morality but completely metaphysical. He sees value as a condition that makes Will to power possible, without the concept of value in their minds, human beings would not struggle for power, trying to extend their force. For Nietzsche will to power is the essence of life, it cannot be defined as moral or immoral. To sum up without the metaphysical concept of value, life would be supposed to be without essence. So it can be seen that Nietzsche, uses another approach trying to define value.

By comparing these two different approaches to the same concept it can be indicated, that a simple definition like given by dictionaries cannot measure the fundamental meaning of value. It is helpful to ask the question, how something may become valuable, i.e. when a value is assigned to it. Heidegger argues that when we are directing ourselves towards something that means we are valuing it - if we are directing towards something than implicates that we have an aim. Furthermore he asks if by aiming for something we are making it valuable, or is it its value which makes us aim for it. So we can try to define value as an aim which we try to achieve.

In general a shareholder measures the values of his shares depending on their nominal value in monetary terms. So his only aim is to increase the monetary value of his shares - which seems to be an obvious pleonasm - and therefore to make him more wealthy. To get back now to the economical definition of value: the increase in nominal value seems to be utile for the shareholder. As defined before utility is the profitability, benefit and usefulness of something. Here we should ask the question if the increase of nominal value is the only factor to measure the usefulness of an investment.

To answer this question we may refer to the classical economic theory of Adam Smith’s (1776) and his definition of value, which is called the labour theory of value. He argues that the nominal value of a good should be the same as its real value and the real value is the amount of labour required to earn enough money to afford it. The plain English definition of this theory is that if the value of a commodity is given by its price (i.e. 10€), the amount of labor needed to acquire it has to be equal to the amount of labor to produce it. So if one unit of labor is needed to produce the commodity and this unit is worth 10€, the buyer has to earn 10€ for one unit of labor too. If the money supply rises and therewith the purchasing power of the Euro decreases, than the price and the wage have to increase by the same amount, the invisible hand will lead to this consequence.

As a result in Smith’s (1776) prediction of the economy, the nominal value of stocks will be equal to their real value. So there can be no increase in the value of shares without increase in production and consumption. This leads to the conclusion, that a company can increase the nominal value of its shares only by increasing the production and not just by cutting costs. Therefore purchasing power has to increase in order to increase shareholder value.


Excerpt out of 51 pages


Does Shareholder Value Require a Revival of Corporate Culture?
Free University of Bozen-Bolzano  (School of Economics and Management)
5 von 5
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Shareholder value, corporate culture, value investing, warren buffet, finanzkrise, unternehmenkultur, business ethics
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Michael Frei (Author), 2012, Does Shareholder Value Require a Revival of Corporate Culture?, Munich, GRIN Verlag,


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