It’s Time to Value Stakeholders over Shareholders

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In 2016 U.S. Senate hearings, Valeant Pharmaceuticals International executives were accused of imposing “unwarranted price hikes … at the expense of real people.” | Reuters/Jonathan Ernst

Look at corporate press releases and financial documents and you’ll see countless references to the goal of “creating shareholder value.” But, says Bethany McLean, shareholders alone are too narrow a population for a company to serve. “If creating shareholder value means doing something that’s terrible for employees, that’s a problem,” says McLean,who visited Stanford Graduate School of Business recently as part of the school’s Corporations and Society Program.

A longtime journalist best known for exposing Enron’s scandalous business practices, McLean contends that companies should instead be judged on how well they create “stakeholder value,” meaning benefits for employees and customers as well as shareholders. Such a shift requires crafting “a language to measure impact, so that ‘creating stakeholder value’ doesn’t become an excuse for poor performance,” she says. That language would need to include metrics that quantify the overall social benefit of a company’s products and reflect the source of profits, clearly showing if, for instance, a significant portion of profits were coming from layoffs rather than rising sales.

Now a contributing editor at Vanity Fair, McLean was at Fortune in 2001 when she wrote the first investigative piece noting the impenetrable complexity of Enron Corp.’s financial statements and suggesting that the company’s shares were overpriced. She has also written about scandals at a range of companies, including Valeant Pharmaceuticals International and Wells Fargo.

Misaligned Incentives

One common thread in many high-profile business scandals is a focus on short-term profits, McLean says. Citing employees at Enron and at subprime mortgage companies who profited handsomely before their firms went under, she suggests that compensation and incentives were misaligned with the long-term health of the company.

“There’s something wrong if people are able to extract millions in personal wealth out of a company that’s bankrupt a few years later,” she says, adding that in some cases, the companies’ actions were legal but executives were “gaming the system” to benefit themselves and feed their egos.

McLean says that government regulations are of limited use because while they purport to prevent a problem from reoccurring, they can’t anticipate every potential scandal in a fast-changing business world. Nonetheless, regulators should attempt to set rules that are fair and effective. Save for whistleblowers, employees have proven to be ineffective at helping to police the companies they work for. “If you’re in a culture, you absorb the mores of where you are whether you want to or not, and you function according to its edicts,” she says.

Profits as a Byproduct of Sound Practices

After years of writing about businesses gone awry, McLean has some ideas about what makes well-run companies. In those, she says, executives’ financial incentives are “aligned with the well-being of all stakeholders,” including employees and consumers, so that “you actually provide a safe and remunerative work environment for your employees and provide products or services that are really offering a value to the world.” A well-run business doesn’t drastically raise the price of an old drug or peddle loans to people who clearly will be unable to repay them, she says.

Of course, a firm must generate income to survive, but shareholder returns should not be the primary driver; they should be a byproduct of processes that provide value to customers and employees, McLean says.

“I actually think most people in most companies are extremely well-intentioned,” she says. “But there’s the capability in any company, particularly in a world that is short-term oriented and bottom-line driven, to go wrong.”