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refore,as a precondition for considering the arguments for ‘maximizing shareholdervalue’ in those nations in which it is not yet an entrenched principle of corporate
governance, it is imperative that we understand the evolution and impact ofthe quest for shareholder value in the United States over the past two decades.Such is the purpose of this paper.
The origins of `shareholder value’
The arguments in support of governing corporations to create shareholder valuecame into their own in the United States in the 1980s. As has been the casethroughout the twentieth century, in the 1980s a relatively small number of giant
corporations, employing tens or even hundreds of thousands of people dominated
the economy of the United States. On the basis of capabilities that had
been accumulated over decades, these corporations generated huge revenues.
They allocated these revenues according to a corporate governance principle that
we call ‘retain and reinvest’. These corporations tended to retain both the money
that they earned and the people whom they employed, and they reinvested in
physical capital and complementary human resources. Retentions in the forms
of earnings and capital consumption allowances provided the Ž nancial foundations
for corporate growth, while the building of managerial organizations to
14 Economy and Society
develop and utilize productive resources enabled investments in plant, equipment
and personnel to succeed (Ciccolo and Baum 1985; Hall 1994; Corbett and
Jenkinson 1996).
In the 1960s and 1970s, however, the principle of retain and reinvest began
running into problems for two reasons, one having to do with the growth of the
corporation and the other having to do with the rise of new competitors.
Through internal growth and through merger and acquisition, corporations
grew too big with too many divisions in too many different types of businesses.
The central offices of these corporations were too far from the actual processesthat developed and utilized productive resources to make informed investmentdecisions about how corporate resources and returns should be allocated toenable strategies based on ‘retain and reinvest’ to succeed. The massive expansionof corporations that had occurred during the 1960s resulted in poor performance
in the 1970s, an outcome that was exacerbated by an unstable
macroeconomic environment and by the rise of new international competition,especially from Japan (Lazonick and O’Sullivan 1997; O’Sullivan 2000: ch. 4).
Japanese competition was, of course, particularly formidable in themassproductionindustries of automobiles, consumer electronics and in the machinery
and electronic sectors that supplied capital goods to these consumer durable
industries. Yet these had been industries and sectors in which US companies had
previously been the world leaders and that had been central to the prosperity of
the US economy since the 1920s.1 Japan was able to challenge the United States
in these industries because its manufacturing corporations innovated through
the development and utilization of integrated skill bases that were broader and
deeper than those in which their American competitors had invested (Lazonick
1998). Compared with American practice, Japanese skill bases integrated the
capabilities of people with a broader array of functional specialties and a deeper
array of hierarchical responsib