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Enlightened Shareholder Maximization: Is this Strategy Achievable?

Pamela E. Queen

Received: 16 September 2013 / Accepted: 15 January 2014 / Published online: 5 February 2014

� Springer Science+Business Media Dordrecht 2014

Abstract The role of a corporation is often debated as a

mutually exclusive choice between economic responsibil-

ity to shareholders and social responsibility to society. An

evolving viewpoint embraces an integrated approach

focused on long-term value creation for shareholders which

benefits other stakeholders. Maximizing long-term share-

holder value as a corporate objective can be compatible

with stakeholder theory when an enlightened shareholder

maximization strategy is embraced. Firms implementing an

enlightened shareholder maximization strategy are expec-

ted to make decisions and use resources which achieve

long-term value-creating outcomes. However, critics of

enlightened shareholder maximization as a corporate goal

contend this strategy conflicts with maximizing share-

holder value. This study explores whether firms which

embrace a balanced enlightened shareholder maximization

strategy indeed create long-term value which does not

sacrifice shareholder wealth.

Keywords Enlightened shareholder wealth

maximization � Stakeholder theory � Value-based management

Introduction

The role of a corporation is often debated as a mutually

exclusive choice between economic responsibility to

shareholders and social responsibility to society. An

evolving viewpoint among corporate managers embraces

an integrated shareholder maximization and stakeholder

management approach motivated by long-term wealth

creation for shareholders. Both investors’ and managers’

views are progressing from a solely economic responsi-

bility of corporations to a broader social responsibility as a

legitimate and expected role for business. Surveys of cor-

porate executive attitudes toward social responsibility

indicate that executives strongly assert in addition to

making a profit, business should help to solve social

problems whether or not business helps to create those

problems and whether profits are realized (Holmes 1976;

Carroll and Shabana 2010).

Shareholder theorists believe that corporate managers

should spend funds in ways which are authorized by

advantage firm owners because they provide capital to

corporations and are due compensation. For proponents of

shareholder theory, the only social responsibility of a

business is to engage in transparent, free competition

without deception or fraud with a goal of increasing firm

profits which benefits shareholders (Friedman 1970). In

contrast, stakeholder theorists believe that corporations

have a responsibility to shareholders as well as other

stakeholders because business and society are intertwined;

therefore, actions of corporate managers impact firm

owners and broader stakeholder groups (Freeman 1984).

For proponents of stakeholder theory, corporate managers

are expected and are duty-bound to engage in appropriate

business behavior which uses corporate resources in ways

that help society 1

Corporate managers, as members of

society, are obligated to take into account society-at-large

P. E. Queen (&) Department of Accounting and Finance, Morgan State

University, Baltimore, MD, USA

e-mail: [email protected]

1 Despite evidence that corporate legitimacy is strengthened when

businesses solve social problems (Phillips 2003; Palazzo and Scherer

2006), opponents of stakeholder theory, as a business objective,

contend that maximizing shareholder value must be the unambiguous

corporate objective (Sundaram and Inkpen 2004).

123

J Bus Ethics (2015) 127:683–694

DOI 10.1007/s10551-014-2070-6

when making decisions, independent of personal or direct

benefits to themselves or their agents (Wood 1991; Gray

et al. 1996; Kok et al. 2001).

Maximizing long-run shareholder value as a corporate

objective can be compatible with stakeholder management

approaches. 2

Enlightened shareholder maximization is a

revised, integrated role of a corporation which encom-

passes financial and social obligations of firms as its core

strategy, a strategy with one emphasis which is long-term

wealth creation for shareholders (Jensen 2002). Firms

implementing an enlightened shareholder maximization

strategy make decisions and use resources to achieve

value-creating outcomes. Resources are devoted to socially

responsible initiatives as a means of maximizing long-run

firm value (Lougee and Wallace 2008).

This study explores the role of a corporation in terms of

three distinct factors—(1) firm financial performance, (2)

firm social performance, and (3) shareholder wealth crea-

tion with an assessment of which financial measures

explain observed benefits to investors. Researchers are

recognizing a distinction between making money for a firm

versus creating shareholder value (Enderle 2009). Firm

strategies geared toward short-term profit gains at the

expense of developing long-term value are not beneficial to

either shareholders or other stakeholders (Smith 2003).

This evolving management approach encapsulates tenets of

traditional shareholder maximization and stakeholder

management strategies into a primary strategy with a single

goal which is creating long-term value for firm owners.

This study examines direct wealth benefits to share-

holders measured by stock return performance to answer

whether firms which embrace an enlightened shareholder

maximization strategy indeed create value for shareholders.

For firms which effectively implement enlightened share-

holder maximization strategies, I expect shareholder wealth

(e.g., stock returns) to positively correlate with long-term

value-driven financial performance measures rather than

short-term market-driven performance measures. There-

fore, firms implementing strategies based upon value-based

management methods do not sacrifice stakeholder benefits.

Literature Review: The Role of a Corporation

At the center of debate about the role of a corporation is

what impact business decisions have on society. Business

and society are interwoven rather than distinct entities; as

such, society has certain expectations for appropriate

business behavior and outcomes. For corporate executives,

this interdependence between society and business is a

dilemma that corporate executives must effectively address

or face disapproval from internal business stakeholders

(investors, board members, employees, and suppliers) or

external society stakeholders (customers, local communi-

ties, and governing bodies). One prevailing viewpoint is

that businesses do not operate in isolation; therefore, firms

ought to exhibit responsibility to the public because of their

interdependence with social institutions (Preston and Post

1975). Within a business enterprise, a role of social

responsibility is anticipated because business and society

exist and operate in a shared environment.

With this interdependence between business and society,

one distinct, unambiguous directive for corporate managers

is vague because lines between business and society are

blurred. So, a single management imperative for corporate

executives is often weighed, as a choice between an eco-

nomic responsibility to firm owners and a broader social

responsibility to other stakeholders, those members of the

society where the firm operates. According to Milton

Friedman (1970), the role of a corporation is to increase its

profits as its objective with no place for social responsi-

bility as a business function; this limited emphasis is often

the source of contention. Whether shareholder value

maximization is an appropriate objective for corporate

executives is not itself problematic, but rather when efforts

to achieve shareholder value maximization are paramount

to other stakeholder interests, do greater society woes

ensue. It is actions, rather than intent, which are the source

of conflicts. Whenever shareholder maximization is pur-

sued by any means to benefit firm owners without regard to

negative consequences for others, no one benefits. As

observed in the 1990s, a period of ‘‘shareholder suprem-

acy’’ where corporations competed to create shareholder

value, at any consequence, corporate misconduct and

market downturns were observed.

Shareholder supremacy as a dominating strategy for

corporate executives has progressed into a balanced strat-

egy in which business decisions consider the welfare of

society-at-large. Subsequently, the first decade of the 2000s

became a period of corporate transition where the role of a

corporation was revisited and revised into value-based

management approaches which simultaneously focus on

owner wealth maximization and social welfare maximiza-

tion (Martin et al. 2009).

A Corporation’s Economic Responsibility: Shareholder

Wealth Maximization as a Business Objective

As agents of firm owners, corporate executives should

operate firms in the best interest of their owners, not

themselves or other groups who make demands.

2 When efforts to maximize shareholders’ wealth reflect fairness,

open and free competition in which no market participants are

harmed, these efforts are aligned with stakeholder management views

in which no harm is done to the environment, people, or society.

684 P. E. Queen

123

Shareholder theory advocates that corporate executives

must direct resources and concentrate efforts to create

wealth for firm owners; it is a binding fiduciary duty of

executives to put shareholders’ needs first and that of other

constituents second. With a corporate strategy of maxi-

mizing shareholder profits, corporate social responsibility

is best viewed as a form of investment in which firms must

weigh the cost of social agendas versus its benefits. As

guardians of the financial welfare of corporations, CEOs,

CFOs, corporate boards, and upper level managers are

justifiably concerned about effects of social initiatives on a

firm’s financial performance. Understandably, these finan-

cial guardians have a duty to firm owners over other

stakeholders; this priority to shareholders requires these

financial guardians to assess whether socially responsible

strategies are consistent with financial strategies before

implementing social agendas (O’Sullivan 2006).

Critics of shareholder theory contend when resources

are narrowly applied to maximizing owners’ wealth, this

approach prohibits philanthropic giving, spending on

efforts to improve employee morale, or directing funds to

other constituent groups such as customers, suppliers, and

local communities. Therefore, shareholder value maximi-

zation strategies are seen as detrimental to the overall well-

being of society. Furthermore, adversaries of shareholder

maximization strategies raise concerns when corporate

guardians act unethically or disadvantage certain constit-

uent groups. The intent of shareholder maximization is that

corporate managers operate firms in the best interest of

their owners which translates into increasing firm profits

without deception or fraud. When this intent is violated,

firm value decreases; subsequently, shareholder maximi-

zation approaches are perceived as the culprit.

Whenever corporate executives implement strategies

that are concentrated short term on quarterly earnings and

immediate stock price fluctuations, these actions hinder

both firm owners and other stakeholders, especially when

interests of shareholders and other stakeholders diverge.

For example, when firms forego maintenance projects, fail

to update technology, or avoid costs that would lead to

operating efficiencies in lieu of getting temporary earnings

increases it affects shareholders’ wealth, impedes the pro-

ductivity of employees, and potentially decreases customer

satisfaction due to less quality products and services.

For some firms, creating value in the long term may be a

difficulty due to misaligned incentives or inappropriate

compensation to executives. When compensation com-

mittees choose to grant perks to executives for reaching

quarterly benchmarks instead of using these resources for

investment in research and development, the result is likely

to be a lasting value-decreasing outcome. When wealth

maximization efforts are misguided with emphasis on

immediate benefits, it pits stakeholder groups against each

other by advancing the rights of one group while harming

other groups (Freeman et al. 2004). For example, salary

differentials between top executives and lower level

employees can lead to declines in employee morale and

productivity which impacts shareholders’ wealth.

Researchers find that successfully implemented profit-

maximizing strategies are not implemented with expecta-

tions for immediate results, but rather consider factors

which produce long-run value creation for shareholders

(Jordi 2010). Shareholder maximization is an appropriate

objective for managers making financial decisions. When

firms invest in positive NPV projects with long-term

financial gains, these actions benefit all shareholders. As

guidance for investment decisions, a shareholder maximi-

zation strategy with long-term emphasis is the best use of

capital and can yield outcomes which help all stakeholders

(Danielson et al. 2008).

A Corporation’s Social Responsibility: Stakeholder

Management as a Business Objective

Stakeholder theory broadens the relationship between

corporations and their owners to multiple constituent

groups. In contrast to shareholder theory, its fundamental

difference is stakeholder theory demands that interests of

all stakeholders be considered regardless of impact to

company profits. A successfully implemented stakeholder

management strategy incorporates financial interests of

firm owners with the interests of other stakeholders—

employees, customers, suppliers, and community with an

objective to balance profit maximization for shareholders

with maximizing social benefits. Stakeholder theorists

define corporate managers as agents of all stakeholders

who must insure that one group’s interests are not violated

at the expense of another group’s interests.

Critics of stakeholder theory perceive shareholder versus

stakeholder agendas as separate, distinct, and competing

which is burdensome for corporate managers to address

without negatively impacting firm owners. Divergent

interests of various constituent groups are not easily com-

promised or balanced against each other. Blattberg (2013)

suggests that corporate executives waste time and resources

engaging in dialog and negotiations to deal with conflicting

stakeholder interests. The concern is that when resources

and management attention are directed to broader stake-

holder concerns, this wide-ranging attention occurs at a

detriment to firm owners. Thus, critics hold that stakeholder

management strategy is value-decreasing and not beneficial

to any stakeholder. Using corporate funds to settle labor

disputes or enhance employee pension plans when a better

use of these funds could be for positive NPV projects is

often viewed as stakeholder management strategy is dam-

aging to core business objectives. The underlying criticism

Enlightened Shareholder Maximization 685

123

is when stakeholder management actions only promote

private benefits for executives or executives fail to make

choices which create firm value, this is a waste of limited

resources and potentially destroys shareholder value (Cespa

and Cestone 2007; Barnea and Rubin 2010).

Although critics of shareholder theory find it is at odds

with profit making and shareholder value maximization,

evidence indicates that stakeholder and shareholder strat-

egies are not mutually exclusive approaches. An optimal

level of stakeholder management which benefits share-

holders exists when stakeholder management costs do not

exceed shareholder benefits (Benson et al. 2011). A posi-

tive correlation among social, environmental, and financial

performance is observed when firms focus on long-term

financial returns as part of developing their social strategy

(Orlitzky et al. 2003). When shareholder and stakeholder

interests are effectively addressed such that firms are able

to maintain their financial business goals and serve inter-

ests of all stakeholders, these firms are progressing toward

successfully implementing enlightened shareholder maxi-

mization approaches.

A Corporation’s Modern Role: Enlightened

Shareholder Value Maximization as a Business

Objective

As the corporate landscape changes and societal expecta-

tions emerge, management decision making is expected to

effectively incorporate environmental, social, and gover-

nance criteria, along with financial performance objectives

into a comprehensive firm strategy. Over the last 50 years,

corporate managers are realizing a need to broaden their

goals beyond traditional financial expectations to assume

socially responsible tasks in their corporate strategy (de

Lange et al. 2012).

Acknowledgment that business and society are explic-

itly linked with an expectation that corporate executives

have a duty to both business stakeholders and society is not

novel. When Berle and Means noted concern about a

separation of ownership in the modern corporation struc-

ture, their concern was managers’ lack of accountability to

investors, as well as managers’ lack of accountability to

society (Mizruchi 2004). Dodd presented a view of the firm

as an economic institution with attention on social service,

as well as focus on profit maximizing (Dodd 1932). So, the

corporation then and the corporation now must have a

concern for owners, employees, and the well-being of the

public. When these interdependencies are not recognized,

social performance initiatives are not effective and

opportunities for business to benefit society are obscured

(Porter and Kramer 2006).

When managers implement a hybrid approach which

incorporates tenets of stakeholder management and

shareholder maximization such that long-run shareholder

value creation does not conflict with long-run interests of

stakeholders, this is good for business and subsequently

good for society (Wallace 2003). Productive, lasting value

maximizing strategies are not merely a balancing act for

managers, but a carefully planned and integrated business

strategy. A management approach based upon balancing

neglects to consider interdependencies of economic and

social factors and sees them as conflicting rather than

complimentary agendas (Crews 2010).

Critics of enlightened shareholder maximization strate-

gies contend this approach satisfies interests of stakehold-

ers by sacrificing shareholder wealth maximization.

Consequently, shareholders do not achieve maximum

shareholder wealth when resources are directed toward

benefiting other stakeholders. Yet, past research notes that

human beings lack the cognitive resources to implement

optimal-decision making strategies (Simon 1955). Instead,

boundedly rational agents develop satisficing contracts

which meet acceptable thresholds (Bolton and Faure-Gri-

maud 2010). Therefore, whether an enlightened share-

holder strategy is achievable is questionable. This study

seeks to determine whether resources directed to long-run

firm value creation and firm sustainability endeavors versus

short-term financial performance goals result in benefits to

shareholders of those firms which adopt an integrated

shareholder maximization and stakeholder management

strategy. Therefore, enlightened shareholder maximization

can meet acceptable thresholds when value-based man-

agement methods are implemented.

Data and Methods

Data consist of firms named to the 100 Top Corporate

Citizen list. Top corporate citizen firms are a proxy for

firms which embrace enlightened shareholder value maxi-

mization strategies, because they achieve both good

financial performance and good social performance. 3

This

study defines good financial performance as a measure of

each firm’s stock returns compared to a market benchmark.

Two basic questions are considered—(1) whether financial

benefits to shareholders are correlated with long-term

value-driven measures of firm performance as compared to

short-term market-driven measures of firm performance;

and (2) whether value-driven measures of firm performance

explain stock return performance. These 100 Top Corpo-

rate Citizen firms are expected to yield benefits to share-

holders that correlate with long-term value-driven

3 The measures used to rank these firms include factors related to the

triple bottom line (people, profit, and planet).

686 P. E. Queen

123

performance measures versus short-term market-driven

performance measures.

Data Sample and Selection

An unbalanced panel of 1,122 firm-year observations from

years 2000 through 2012 was compiled. These firms were

annually ranked among the 100 Top Corporate Citizens

each year in the Corporate Responsibility (CR) Magazine.

This magazine ranks firms based upon seven categories

which are environment, climate change, employee rela-

tions, human rights, governance, finance, and philanthropy.

The magazine’s methodology committee weights each data

category differently to account for different relative val-

ues. 4

These firms are often used in management research

on corporate social responsibility.

Firms named to this list are reputed to demonstrate

concern and create value for all stakeholders. They develop

a culture in which accountability, integrity, and genuine

concern for all stakeholders is fostered. These 100 Top

Corporate Citizen firms have successfully integrated

shareholder maximization and stakeholder management

strategies into their business goals.

Measure of Investor Benefit

The dependent variable of study is a financial measure of

investor benefit defined as 12-month holding period stock

returns for a given firm.

Holding Period Return ¼ Y12th month

i¼month listed

1 þ returnð Þ ð1Þ

For each firm, monthly stock return data are obtained the

month a firm is listed as a top corporate citizen and up to

12 months following. Monthly stock return data are

obtained from the University of Chicago Center for

Research in Security Prices (CRSP) database.

Market-Driven Measures of Firm Performance

Market-driven measures of firm performance are ratios

which evaluate the economic status of a given firm com-

pared to the stock market. These measures of firm perfor-

mance relate a firm’s stock price to financial measures of

earnings, book value, and cash flow. Firm managers are

interested in these measures, because they indicate inves-

tors’ perception of a firm’s past and future performance.

Financial analysts, as well as current and prospective

investors, analyze market ratios to assess firm operations.

Although market measures are widely used to evaluate firm

performance, most market measures do not adequately

quantify a firm manager’s contribution to a firm’s overall

financial status.

For this study, two commonly cited market ratios are

considered—price-to-earnings (P/E) ratio and market-to-

book (M/B) ratio. The P/E ratio indicates how much

investors are willing to pay per dollar for one share of

stock as compared to one dollar of reported earnings. It is

calculated by dividing per-share market price of a com-

pany’s stock by a company’s earnings per share (EPS) as

expressed on its income statement. The higher the P/E

ratio, the higher a firm’s perceived value to potential

investors. The second measure, M/B ratio, compares a

firm’s value in the market (market capitalization) to its

accounting value or book value. It is calculated by

dividing a firm’s market capitalization to its balance sheet

value. A M/B ratio of one indicates accurate stock valu-

ation. When market value exceeds book value, share-

holder value is created; otherwise, shareholder value is

destroyed.

These market measures tend to capture short-term

market evaluations which are more likely to attract new

investors. For example, when a firm’s stock market price

is lower than its corresponding book value, this is good

for prospective investors who can obtain new shares of

an undervalued stock. A weakness with strong reliance

on P/E and M/B ratios is their susceptibility to

accounting manipulations on balance sheet and earnings

statements. 5

Consequently, these ratios may not accu-

rately reflect a firm’s true value as compared to the

market. Since a firm’s stock price can be manipulated in

the short term, incentives to increase a firm’s current

stock price can lead to ineffective operations and poor

investment decisions (Danielson et al. 2008). Therefore,

for firms implementing enlightened shareholder maximi-

zation strategies, I expect stock return performance

would not be influenced by short-term market-driven

performance measures.

4 The CR magazine’s methodology committee ranks companies in

the Russell 1000 index based upon over 290 data elements in seven

categories: environment, climate change, employee relations, human

rights, governance, finance, and philanthropy. The methodology

committee defines the relative weights for these categories. For

example, the environment category may have a weight of 20 % as

compared to a 12 % weight for the finance category.

5 Both the P/E and M/B ratios are based upon accounting measures

(earnings for the P/E ratio and book value for the M/B ratio) which

are susceptible to manipulation. A key drawback of the P/E ratio is

firms often manage earnings with accounting wizardry to make them

look better than they actually are. For the M/B ratio, problems with

manipulation are sometimes cited, but not as often as with the P/E

ratio. However, both measures should be avoided as the sole basis for

decision making.

Enlightened Shareholder Maximization 687

123

Value-Driven Measures of Firm Performance

In recent years, value-based performance measures have

gained interest as benchmarks which properly incentivize

managers to create value for shareholders. Value-based

performance metrics are used to influence corporate man-

agers to direct resources, policy, and processes toward

creating long-term value. For this study, two value-driven

measures are evaluated—market value added (MVA) and

total shareholder return (TSR). Unlike many market ratios,

these measures gage a manager’s contribution to the

overall value of a firm and are long-term focused. MVA

measures shareholder wealth gained through actions of firm

managers. It is defined as the difference between a firm’s

market value of stock and the amount of equity capital

shareholders have provided the firm. This measure reflects

the performance of management in increasing the firm’s

value from the market’s perspective. Therefore, firm

executives have less ability to manipulate this measure,

especially over a long-term horizon. When MVA is posi-

tive, it is interpreted as management actions and invest-

ments have added value greater than shareholders’ capital

contributions; a high, positive MVA is good for share-

holders. TSR measures stock performance over a given

period of time. For a given time period (typically a year),

this computation combines stock price appreciation and

dividends paid to indicate a total return to shareholders

expressed as a percentage. TSR is simply the capital gain

yield from stock price appreciation and a stock’s dividend

yield. As an approximation over one year, it can be cal-

culated as:

TSR ¼ðStockPriceend� StockPricebegin þ Dividends)/StockPricebegin ð2Þ

I expect value-driven measures of firm performance have

significant correlation with investor financial benefits (e.g.,

stock returns) for firms which implement enlightened

stakeholder value maximization strategies.

Measures of Economic Conditions

As another explanation of shareholder wealth benefits,

economic conditions were considered. Economic condi-

tions affect business development and growth (Lewis

2013). During periods of recession, business risks, costs,

uncertainty, and failures increase while growth opportuni-

ties decrease (Figueroa-Armijos et al. 2012). Changes in

economic conditions can impact wealth benefits to share-

holders. Two measures are chosen to assess economic

conditions for this study. As a measure of economic con-

ditions, the National Bureau of Economic Research

(NBER) business cycles of expansion and recession are

used. The business cycles measure long-term economic

growth; they reflect up-and-down movement in economic

activity as measured by fluctuations in real gross domestic

product (GDP) and other macroeconomic variables. Some

business analysts use NBER business cycles to explain

fluctuations in business inventory and other elements of

corporate operations. A NBER value of 0 represents peri-

ods of expansion, and a value of 1 represents periods of

recession.

As a measure of financial crisis, the Kansas City Federal

Reserve Financial Stress Index (KCFSI) is used. This index

is based upon 11 financial market variables which capture

one or more key features of financial stress. Financial stress

observed in the U.S. economy has contributed to down-

turns in the economy by boosting the cost of credit and

making businesses, households, and financial institutions

highly cautious. This measure is chosen, because the

KCFSI has shown to perform well in identifying widely

recognized episodes of financial stress over the last

20 years (Hakkio and Keeton 2009).

Methods

Regression Analysis

A regression analysis was performed to gain insight into

relationships between measures of shareholder wealth

(stock returns) and measures of firm performance captured

by market-driven measures and value-driven measures.

This approach assesses a correlation between derived

shareholder benefits and management outcomes based

upon firm financial performance. As an alternate explana-

tion of shareholder wealth effects, economy conditions are

also examined.

Partial Least Squares (PLS) Analysis

For further analysis of shareholder wealth predictability,

PLS analysis was conducted. PLS is a research method

typically used to explain or predict behavior of variables,

especially when variables are collinear or highly redundant.

I expect both market-driven and value-driven measures of

firm performance are highly correlated with each other and

economic conditions. So, to evaluate which measures, if

any can predict a firm’s return performance, PLS analysis

is useful.

Analysis and Results

Shareholder Wealth and Firm Performance

Critics of stakeholder management strategies argue that

shareholder benefits are sacrificed. If so, then firms which

688 P. E. Queen

123

adopt stakeholder management strategies should yield

stock returns which are systematically lower than market

benchmark returns. As shown in Table 1, no statistical

difference was found between annual holding period

returns of the 100 Top Corporate Citizen firms and S&P

500 Index returns over the 2000–2012 period of study.

Furthermore, the returns for the 100 Top Corporate Citizen

firms were higher than S&P 500 Index returns. This result

suggests that stock returns for investors in firms from the

100 Top Corporate Citizen list were not sacrificed at the

benefit of broad stakeholder management efforts.

As shown in Table 2, shareholder wealth, as measured

by a firm’s return performance, relates significantly to both

firm performance measures and measures of the economy.

For value-driven measures, model 1 is statistically signif-

icant (R 2

= 0.27395, p B 0.0001); both MVA and TSR

measures positively correlate with shareholder wealth. So,

as managers make decisions which add value to firms,

shareholder wealth increases. During this period of study,

MVA is positive and its magnitude is zero which indicates

that managers have neither added nor decreased firm value.

This result may be attributed to a short-time frame of

observation. MVA may be more suitable for a longer time

period of study, 3–5 year performance trend versus one

year of observation.

Table 2, model 2 indicates that market-driven measures

of firm performance significantly relate to shareholder

wealth, but this significance does not hold for the multi-

variate regression (Table 2, model 6). This result is pos-

sibly a multicollinearity issue which is discussed later (see

Table 3). Although market-driven measures are widely

used to assess firm performance, they may not uniquely

influence shareholder wealth, as indicated by a smaller R 2

in model 2 in comparison with other models. One inter-

pretation is managers of these Top Corporate Citizen firms

concentrate on creating long-term wealth for shareholders

versus short-term market-driven performance targets. Or, it

may mean that market-driven measures of firm perfor-

mance do not assess a firm’s fundamental value or a firm’s

ability to create wealth for shareholders.

Table 2, model 3 shows that economic conditions relate

significantly to shareholder wealth (R 2

= 0.23063,

p B 0.0001). As measures of financial stress decrease

(KCFSI), shareholder wealth increases. For firms in this

study, shareholder wealth is higher during periods of

Table 1 Holding period returns of top corporate citizen firms com- pared to S&P 500 Index

100 top

corporate

citizen firms

S&P 500 Index All returns

Mean SD Mean SD Mean

diff.

(0–1)

SD

Holding

period

return

1.0946 0.3913 1.0106 0.1970 0.0841 0.3898

This table presents results of differences between 12-month holding

period returns of the 100 Top Corporate Citizen firms and S&P 500

Index. The period of study is 2000–2012

***, **, * Statistical significance at the 0.01, 0.05, and 0.10 level,

respectively

Table 2 Shareholder returns and firm performance (value-driven and market-driven)

Value-driven

measures

Market-driven

measures

Economy

measures

Value-driven and economy

measures

Value-driven and

market-driven

All

(Model 1) (Model 2) (Model 3) (Model 4) (Model 5) (Model 6)

MVA 0.00001*** 0.00001*** 0.00001*** -0.00000

TSR 0.73928*** 0.82962*** 0.65509*** 0.48019***

M/B

ratio

0.01053*** 0.00759*** 0.00033

P/E

ratio

0.00874*** 0.00723*** -0.00007

NBER 1.91918*** 1.64301*** 0.09744*

KCFSI -0.52742*** -0.42745*** -0.07466***

R 2

0.27395 0.17909 0.23063 0.44382 0.36901 0.28621

F value 203.75 (\0.0001) 121.95 (\0.0001) 168.77 (\0.0001) 215.06 (\0.0001) 157.31 (\0.0001) 71.71 (\0.0001)

This table presents ordinary least squares regression models for value-driven, market-driven, and economy performance measures. The

dependent variable is 12-month holding period stock returns. Value-driven measures are MVA and TSR. MVA is defined as difference between

market value of stock and shareholder-supplied equity capital. TSR is capital gains yield from stock price and dividend yield. Market-driven

measures are M/B ratio and P/E ratio. Economy measures are the NBER periods of expansion and contraction; and the KCFSI which measures

periods of financial stress (higher values indicate greater financial stress). The sample includes an unbalanced panel of 1,122 firm-year

observations

*** ,

** ,

* Statistical significance at the 0.01, 0.05, and 0.10 level, respectively

Enlightened Shareholder Maximization 689

123

recession versus expansion periods. The NBER coefficient

is positive.

Firms with a reputation as good corporate citizens tend

to create value which is sustained during periods of eco-

nomic downturns. This may be due to reputation, brand

loyalty, or slack resources which enable these firms to

sustain (Harrison and Combs 2012). Mostly likely, the

firms named to the 100 Top Corporate Citizen list are

financially well-positioned firms with slack resources to

weather a short-term financial crisis. One interpretation is

firms which adopt an enlightened shareholder wealth

maximization strategy either due to reputation, customer

loyalty, or slack resources can endure economic down-

turns; that is their strategies persistently create value for

shareholders.

Correlation Between Firm Performance Measures

Both market-driven and value-driven firm performance

measures are expected to relate to each other and possibly

distort their influence on shareholder wealth. One indica-

tion of possible multicollinearity issues is the presence of a

highly significant global F test with non-significant t tests

for individual regression coefficients which is observed in

Table 2, model 6. One approach to assess multicollinearity

issues is to evaluate each measure’s variance inflation

factor (VIF). With this approach, each variable’s VIF is

compared to an arbitrary value; typically, values greater

than 5 or sometimes greater than 10 are considered cause

for concern. As indicated in Table 3, none of these vari-

ables have a VIF value greater than 5. So, another approach

is used which compares VIF for each variable to the

model’s computed VIF using the model’s R 2

value. A

model’s computed VIF is defined as 1/(1 - R 2 ). Based

upon this approach, the model’s computed VIF is 1.4010

which shows that both measures of economic conditions,

NBER and KCFSI, are cause for multicollinearity

concerns. As Table 4, Pearson Correlation highlights, both

NBER and KCFSI are highly correlated with each other

and market-driven measures of firm performance. These

results further highlight that value-driven measures of firm

performance provide a distinct explanation of stock return

performance; they are not redundant with market-driven

measures or economy measures.

Firm Performance Measures Influencing Shareholder

Wealth

To gain further insight into effects of firm performance

measures on shareholder wealth, PLS analysis was per-

formed. PLS is a method which tries to maximize variance

explained by variables in a model with a goal of defining

the best predictive model. As shown in Table 5, most of the

variation in both the dependent and independent variables

was captured by two factors with the model’s six measures

of firm performance and economy measures accounting for

28.62 % of variation in shareholder wealth. This finding

suggests that firm performance measures account for

approximately 30 % of explanation of stock return per-

formance, 6

an eye-opening result for firms which tie

manager performance ratings and compensation to only

firm performance benchmarks. Those firms which achieve

favorable financial performance benchmarks, especially

those based-upon market-driven measures may not convert

this good firm performance into wealth creation for

shareholders. Making money does not translate into cre-

ating wealth for shareholders (Enderle 2009). So, if firm

performance measures are intended to align manager’s

actions to shareholder’s interests, then value-driven mea-

sures should be used because value-driven measures have

distinct and significant correlation to shareholder wealth;

whereas, market-driven performance measures used in this

study do not.

Value-Added Firm Performance Measures and Long-

Term Shareholder Wealth

As a robustness test, a longitudinal study was conducted.

The data panel consists of firms named to the 100 Top

Corporate Citizen list in the year 2000. Observations for

these firms were collected from the year 2000 through the

year 2012. The data sample consists of 50 randomly

selected 100 Top Corporate Citizen firms with at least 10

observation periods for each firm. As highlighted in

Table 6, both value-driven measures of firm performance

Table 3 Variance inflation factor of all variables

Variables VIF

MVA 1.01399

TSR 1.06025

M/B Ratio 1.00802

P/E Ratio 1.02885

NBER 3.27293

KCFSI 3.25296

R 2

0.2862

F value 71.71 (\0.0001)

This table shows the variance inflation factor for each independent

variable of a multivariable model. The VIF values are used to assess

multicollinearity concerns using the model’s computed VIF defined as

1/(1 - R 2 )

6 Meta-analysis of the relationship between firm performance and

social measures finds various results from negative, neutral, or

positive correlation with studies using intangible measures such as

reputation and non-financial measures yielding stronger explanatory

results (Margolis and Walsh 2001; Aguinis and Glavas 2012).

690 P. E. Queen

123

positively and significantly relate to shareholder wealth

over a long-term horizon. Whereas, as previously shown,

market-driven measures and measures of the economy

have less explanatory strength as indicated by models with

lower R 2

values. Furthermore, these measures are not sig-

nificantly correlated with long-term shareholder wealth.

This finding suggests that value-driven measures, not

market-driven measures, are positively correlated with

long-term shareholder wealth.

Discussion

While the role of a corporation is often debated as a choice

between economic responsibility to shareholders and social

responsibility to society, both investors’ and managers’

viewpoints are changing from a solely economic respon-

sibility to a broader social responsibility as a legitimate and

expected role for business. An achievable new modern role

of a corporation is one which embraces an integrated

shareholder maximization and stakeholder management

approach focused on long-term value creation for firm

owners. With this evolving new firm agenda, value is not

achieved via short-term profits, but rather via market-ori-

ented responsible behavior. When firms fail to effectively

manage both financial and non-financial dimensions of

corporate social responsibility, shareholder benefit is at risk

(Andreadakis 2012). Enlightened shareholder maximiza-

tion is a revised, integrated role of a corporation with

principles of financial and social obligations as its core

strategy. Firms implementing an enlightened shareholder

maximization approach make decisions and use resources

to achieve value-creating outcomes (Jensen 2002).

For this study, firms from the 100 Top Corporate Citi-

zens list are chosen because they are firms which integrate

financial and social objectives into their central strategy. A

manager’s ability to address various stakeholder groups’

concerns and maintain financial benefits for shareholders is

difficult. Those firms which achieve good social perfor-

mance and good financial performance that converts into

shareholder wealth exemplify principles of enlightened

shareholder wealth maximization. These firms appear to

successfully implement enlightened shareholder maximi-

zation strategies which do not reduce shareholder wealth

benefits. In choosing these firms for study, two assumptions

are made—(1) these firms implement principles of

enhanced shareholder maximization strategies; and (2)

these firms create value for their shareholders. Research

(Filbeck and Preece 2003) finds that firms on most admired

or best firm lists yield higher relative wealth for investors,

and these firms yield positive wealth for investors (Ahmed

et al. 2010). Research shows that managers who address

wider stakeholder perspectives do not disadvantage stake-

holders (Bird et al. 2007). It is unclear whether managers

seek corporate social responsible initiatives as a genuine

concern for society or to increase firm profits (Bakan 2004;

Kolstad 2007). As a guiding principle rather than purpose,

shareholder maximization can serve to control and direct

firms to achieve corporate objectives (Koslowski 2000).

Although extant research shows that firms with good

corporate social performance also have good financial

performance, it is unclear whether good social performance

Table 4 Pearson correlation of independent variables

Variables 1 2 3 4 5 6

1. MVA 1.0000

2. TSR 0.00647 1.0000

3. M/B ratio 0.04818 -0.02290 1.0000

4. P/E ratio 0.08140** 0.08436** 0.01921 1.0000

5. NBER -0.03319 -0.19702*** 0.04833 -0.10180*** 1.0000

6. KCFSI 0.00440 -0.18776*** 0.01640 -0.10432*** 0.83262*** 1.0000

This table shows the Pearson correlation of the model’s independent variables. Value-driven variables are MVA and TSR. Market-driven

variables are M/B and P/E ratios and Economy variables are NBER contraction and expansion periods and KCFSI

*** ,

** ,

* Statistical significance at the 0.01, 0.05, and 0.10 level, respectively

Table 5 PLS of independent variables

No. of extracted

variables

% Independent variables % Dependent variables

Current Total Current Total

1 26.7448 26.7448 28.1871 24.1871

2 20.7529 47.4976 3.9776 28.1647

3 11.8732 59.3708 0.2588 28.4235

4 7.3721 66.7429 0.1940 28.6174

5 16.9001 83.6430 0.0032 28.6206

6 16.3570 100.0000 0.0000 28.6207

This table shows the PLS results for the model’s six independent

variables. The dependent variable is 12-month holding period stock

returns; the independent variables are MVA, TSR, M/B, P/E, NBER,

and KCFSI

Enlightened Shareholder Maximization 691

123

and good financial performance translate into wealth cre-

ation for shareholders. This study attempts to provide

clarity and greater insights via distinguishing between

firms making profits (good financial performance) versus

creating shareholder wealth (e.g., stock return perfor-

mance). So, this study attempts to reveal whether firms

which embrace an enlightened shareholder maximization

strategy indeed create long-term value for shareholders,

returns which are not inferior to market benchmark returns.

Shareholder wealth is measured by firm stock returns, and

firm financial performance is measured by value-driven

and market-driven performance measures. Value-driven

financial performance measures better indicate a firm’s

long-term projections; whereas, many market-driven

financial performance measures convey a firm’s short-term

outcomes and forecasts. This study explores which mea-

sures (value-driven, market-driven, or both) relate to a

firm’s stock return performance. For firms implementing

enhanced shareholder maximization strategies, as I

expected, value-driven firm performance measures highly

correlate with shareholder wealth.

For firms seeking practical guidance on how to effec-

tively manage multiple and often conflicting objectives

(Sundin et al. 2010), my findings provide interesting

insights and contribute to management research in three

ways. First, these results highlight that value-driven mea-

sures of firm performance specifically and significantly

correlate with firm stock returns; whereas, market-driven

performance measures may correlate with stock returns,

but are redundant with other measures. This finding indi-

cates that good financial performance, as measured by P/E

and M/B ratios, may not translate into shareholder wealth.

As such, research evaluating links between firm financial

performance and shareholder wealth effects may achieve

greater insights for future firm strategy by avoiding finan-

cial measures which are susceptible to accounting manip-

ulations and measures which influence short-term

management focus.

Second, the financial measures used in this study explain

approximately 30 % of variance in firm stock returns.

Although not specifically evaluated, this finding suggests

that non-financial factors may correlate with shareholder

returns and help to explain greater variance. Therefore,

efforts to better align the actions of managers with the

desires of shareholders should consider non-financial

measures such as customer satisfaction surveys, employee

surveys, and third-party firm rankings into executive per-

formance reviews. Non-financial measures are not perfect;

but when combined with accounting measures to imple-

ment management strategies geared toward producing

shareholder value, developing internal processes aligned

with business goals, and creating incentive plans which use

value-based management frameworks, these measures can

provide benefits (Ittner and Larcker 2001).

Therefore, management compensation packages and

incentive programs aimed at aligning manager’s actions to

shareholders’ objectives (e.g., gaining shareholder wealth)

should include other measures which capture non-financial

performance measures. A study of financial and non-

financial measures finds that a model’s prediction strength

is better when both types of measures are included (Mal-

gharni et al. 2010). An emerging paradigm in management

performance evaluations emphasizes combining financial

and non-financial measures, such as customer satisfaction,

employee job satisfaction, internal processes, productivity,

and innovation into performance plans because non-

Table 6 Long-term shareholder returns and firm performance (value-driven and market-driven)

Value-driven measures Market-driven measures Economy measures All

(Model 1) (Model 2) (Model 3) (Model 4)

Intercept 1.00491*** (0.0022) 1.00587*** (0.0021) 1.00863*** (0.0024) 1.00563*** (0.0026)

MVA 0.00000*** (0.0000) 0.00000*** (0.0000)

TSR 0.02526*** (0.0045) 0.02416*** (0.0046)

P/E ratio 0.00005 (0.0000) 0.00004 (0.0000)

M/B ratio 0.00000 (0.0000) -0.00000 (0.0000)

NBER -0.00614 (0.0084) -0.00463 (0.0082)

KCFSI -0.00133 (0.0037) -0.00054 (0.0364)

R 2

0.0516 0.0042 0.0056 0.0565

This table presents panel regression models for value-driven, market-driven, and economy performance measures. The dependent variable is

12-month holding period stock returns over 13 periods from 2000 to 2012. The panel consists of 50 firms which were named to the 100 Top

Corporate Citizen list in the year 2000. Value-driven measures are MVA and TSR. MVA is defined as difference between market value of stock

and shareholder-supplied equity capital. TSR is capital gains yield from stock price and dividend yield. Market-driven measures are M/B ratio

and P/E ratio. Economy measures are the NBER periods of expansion and contraction, and the KCFSI which measures periods of financial stress

(higher values indicate greater financial stress). The sample includes 579 observations

*** ,

** ,

* Statistical significance at the 0.01, 0.05, and 0.10 level, respectively. Estimation of the standard errors is in parentheses

692 P. E. Queen

123

financial measures influence future financial outcomes

(Kaplan and Norton 1992; Cross and Lynch 1992; Ndlovu

2010). Simnett et al. (2009) find that non-financial infor-

mation better reveals corporate relationships with stake-

holders and its impact to society.

Third, this study reinforces that the modern role of a

corporation is to implement enlightened shareholder max-

imization strategies which concentrate manager’s actions

on long-term wealth creation for shareholders. When value

creation is an objective, a long-term perspective is required

because the value of a strategy cannot be estimated without

forecasting economic benefits over the long run (Copeland

et al. 1994).

While I agree that shareholder value maximization

should be the preferred corporate goal because among all

available alternatives, it is the best guiding principle for

formulating and implementing strategy (Sundaram and

Inkpen 2004), I suggest that wealth creation for share-

holders is best achieved by focusing on long-term value-

added financial performance measures and attention to

non-financial performance indicators which can reinforce

and focus managers on value-creating objectives. However,

there is need for caution because non-financial perfor-

mance measures are also susceptible to accounting

manipulations (Ittner and Larcker 2003).

In summary, firms which embrace an enlightened

shareholder maximization strategy do create long-term

value for shareholders; this is achieved by integrating

principles of shareholder wealth maximization and stake-

holder management into a core strategy with one objective

which is to create acceptable thresholds of value.

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