1. The ShareHolder Value Myth
Chapters 5 and 6
Carly Krieger

2. Limits to Market Efficiency and
Maximizing Shareholder Value
• Maximizing shareholder value is harmful for companies
in the long term
• Stock prices to not reflect true value
• Private information about products is not fully
reflected in stock price until the bad news is publicized
• (Think Toxic Fish Example)
• http://nymag.com/news/features/scandals/martha-
stewart-2012-4/
• Behavioral finance- examines how human emotions
and irrationalities can distort prices and drive trading

3. Team Production
• Team Production theory
• Developed by Lynn Stout and Margaret Blair
• Both participators in investment project are
needed for the success of the project
• Some projects require not only team production
from financial investors but also team production
with stakeholders.
– Railroad example: a railroad requires more then just
the tracks and cars, it requires engineers, conductors
from the community

4. Shareholder Primacy Ideology Vs
Team Production Theory
• Shareholder value thinking discourages team production
• Surveys show that as U.S. firms have accepted shareholder
primacy, their employee loyalty has decreased
• The two theories conflict, team production theory says
businesses cannot thrive and function in accordance with
shareholder primacy ideology
• Conflict exists in shareholders desire to attempt to unbind
themselves from projects in the attempts to capitalize on
their investments and exploit their partners/ other
shareholder/stakeholders endowments
• More U.S. public corporations are going “private”
• What benefits are there to this?

5. BP and Shareholder Primacy
• The U.K. has less structured, more shareholder friendly laws than the U.S.
• Shareholders can vote on dividends and have the power in a extenuating
circumstance, to remove board directors
• These laws do not guarantee U.K. corporations to lock in shareholder
capital
• After the Deepwater Horizon oil spill, BP was going to cut back by delaying
paying its dividends which angered British pentioners
• BP quickly resumed paying dividends and instead cut spending by selling
$30 billion in assets
• This quick change over shows that shareholder primacy does not protect
stakeholder’s ability to lock in corporate capital
• Do you agree with BP’s decision? Does BP use shareholder primacy or
team production? Split into 4 Groups and come up with alternative actions
BP could have had after this crisis.
• *Things to consider: what is more important for a company, loyalty to
stakeholders? Or locking in corporate capital?

6. The Rise of Short Term Investors
• Many powerful shareholders today are short term
shareholders
• NYSE Annual share turnover in 1960- 12% (8 year
holding period)
• NYSE Annual share turnover in 2010- 300% (4 month
holding period)
• Change occurred due to advances in Information
technology, deregulation
• Brokers used to be used to buy stocks- now funds
specialize in computerized “flash trading” strategies in
which shares are bought and held for seconds before
being resold

7. The Long-term vs Short-term Conflict
• Short-term investors (Hedge fund activists)
want to raise share price now
• Long Term investors want directors to invest in
the companies future, don’t want the stock
price to reflect an untrue value
• While the two want different things, they do
not compete directly with each other
• Hedge Fund Activists have the upperhand

8. Accounting Fraud
• Raises share price without improving real
performance
• Hides large quantities of money in debt
• Enron, Worldcom
• Many institutional investors became rich from
Enron because Enron “unlocked” shareholder
value (68)

9. Other Ways of Raising Share Price
• Another way to create shareholder value is to split up
companies by selling off assets or divisions and
allowing investors to invest only in the line of business
they prefer (69)
• Kraft Foods did just this when they took over British
Chocolate manufacturer Cadbury in 2010. A year and a
half later Kraft decided to split itself into 2 companies.
• One would sell sugary snacks and chocolate, the other
would sell cold cuts and Kraft mac n Cheese
• In arrangements like these, short term investors
benefit while long term investors do not

10. Corporate Musical Chairs: Why do
Hedge funds have the upper hand?
• SEC does not require hedge funds to report
their activity
• Difficult to find data on hedge fund
performance
• Stock based compensation plans have made
executives wealthier in the last 20 years

11. Shareholder Value Expectations
• Roger Martin points out that investors use
their assessments of a companies market
activities to form expectations regarding how
the company will perform in the future to
estimate the stock price of the company (71)
• Do you think this an accurate assessment

12. Chapter 6: Keeping Promises to Build
Successful Companies
• Share holders “tie their hands” when they buy
public corporation stocks
• Investor’s money goes straight to the corporation
when they stock in the primary market
• In return for investing their money, the
shareholder receives a contract with the
corporation
• Share holder may never get money back
• Share holder’s contribution is “locked in” to the
corporate entity

13. Why do Investors Tie Their Hands?
• Advantages: investors are protected from each
other’s possible financial losses
• Partial value of company would be destroyed if
investors could withdraw investments
• Makes company look more attractive and stable.
Would not have this stability if different investors
were withdrawing and becoming involved all the
time
• Protects each investor from the betrayal of the
other – “opportunism”

14. Avoiding Opportunism
• A company as a factory: no single shareholder can
threaten to withdraw their money thus ruining the
business
• If investors could withdraw their money whenever they
wanted, no creditor would ever feel confident lending
a company money
• Bondholders would be able to withdraw their money,
preventing the firm from using borrowed money to
make long term investments
• Corporate Asset Shielding – “corporation’s ability to
protect its assets from the claims of shareholders and
shareholders creditor’s” (79) Hansmann and Kraakman

15. Why is a Board of Directors
Necessary?
• Investors have the expectation that the board of
directors will have stable control of the public
company. If they cannot keep the company on it’s
feet they will lose their board positions
• Directors are trusted to not steal corporate assets
• Board power allows directors to mediate
between shareholders and stakeholders who
have different interests