The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

The Principle of Shareholder Primacy and Hyper-Speculation 145
and infallible result of the actual performance of the manager and the firm, but the
result of their performance as perceived by the stock market and of their policy of
intimating their own success in their communications with the stock market.
Equally, the speculative element in share prices and hence in shareholder
value makes it problematic to make executive remuneration too dependent on the
development of the firm’s share price.
If a firm’s shares register a gain in value due to pure stock-exchange speculation
about the firm’s share price, the enhancement in income that management receives
from share options and similar arrangements, as a result of such speculation, is
unjustified since they are not the ones who caused the increase in the share price.
Another question is whether or not it is justified to reward an average rise in a
firm’s share price with an above-average uplift in income for management by the
mechanism of executive equity plans.
One of the most important effects of shareholder value as a control principle
and disciplining method is to ensure that the firm makes profits in every period,
which effectively regulates the time-structure and time-preference of investments.
Rappaport 40 demonstrates this effect of the shareholder-value principle, which can
be seen as one of the principle’s main beneficial effects with regard to corporate
performance and dividend policy. The shareholder-value criterion forces the firm
to ensure, each and every year, that the year’s investments in the firm have been
profitable, and this requirement in turn ensures that a dividend is paid each and
every year.
Rappaport points out that if the firm is going to generate positive capital gains
above the market interest rate in the future periods, theoretically, it would make
sense not to pay any dividend at all in the present. In that scenario, all profits should
be retained within the firm because they will guarantee higher earnings in the future
if they accumulate in the firm rather than being paid out as dividends.
However, the shareholder-value criterion prohibits this option by countering the
proposition that profits should be retained within the firm for the purposes of selffinancing
and equity accumulation with a very simple argument: if the firm stops
paying dividends, the shareholders will go elsewhere. But this outward impression
of shareholder disloyalty masks a deeper insight: whatever management says about
its plans for future earnings and dividends that are retained in the firm rather than
distributed, the shareholders can never be certain that it is true; nor can they be
certain whether it will come true, since the overall economic situation can change
over the subsequent 3 years, with the result that profits retained in the firm for 3
years may suddenly vanish in year four. In either case, no gain will accrue to the
shareholder – nor, indeed, to the firm – from agreeing to wait. 41
40 A. RAPPAPORT: Shareholder Value. Wertsteigerung als Maßstab für die Unternehmensführung,
Stuttgart (Schäffer-Poeschel) 1995, pp. 27ff. Original: Creating Shareholder Value. The New
Standard for Business Performance, New York (The Free Press) 1986.
41 Cf. GÜNTER H. ROTH: “Shareholder Value und Dividendenausschüttung” [Shareholder value
and dividend distribution], in: P. KOSLOWSKI (ed.): Shareholder Value und die Kriterien des
Unternehmenserfolgs, Heidelberg (Physica-Verlag) 1999, pp. 128–145.