Recently I did a post or two on the gospel of shareholder value, where I argued that ethical managers need to consider the implications of their decisions on a variety of stakeholders, certainly including employees and customers, but also the larger society and natural environment. William Lazonick, a professor at the University of Massachusetts, argues that the ideology of maximizing shareholder value has also been a big drag on innovation since it came into vogue in the 1980s. In Harvard Business Review:

For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality…

Retained earnings have always been the foundation for investments in innovation. Executives who subscribe to MSV are thus copping out of their responsibility to invest broadly and deeply in the productive capabilities their organizations need to continually innovate. MSV as commonly understood is a theory of value extraction, not value creation.

He goes into much more detail on his theories in this working paper from the “Academic-Industry Research Network“, and with just a little digging I came across this interview with him and this article by him on the “Institute for New Economic Thinking” blog.

When asked for a dissenting view, Gordon Gekko had the following comment: