What Does It Mean to Create Shareholder Value?  5
because their peers are doing so, and don’t use accounting or financial gim-
micks to boost short-term profits. Such actions undermine the interests of all 
stakeholders, including shareholders. They are the antithesis of value creation.
To dispel such misguided notions, this chapter begins by describing what value 
creation does mean. We then contrast the value creation perspective with short-
termism and acknowledge some of the difficulties of value creation. We offer guid-
ance on reconciling competing interests and adhering to principles that promote 
value creation. The chapter closes with an overview of the book’s remaining topics.
What Does It Mean to Create Shareholder Value?
Particularly at this time of reflection on the virtues and vices of capitalism, it’s 
critical that managers and board directors have a clear understanding of what 
value creation means. For value-minded executives, creating value cannot be 
limited to simply maximizing today’s share price. Rather, the evidence points 
to a better objective: maximizing a company’s collective value to its sharehold-
ers, now and in the future.
If investors knew as much about a company as its managers do, maximiz-
ing its current share price might be equivalent to maximizing its value over 
time. But in the real world, investors have only a company’s published finan-
cial results and their own assessment of the quality and integrity of its man-
agement team. For large companies, it’s difficult even for insiders to know 
how financial results are generated. Investors in most companies don’t know 
what’s really going on inside a company or what decisions managers are mak-
ing. They can’t know, for example, whether the company is improving its 
margins by finding more efficient ways to work or by skimping on product 
development, resource management, maintenance, or marketing.
Since investors don’t have complete information, companies can easily 
pump up their share price in the short term or even longer. One global con-
sumer products company consistently generated annual growth in earnings 
per share (EPS) between 11 percent and 16 percent for seven years. Managers 
attributed the company’s success to improved efficiency. Impressed, investors 
pushed the company’s share price above those of its peers—unaware that the 
company was shortchanging its investment in product development and brand 
building to inflate short-term profits, even as revenue growth declined. Finally, 
managers had to admit what they’d done. Not surprisingly, the company went 
through a painful period of rebuilding. Its stock price took years to recover.
It would be a mistake, however, to conclude that the stock market is not 
“efficient” in the academic sense that it incorporates all public information. 
Markets do a great job with public information, but markets are not omni-
scient. Markets cannot price information they don’t have. Think about the 
analogy of selling an older house. The seller may know that the boiler makes 
a weird sound every once in a while or that some of the windows are a bit