Shareholder value does not equate to short-termism

Shareholder value should not be conflated with short-termism, according to Professor of Finance at London Business School Alex Edmans.

Appearing on the latest episode of the VoxTalks Economics podcast, Professor Edmans spoke to host Tim Phillips about the use of mainstream economic theory and practice to address 10 ESG issues.

The interview followed the publication of Professor Edmans’ article ‘Applying Economics – Not Gut Feel – To ESG’ on the same topic.

“We do have tried and tested practices that have been established - based on research - for decades,” Professor Edmans said.

“ESG is a long-term investment that generates long term financial and social value. But the frameworks that we have used for decades are frameworks that are applicable to long-term decisions.

“I like to think about ESG just like any other business decision and therefore rather than shooting from the hip and making up new stuff, I’d like to use – to the extent possible – tried and tested frameworks.”

In one example, Professor Edmans argued against the view the shareholder value was short-termist.

“One of the points of the article is to highlight that shareholder value is an inherently long-term concept. Finance 101 – and in fact the very first lecture I teach – suggests that shareholder value is the present value of all future cashflows from now until the end of time,” he said.

“So why is it so important to distinguish between short termism and shareholder value? Well, I think we need to diagnose the problem in order to address and devise a solution.

“Because if people think shareholder value is the problem, then they argue: let’s put workers on boards, or customer representatives or environmental representatives and reduce the power of shareholders.

“But, in fact, if shareholders are not the problem, then there’s nothing wrong with shareholder value. Instead the problem is short termism, and so the correct solution is instead to lengthen the horizon of CEO pay.”

Listen to the full episode, ‘Applying economics (not gut feel) to ESG’, for free online.

VoxTalks Economics podcast is produced by the Centre for Economic Policy Research (CEPR).