Abstract: Innovative Enterprise and Shareholder Value

William Lazonick


This paper invokes the theory of innovative enterprise to analyze the relation between value creation and value extraction in the evolution of the U.S. economy. Beginning with a managerial, as distinct from a financial, explanation for the separation of ownership and control in the U.S. corporation a century ago, I focus on why and how a ''retain-and-reinvest'' corporate resource location regime has been a necessary condition for innovative enterprise in the U.S. economy. On that basis, I demonstrate that the ideology that the economy will achieve superior performance if business enterprises ''maximize shareholder value'' (MSV) is a theory of value extraction that promotes a ''downsize-and-distribute'' allocation regime that results in employment instability and income inequity. Like the neoclassical theory of the market economy in which it is rooted, MSV lacks a theory of innovative enterprise, and hence cannot explain how, through the investment strategies and organizational structures of its major business enterprises, a national economy might achieve stable and equitable economic growth.