The economic crisis has revived the old debate about whether firms should focus most on their shareholders, their customers or their workers

THE era of “Jack Welch capitalism” may be drawing to a close, predicted Richard Lambert, the head of the Confederation of British Industry (CBI), in a speech last month. When “Neutron Jack” (so nicknamed for his readiness to fire employees) ran GE, he was regarded as the incarnation of the idea that a firm’s sole aim should be maximising returns to its shareholders. This idea has dominated American business for the past 25 years, and was spreading rapidly around the world until the financial crisis hit, calling its wisdom into question. Even Mr Welch has expressed doubts: “On the face of it, shareholder value is the dumbest idea in the world,” he said last year.

In an article in a recent issue of the Harvard Business Review, Roger Martin, dean of the University of Toronto’s Rotman School of Management, charts the rise of what he calls the “tragically flawed premise” that firms should focus on maximising shareholder value, and argues that “it is time we abandoned it.” The obsession with shareholder value began in 1976, he says, when Michael Jensen and William Meckling, two economists, published an article, “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure”, which argued that the owners of companies were getting short shift from professional managers. The most cited academic article about business to this day, it inspired a seemingly irresistible movement to get managers to focus on value for shareholders. Converts to the creed had little time for other “stakeholders”: customers, employees, suppliers, society at large and so forth. American and British value-maximisers reserved particular disdain for the “stakeholder capitalism” practised in continental Europe. …