A primer on sustainable value creation. Issue 3 (9th November 2019)

• Record Type: Journal Article
• Authors: Fatemi, Ali; Fooladi, Iraj
• Is Part Of: Review of financial economics. Volume 38:Issue 3(2020)
• Page Start: 452
• Page End: 473
• Publication Date: 2019-11-09
• Subjects: corporate finance -- corporate governance -- ethics -- shareholder model -- sustainability; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1002/rfe.1087
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: This paper argues that the current paradigm of value creation has led to a number of unacceptable outcomes. Exaggerated by executive compensation incentives focused on short‐term results, the model of shareholder wealth maximization spurs short‐term profits that fail to take into account those costs that are externalized to other stakeholders. We argue that the all‐inclusive costs can far exceed those explicitly accounted for and that their magnitude is often such that it outweighs the short‐term gains by a wide margin. The cascading nature of these costs, the growing voice of other stakeholders in support of their interests, the erosion of public trust, and the increasingly dire state of the global environment have accelerated the pace of calls for the adoption of a model of sustainable value creation—one in which shareholders' wealth is maximized without making any of the other stakeholders significantly worse off. Taking an exploratory step toward developing such an ideal process, we present a simple example of a valuation model that incorporates such a principle. We also argue that markets, education, and regulation represent the three indispensable cornerstones of a sustainable value creation framework.