for better corporate governance, the shareholder value review.pdf

Forthcoming February, 2007 Journal of Applied Corporate Finance For Better Corporate Governance, The Shareholder Value Review Bartley J. Madden bartmadden@ Author’s website: www.LearningWhatW A Shareholder Value Review (SVR) is proposed as the best way for boards of directors to explain to shareholders how the board monitors management’s performance in maximizing shareholder value. An SEC requirement that boards perform SVRs would motivate both management and the board to select and use an explicit valuation model to guide corporate actions. The life-cycle model, used in various forms in the money management industry, would likely be the model of choice for SVR implementation. Increased attention by both management and boards to how financial performance connects to shareholder value would lead to a common valuation language and useful dialogue with investors, proponents of accounting reform, and accounting rule-makers. In the wake of the financial reporting scandals of Enron, WorldCom, Tyco, and other major firms, corporate governance reforms were initiated in the U.S. with the expressed aim of holding managements and boards more accountable for fulfilling their responsibilities to shareholders. Logically, any proposal for achieving this aim should be rooted in a corporation’s ultimate goal of maximizing shareholder value. As a long line of economists starting with Adam Smith have argued, maximizing long-term value provides a criterion for management decision-making that leads to the most efficient use of society’s resources.1 1 See Anant K. Sundaram and Andrew C. Inkpen, “The Corporate Objective Revisited,” Organization Science, vol. 15, no. 3 (May/June, 2004): 350-363. 1 But at the practical level, manag