User:Howard C. Berkowitz/Share

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Maximizing shareholder value is a general principle of capitalism, in principle keeping the value of stock at a maximum at times. In practice, short- and long-term maximization may involve different strategies. The legal system of many countries allows shareholders to sue corporate officers and directors for not maximizing short-term value, even if the intent is speculation rather than corporate growth.

Greenmail

Regulators and legislators are struggling with the balance between frivolous lawsuits that make corporations less competitive, and the legitimate concerns about firms that make overly optimistic forward-looking announcements.

U.S. Securities and Exchange Commission Commissioner Steven Wallman, in a presentation at Stanford Law School observed "Currently, corporations and their shareholders pay other shareholders and their lawyers very large amounts, both in terms of defense costs and settlement fees, while those responsible for perpetrating serious frauds -- sometimes, yes, even corporate executives -- frequently emerge unscathed unless the Commission itself sues them.

"The costs of these suits are considerable. One study indicates that the average shareholder suit costs $700,000 in legal fees and consumes 1,055 hours of management's time.As for the settlements, according to one estimate, between 1988 and 1993, 343 publicly traded companies paid a total of $2.5 billion in settlements alone. The American Electronics Association estimates that 93 percent of private class action securities fraud suits settle out of court at an average settlement of $8.6 million."

Reinvestment

A different, policy-related issue comes with investments in R&D or manufacturing, which may lower the short-term stock price and invite suits. Your system of financial controls should include realistic projections on the return on re-investment. Unfortunately, the business climate is such that it is always well to prepare to be sued.

To avoid litigation risk, financial and strategic planning has to be documented so it demonstrates that, for example, it is following a reinvestment policy approved by the board and possibly the shareholders. In the event of major incidents that impair your ability to deliver services and get revenue, you must be sure the stakeholders, including industry financial analysts, are quickly informed. For U.S. public corporations, Section 409 of the Sarbanes-Oxley Act requires such notification.

Loss of revenues

Another reason for shareholders to sue is loss of revenue and loss of customers. Assume your enterprise sells its product online, meaning that downtime is directly responsible for a loss of revenue. A lengthy period of downtime may cause you to lose customers to competitors with more reliable systems.

Alternatively, assume you are a manufacturing company whose assembly lines cannot function without computer support. During downtime, you are still paying salaries and benefits. You may be able to get downtime credit on leased equipment, but the total cost of downtime far outweighs the equipment cost.