Summary.
After years of cheap capital, many companies drifted away from managing for shareholder value in favor of loosely defined stakeholder models. Now capital costs are moving back toward historical norms, and value maximization should once again guide
That shift coincided with an unusually forgiving capital-market environment. In the decade following the global financial crisis, capital costs fell to historically low levels, muting the consequences of weak capital allocation and obscuring the trade-offs inherent in strategic choices. Growth masked weak returns; subpar performance was tolerated; and the discipline of rigorously testing potential moves against their ability to create value eroded.
The results were uneven at best. Starbucks expanded rapidly, boosting revenues but diluting returns on invested capital before closing underperforming stores and refocusing on profitable growth. The French food products giant Danone leaned heavily into a purpose-driven governance model, but after it suffered sustained underperformance relative to its peers, shareholder pressure forced a leadership change. In both cases the central issue was not ambition or stakeholder concern—it was the absence of clear return thresholds guiding capital allocation. Now, as capital costs move back toward historical norms (see the exhibit “The Return of Normal Capital Costs”), companies are less willing to look at options that do not create value. Trade-offs that once seemed manageable are becoming untenable, making the lack of a coherent governing objective increasingly costly.
This article argues that it’s time to reimagine value-based management for a more constrained world. Properly applied, value maximization remains the only governing objective capable of guiding consistent, accountable decision-making in large, complex organizations. Managers must relearn what earlier generations understood about managing for value—and rebuild the organizational capabilities that atrophied during an extended period of exceptionally low capital costs.
A Return to Value
If value maximization is to guide decision-making once again, it must be applied differently. Leaders must incorporate what recent experience has made clear about the real and enduring impact corporations have on multiple stakeholders. We propose a simple but disciplined model, one rooted in linear programming: Retain value maximization as the governing objective—the maximand—but explicitly recognize stakeholder commitments as specific constraints that limit the set of feasible choices, not as objectives in and of themselves.
The intellectual foundations for this approach have existed for decades. Michael Jensen and other scholars argued, correctly, that value maximization was the only coherent governing objective for large organizations, with legal, ethical, and contractual obligations appropriately constraining managerial action. But those arguments largely operated at the level of principle. They explained what firms should aim to do in theory, not how leaders can address constraints in concrete strategic and capital-allocation decisions.
It’s critical that leaders make those constraints explicit, distinguishing between hard and soft constraints.
Hard constraints.
Hard constraints are inviolable. Any alternative that fails to satisfy them is eliminated from consideration. Compliance with the law is the most obvious example: Every strategic option must be legal. Leadership may impose additional hard constraints to reflect binding commitments or nonnegotiable priorities. Examples include “no increase in the firm’s carbon footprint,” “no reduction in employee satisfaction,” or “no decline in customer Net Promoter Scores.” To be effective, hard constraints must be:
Measurable and monitorable.
Hard constraints must be defined in objective, observable terms. Scholars and practitioners have developed rigorous tools to support this discipline—such as the Net Promoter Score framework created by Fred Reichheld and colleagues at Bain, Robert Kaplan and Karthik Ramanna’s proposed e-ledger accounting measures for carbon, and standardized approaches to measuring employee engagement from organizations such as Gallup and Glassdoor. Without credible measurement, a hard constraint is aspirational rather than binding.
Specified as absolutes.
Hard constraints screen out alternatives. They must therefore be framed in a way that allows leaders to determine clearly whether a proposed action violates the constraint. If the constraint is ambiguous, it invites reinterpretation—and ultimately discretion—precisely what the framework is designed to avoid.
Climate commitments illustrate both the challenge and the promise of defining hard constraints. Many companies—including Amazon, Procter & Gamble, and HP—have adopted net-zero pledges for 2040. While laudable, long-term aspirations can be difficult to treat as binding constraints in near-term decision-making. It is often unclear whether a specific investment meaningfully advances—or undermines—a goal set 15 years in the future, leaving room for competing narratives.
By contrast, some companies have translated environmental commitments into measurable, time-bound targets. Unilever, for example, has established science-based emissions-reduction targets for Scope 1, 2, and 3 emissions validated under the Science Based Targets Initiative. Unilever’s targets are tied to annual reporting and embedded in its climate transition action plan, enabling year-over-year accountability. While the company’s ultimate goals extend to 2030 and beyond, progress is tracked and reported annually—making the constraint more actionable.
Hard constraints need not be limited to environmental commitments. At Alcoa the former CEO Paul O’Neill made worker safety the company’s top priority and tied managers’ evaluations to measurable injury metrics, including lost-workday incident rates. Alternatives that compromised safety performance were unacceptable—even if they promised near-term productivity gains. Similarly, Toyota’s production system empowers frontline employees to stop the line when quality defects are detected, treating customer safety and product integrity as inviolable constraints on throughput and cost. At Lincoln Electric, a long-standing guaranteed employment policy has functioned as a hard constraint during downturns, forcing leaders to adjust compensation structures and operating practices rather than resort to layoffs. In each case the constraint was explicit, measurable, and enforced in practice—screening out a number of alternative solutions to a given problem or challenge.
Soft constraints.
Soft constraints apply only after all hard constraints have been satisfied. They are most useful for differentiating among alternatives with similar—or roughly equivalent—intrinsic value. Examples include “minimizing disruption to local communities,” “increasing workforce diversity,” and “limiting near-term capital expenditures.” To serve their purpose, soft constraints should be:
Measurable but not absolute.
Like hard constraints, soft constraints should be defined in objective terms. Unlike hard constraints, however, they do not eliminate alternatives; they help differentiate among them. When two strategies create comparable value, soft constraints guide leaders toward the alternative that best aligns with secondary priorities. Consider Costco. The company explicitly affirms the primacy of shareholder value while emphasizing the importance of treating employees, customers, suppliers, and communities well. In practice, Costco has repeatedly chosen to pay higher wages and provide greater benefits even when competitors reduced costs—arguing that these decisions support long-term shareholder value. Critically, Costco does not subordinate shareholders; stakeholder preferences influence decisions only when financial outcomes are not materially worse.
Prioritized and weighted.
Soft constraints cannot all carry equal importance, or leaders will lack a principled way to sort through competing claims. When two alternatives create similar value but differ in their impact on multiple soft constraints, leaders need a clear method for determining relative importance and arriving at an overall assessment. This situation commonly arises when decisions affect employees, suppliers, and customers differently. One option may impose short-term costs on employees while substantially benefiting customers or suppliers. Without clarity on the relative weight assigned to each group, leadership inevitably reverts to discretion. Prioritization and weighting reduce ambiguity and preserve discipline.
Both types of constraints must be agreed upon in advance. Waiting until after alternatives have been evaluated invites two failures: allowing hard constraints to quietly replace the objective function, and retroactively elevating soft constraints to veto power. Either outcome substitutes discretion for discipline—the very problem this model is designed to prevent.
Value-Based Decision-Making
Managing for value requires more than a stated commitment to shareholder returns. Leaders must be able to estimate—and compare—the intrinsic value of competing strategic alternatives. Twenty years ago many large companies had the financial information and processes necessary to support value-based decision-making. Today far fewer do. To manage for shareholder value once again, companies must build—or rebuild—four foundational capabilities.
Alternatives-based decision-making.
Most companies do not routinely formulate and evaluate alternatives when making strategic choices. In a Bain survey of executives from 760 large organizations, only one in five reported explicitly considering alternatives in strategy development. A common pattern is incremental substitution: “We are doing this; that looks better; let’s do that.” While that approach can improve performance, it does not ensure that capital and scarce resources are put to their highest-value use. Value maximization demands that leaders evaluate explicit alternatives against a common objective—subject to prespecified constraints.
Balance-sheet reporting at the business-unit level (and lower).
A strategy’s intrinsic value reflects the discounted value of future equity cash flows—or, equivalently, the present value of future economic profits plus initial book equity. Both formulations require an explicit understanding of the balance sheet. Economic profits, by definition, equal earnings minus a charge for the equity capital employed; without accurate measures of invested capital at the business-unit or product level, leaders cannot determine whether returns exceed the cost of equity—or by how much. However, information on the capital requirements of businesses, products, and services is unavailable in many organizations today. We estimate that in 2005, prior to the global financial crisis, nearly one-third of the S&P 500 had the capability to gather it. But today practitioner and academic research suggests that relatively few large companies systematically allocate balance-sheet capital to operating units for ROIC or economic profit measurement. Instead, many rely on top-level metrics like EBITDA or the contribution margin and managerial judgment. But distributed capital measures are essential for rigorous value-based decision-making. A return to value-based decision-making will require most organizations to improve their management reporting.
Reliable estimates for capital costs.
Most companies maintain estimates of their cost of equity, usually developed by treasury or finance teams. These estimates are typically sufficient for comparing strategic alternatives—provided they reflect current risk-free rates and equity risk premiums. Bain analysis suggests that the market rate of return—the average cost of equity across large public companies—is slightly above 9% today, implying a market risk premium of roughly 4% to 4.5% over long-term government bond yields. For most large public companies, the cost of equity falls within a band of plus or minus 1.5 percentage points of that market rate. For smaller private companies, the appropriate cost of equity depends more directly on the risk tolerance and diversification of the owners. Because owners often have a larger share of their personal wealth tied to the business, they may require a higher return to compensate for that concentration of risk—implying a higher effective equity risk premium.
Disciplined strategic decision-making does not require calculating a precise absolute value for all alternatives. The goal is to understand the relative value of each. As long as the cost of equity is specified within a reasonable range, modest differences in the discount rate are unlikely to change the ranking of alternatives. Leaders should therefore resist assigning different discount rates to different strategies; it is generally more reliable to reflect differences in risk by estimating the variability in projected cash flows rather than by adjusting the discount rate itself.
A disciplined approach to financial forecasting.
Companies need their projections of future cash flows or economic profits to be realistic and grounded. While forecasting is inherently uncertain, leaders can impose discipline by using consistent assumptions, considering explicit and well-defined scenarios, and applying projections that reflect both industry attractiveness and the firm’s competitive position under each alternative. The goal is comparability: using a common analytical structure that ties economic profit forecasts directly to the market economics and competitive position implied by each strategic option.
Together, these capabilities allow leaders to compare discounted cash flows across competing strategies. Some firms have retained these disciplines. But many will need to rebuild them.
The New Model in Practice
Strategy is ultimately a sequence of choices. Making good choices requires generating strong alternatives and then applying a rigorous selection process—one that combines a clear objective with explicit constraints.
A large aerospace manufacturer confronted that challenge when demand for commercial aircraft rebounded sharply once the pandemic-induced collapse in air travel ended. The company needed to ramp up production quickly, but many suppliers were unprepared to meet the sudden increase in demand. Senior leaders had to determine the best system-level response, accounting for both supplier readiness and internal production capacity. The leadership team began by specifying the governing objective. The team agreed that it should be value maximization. No alternative objective better balanced profitability and growth or near-term performance and long-term results.
Leaders then specified several hard constraints. First, the company had to meet the required production increase without introducing unacceptable schedule risk. Second, it had entered into binding agreements with state authorities to maintain employment levels in two localities; no alternative could violate those commitments. Third, to improve supply-chain resilience, leadership imposed a constraint to eliminate sole-sourcing of critical components. Finally, leaders specified that the systemwide carbon footprint of manufacturing and assembly could not increase.
After eliminating alternatives that violated hard constraints, leaders turned to soft ones. When two or more options produced similar intrinsic value, they favored those that minimized disruption to existing operations and limited near-term cash outlays—reflecting concerns about execution risk and the company’s still-fragile liquidity position.
Applying this framework ruled out several options that initially appeared attractive. One seemingly promising alternative involved relocating critical activities to lower-cost locations. Despite its cost advantages, the option failed on multiple dimensions: It introduced unacceptable schedule risk, required lengthy transitions for critical work steps, and violated the company’s employment commitments. Another option would have marginally reduced ongoing labor costs by eliminating overtime, but it required substantial new capital investment—destroying value once capital costs were taken into account.
Ultimately, leadership chose to adopt new production technologies—already proven at one of the company’s international sites—and to adjust its make-versus-buy mix. The company outsourced select components where internal bottlenecks would have constrained the production increases, but it retained core activities that were critical to quality and coordination. This alternative enabled the firm to meet its production targets over the subsequent 24 months without violating any of its hard constraints.
The Pendulum Is Already Swinging Back
Many companies are already recalibrating their strategies toward value creation. According to a 2025 survey by the Conference Board, 80% of large companies reported adjusting their ESG approaches in response to policy and market shifts, with many moving away from broad ESG positioning and toward initiatives that demonstrate clear business ROI and shareholder value impact.
BP offers an example of that shift. After pursuing an ambitious renewable-energy transition earlier in the decade, the oil giant announced a “fundamental reset” of strategy in 2025, reallocating capital toward higher-return oil and gas investments and scaling back planned spending on certain low-carbon initiatives. BP’s leadership framed the pivot explicitly in terms of improving cash flow, strengthening returns, and focusing capital on projects with stronger return profiles. The company’s recalibration reflects a broader reality: As capital costs rise and trade-offs reemerge, firms are reasserting return thresholds in capital-allocation decisions. That shift is neither surprising nor inappropriate. The danger lies elsewhere.
The risk is that, in the process of restoring value maximization, companies swing the pendulum too far—treating shareholder returns as the sole objective rather than a governing one that is subject to explicit constraints. Over the past two decades executives have internalized the fact that corporate actions have a real and lasting impact on employees, communities, and the environment. Abandoning those lessons in a rush back to financial rigor would be as misguided as it was to abandon value-based management during the era of cheap capital. The challenge, therefore, is not merely to return to managing for value—but to do so within a disciplined framework that preserves explicit stakeholder constraints.
. . .
As the era of ultralow capital costs draws to a close, business leaders can no longer afford to rely on ad hoc stakeholder balancing to justify the allocation of scarce resources. Managing for shareholder value—properly understood and rigorously applied—provides clear rules. By pairing a single governing objective with explicit hard and soft constraints, leaders can evaluate alternatives consistently, allocate capital to its highest-value use, and address legitimate stakeholder claims without sacrificing accountability. In an environment where mistakes compound quickly and reversals are costly, this discipline is not ideological—it is essential.
