Just like dresses and handbags, business theories come and go with fashion.

An idea that looks superficially attractive can hold sway over the brightest minds for years, seducing them into all kinds of foolish behaviour.

One benefit of the global economic crisis is that it has forced all of us to re-examine theories that too many people had come to accept unthinkingly, in case they are wanting.

One such business theory is ‘efficient markets' — the idea that where information about assets is widely available, their price at any given time must be the correct one.

That theory always seemed to me too good to be true and it has lost credence following the sudden collapse of asset prices, ranging from derivatives based on sub-prime mortgages to stocks and bonds.

Another, related, idea that is now under the microscope is ‘shareholder value'. There has been a long-standing belief that the primary goal of company executives is to make their share price rise as high as possible, along with paying high dividends.

This theory was popularised in the early 1980s by Jack Welch, just after he became chief executive of General Electric, and it grew in stature alongside Welch's own growth as perhaps the most successful business leader of his generation.

Stuck for ideas

For many years it seemed that when any chief executive was stuck for ideas about what to do with his company, he would trot out the mantra that he was determined to maximise shareholder value.

So when Welch, now retired from GE, announced last year that focusing on shareholder value was ‘the dumbest idea in the world', he turned more than a few heads.

A high share price, he suggested, was a result of running a sound business, rather than a strategy in itself.

A host of business leaders have come out in support of Welch's renunciation of his former viewpoint, including Richard Lambert, director general of the CBI, the British employers' group, and Paul Polman, chief executive of Unilever.

So was the focus on shareholder value a dumb idea in the first place?

Not at all. In the 1980s it was a sensible solution to a pressing problem of the time, which was that company executives often ran their firms with scant regard to the interests of their shareholders — who are after all the owners of a company, for whom the executives work.

Shareholder activism in public companies was then almost unknown, making it hard for the owners to express their views.

Moreover, executive compensation was not linked to company share price, for example in the form of share options, to the same extent that later became the norm.

As a result, executives indeed often paid too little attention to a lacklustre share price. The shareholders suffered unfairly as a result.

Over time, in the 1990s and in the past decade, these issues were successfully addressed in most companies, giving an appropriate balance to the interests of their owners. But by then ‘shareholder value' had become a slogan that was invoked for its own sake.

Some companies have gone overboard in their concern for shareholders' immediate interests, forgetting that most look for long-term returns and rely on the company's executives to achieve these through focusing on the company's business, not on its share price.

Sometimes the results have been disastrous. In order to push up the share price in the short term, companies have cut costs too drastically or taken other measures that boost profits briefly, but have no lasting benefit.

Satisfied consumers

These companies have taken their eye off the overriding need to keep the consumers of their products and services satisfied. Some have also ignored the importance of maintaining a sufficiently large, skilled and contented workforce.

Outsourcing is an example of how a company can walk down a blind alley in the name of ‘shareholder value'.

It often lowers a company's cost base, which immediately benefits the bottom line, at the expense of product quality and in-house skills, whose erosion may take many years to become apparent.

Some American companies, in particular, have outsourced manufacturing and service functions to Asia and watched their share price rise at first, before tumbling down as the long-term implications of these decisions became clear.

The columnist is Chief Executive of Nasdaq Dubai.