A recent Business Week article suggested that MBA students' priorities tend to shift during the course of their MBA programs. According to the article, students enter grad school with a variety of priorities for business, but by the time they leave they seem to share a single common priority: to maximize shareholder value. The authors seemed to believe that this is a bad thing, and they expressed their concern that business schools are corrupting students.

Since I teach at a business school, please allow me to offer a word or two in defense, along with a cautionary tale for budding entrepreneurs.

First, I should probably make it clear that I believe that enhancing shareholder value is not only a good thing, but it is also essential to business success. By way of definition, shareholder value is driven by the present value of future free cash flows. Although cash flows and profits are not the same thing, in the long run they will be highly related and so I will refer to them as the same for the rest of this article.

I also need to distinguish between true shareholder value and false shareholder value. False (and usually only temporary) shareholder value may be achieved through fraud or providing false information to investors so they will believe there is true value. True shareholder value results from complete and accurate information about your business.

Profits are the difference between revenues and the costs to provide the product or service. Only a tiny fraction of profits (if any) are ever distributed to shareholders; dividend yields have been declining for years and now average only a little over 1 percent. Most profits are spent buying new plant and equipment, improving existing products, developing new products and building capacity for new products. These expenditures create jobs and benefits for workers as well as tax revenues for governments, which are hopefully used to provide social services, schools, roads, police and other services.

Shareholders make money by selling their shares at a higher price than the price for which they were purchased. Share prices rise because the underlying business becomes more valuable.

Profits (and higher share prices) mean that you produce something using less in resources (costs) than people value the resulting product. That is how you create value. If people do not value what you produce at more than it costs to produce it, you have losses and eventually run out of money. Your shareholders express their opinions about what you are doing by buying or selling your shares, driving your price up or down.

If your objective is to create jobs or have a sustainable business, then creating shareholder value is absolutely necessary. People won't invest and allow you to buy new plant and equipment or hire people to run it unless what you will produce is valued more highly than the cost to produce it. Shareholder value is direct evidence that you are offering a product or service that best meets the needs, values and concerns of your customers.

Some people argue that you can ignore shareholder value because shareholders only care about short-term profits. That is nonsense. Value is derived from all future profits. Why else would Internet or biotech companies with major losses and almost no revenues sell for billions of dollars? Shareholders are told that it will be years into the future before profits are realized, and yet they are still willing to pay billions. "Growth stocks" that incur up-front losses for long-run benefit are selling for the highest prices relative to current earnings and revenues.

Creating shareholder value is not evil. It is the only sustainable way to achieve any worthwhile objective you may have for your business. And that, in my view, is a good thing for MBA students to know.