The Dumbest Idea In The World: Maximizing Shareholder Value

http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

by DanielRibeiro • 15 years ago

376 135 15 years ago

cbr• 15 years ago

This argues against maximizing the stock price in the short term. Nothing about shareholder value beimg the wrong metric.

rayiner2• 15 years ago

It argues against using shareholder value as the metric for the purposes of incentivizing managers.

mixmax• 15 years ago

"In today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called the dumbest idea in the world, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services."

Maybe the real genius of Steve Jobs was to actually spend his time running Apple, creating real products and services instead of playing the expectations game with investors and shareholders.

WalterBright2• 15 years ago

Jobs certainly wound up maximizing shareholder value.

Maybe the shareholders aren't so easily fooled.

yuhong• 15 years ago

But the key thing is that Jobs did it the right way instead of meeting short-term expectations.

tokenadult• 15 years ago

First I slogged through the submitted article. It had some interesting anecdotes about betting on professional football in the early 1960s in the United States, which the author takes as an analogy to the current stock market. I searched back through the list of earlier Steve Denning articles on Forbes to try to find one previously posted to HN that I remember for its silliness and lack of connection with reality. On my part, I can't see I disagree a lot with the idea that publicly traded joint-stock companies do well to attend to the needs of customers, to build long-term value, but the author seems to embroider that claim with a lot of hysteria about the future of capitalism. Precisely because he can point to successful examples (Johnson and Johnson, Procter & Gamble, and Apple), it seems to me that what he identifies as an idea that leads companies astray can be responded to as a market opportunity for other companies to achieve the goal of maximizing shareholder value (over the long term) by the instrumental means of attending to customer needs. I'm not sure that the author has added any new insight here that isn't well known to owners and operators of businesses. (Has the author ever owned any business in the real economy besides promoting his own writing?)

chrismealy• 15 years ago

It's called Enronitis. If you expect managers to be ruthless about shareholder value you'll wind up with managers who are ruthless about benefitting themselves.

The Enron problem is ... the predictable result of too strong of a share-centered view of the public corporation... Corporate law demands that managers simultaneously be selfless servants and selfish masters. On the one hand, it directs managers to be faithful agents, setting aside their own interests entirely in order to act only on behalf of their principals, the shares. On the other hand, in the service of this extreme altruism, they must ruthlessly exploit everyone around them, projecting on to the shares an extreme selfishness that takes no account of any interests but the shares themselves. Having maximally exploited their fellow human corporate participants, managers are then expected to selflessly hand over their gains...

Altruism and rationally self-interested exploitation are extreme and radically opposed positions, psychologically and politically. ... For managers, one easy resolution of these tensions is a simple, cynical selfishness in which managers see themselves as entitled, and perhaps even required, to exploit shareholders as ruthlessly as they understand the law to require them to exploit everyone else. ...

Internally, the share-centered paradigm is just as self-destructive. Corporations succeed because they are not markets and do not follow market norms of behavior. Rather, they operate under fiduciary norms as a matter of law and team norms as a matter of sociology. However, the share-centered paradigm of corporate law teaches managers to treat employees as outsiders and tools to corporate ends with no intrinsic value. Just as managers are unlikely to learn simultaneously to be selfish maximizers and selfless altruists, they are unlikely to be simultaneously cooperative team players and self-interested defectors. Thus, the share-centered view undermines the prerequisite to operating the firm in the interests of shareholders. ...

Managers constructing the firm as a tool to the end of share value maximization treat the people with whom they work as means, not ends. ...they learn as part of their ordinary life to break ordinary social solidarity. Learning to exploit ruthlessly is surprisingly difficult. ... But cynicism can be learned, and managers subjected to the powerful incentives of the share value maximization principle do eventually learn it. ... This training, however, surely creates cynics, not faithful agents. ... A manager whose lived experience is a pretense of selflessness (with respect to employees, customers and business partners) covering real disinterested exploitation (on behalf of shares) is unlikely to suddenly see himself as “in a position in which thought of self was to be renounced, however hard the abnegation” and voluntarily hand over these hard-won gains of competitive practice to his principal. If you can properly lie to your subordinates, why not lie to your superior as well? ... In the end, the cynicism of the share value maximization view must eat itself alive.

-- http://slackwire.blogspot.com/2011/04/selfish-masters-selfle...

fmkamchatka• 15 years ago

I'm not familiar with football betting but it seems to me that the initial example is not a very good analogy. In the case of shareholders, someone initially lent money to the company in exchange for shares (owning part of the company) from which the company benefits. On the other hand, betting on a football team's success doesn't increase its odds of winning, hence it wouldn't make sense for the team to comment or apologize on the outcome of the bet.

rayiner2• 15 years ago

Coincidentally, I just read about this in "Animal Spirits" a recent book on behavioral economics and the market. It mentions Welch's view and analyzes a lot of similar situations.

Hominem2• 15 years ago

Yep, it is easier to increase profit by cutting costs, so that is what people will do to hit their numbers.In the long term, it is akin to burning your clothes to stay warm.

plainOldText• 15 years ago

Cutting costs alone is not necessarily a bad thing. Cutting costs at the expense of the customer is though. And when I say expense I mean the customer gets a crappier service or product.

I just wanted to make it clear for people reading around here. I don't think they should regard strategies that involve cutting costs necessarily evil.

Hominem2• 15 years ago

Oh, of course I agree you should not be profligate. And there are times you have no choice if you are hemorrhaging money.

I work with middle managers who let contractors go and sit on projects months at a time in order to get cost cutting bonuses. It is just working the same numbers on a smaller scale.

acslater00• 15 years ago

"Meanwhile real performance was declining. From 1933 to 1976, real compound annual return on the S&P 500 was 7.5 percent. Since 1976, Martin writes, the total real return on the S&P 500 was 6.5 percent (compound annual)."

Hmm...where have I seen those numbers before. Oh right! He's measuring his control period from the bottom of the great depression. Sounds legitimate to me!

This is so hacky it makes me laugh. You can argue that a focus on short-term shareholder value is bad for various reasons, but a focus on long-term shareholder value is incontrovertibly good for shareholders, long-term. In practice, it is also basically equivalent to the author's other view of focusing on "customers", whatever the hell that means. Or focusing on "real performance" metrics like profit, as though you can do one without doing the other.

If CEO pay is tied to long-term stock performance, the problem of gaming the short term earning expectations goes away. Full stop.

My new years resolution is to not click on link-bait anymore.

adamtmca• 15 years ago

This guy was on the CBC a few months ago and I was basically screaming at my radio.

One choice portion of the show was when the interviewer (who was lapping it up) asked what would be a good alternative to the stock market. He proposed bonds. He even went so far as to say that bonds would reduce the amount of volatility we see in the economy by reducing the impact of the "expectations market".

Yes. Replacing equity financing with debt sounds like a reasonable solution to reducing volatility.

What an absolute fraud.

maigret• 15 years ago

But ultimately stocks have to pay a dividend. I agree that a bond-only system would lead to a lot of junk bonds, but mainly because lot of stocks are also junk. In any case, some bonds belong to a balanced portfolio. Too much people have too much of stock in their portfolio (also too much real estate, but that's another topic).

sitkack3• 15 years ago

At least is spawned a discussion here, but the lead is so full of flawed reasoning by analogy that it made me sick as a rainbow.

kevin_morrill• 15 years ago

Yes, I found this silly in all the same ways.

In the one talk I've seen Jack Welch give he said himself the only form of job security is customers. The article's author is attacking a straw man. He slams Welch's management of the GE as short sighted, but the only facts in support are the deterioration under Immelt's management.

Ultimately, in the long term customers and shareholders have aligned interests in most all cases.

mhartl5• 15 years ago

  There is only one valid definition of a business purpose:
  to create a customer.

No. The one valid definition of a business purpose is this: A business should do what the owners want it to do. Otherwise, the notion of ownership loses meaning.

If the owners want to create lots of customers, they do that. If they would rather have a smaller number of highly profitable customers, they do that. If they want to create a nice side business so that they can surf in the summer and snowboard in the winter, they do that.

Scottish philosopher David Hume drew an essential distinction between factual matters—is—and moral matters—ought. Asking "What should a business do?" looks like a Humean ought, but it's actually a Humean is. A business is a vehicle for achieving the ends of its owners. How then can we make sense of the maxim "a business should maximize shareholder value"? In certain kinds of businesses—especialy those owned by a large number of shareholders—the interests of the owners may generally conflict, but they can usually agree on one thing: maximize the value of the company. This describes virtually all publicly traded companies and many family businesses as well. It doesn't describe, e.g., my present business (the Ruby on Rails Tutorial), which I created as a 4-Hour Work Week–style product company to let me relax for a while, travel the world in style, and have the financial freedom to develop longer-range plans for world domination. Its purpose is definitely not to maximize shareholder value; I'm the only shareholder, so it does whatever I damn well tell it to do.

Let the owners worry about what a company ought to do. Unless you're an owner, it's none of your business.

sliverstorm• 15 years ago

Where on earth did you get the ridiculous idea that your business can do what you want it to?

[/sarcasm]

barrkel4• 15 years ago

Incorporation is a privilege granted by society; and property rights are never absolute. What you state is extremely individualistic, but it is unrealistic and naive for the same reason. I understand your exhortation, but it does not amount to an argument. For example, most large companies with broad shareholder bases have no owner interests that you can easily point to; the shareholder base has collective action problems, and frequently cannot meaningfully affect the company.

I think you're at risk of deriving an ought from an is yourself. You take capitalist ownership structures, which exist for the hopeful progress of society at large, but you infer an ought from them, that the only thing that is fair is that ownership is absolute in control over what it owns.

dextorious• 15 years ago

"""What you state is extremely individualistic, but it is unrealistic and naive for the same reason."""

Actually not at all. It just takes a certain type of society that wants to have and enforces such norms.

alexqgb3• 15 years ago

This is a much more civilized response than my initial reaction, which was "go fuck yourself, mhartl".

The reason for that indignation was, as you pointed out, the obvious truth that without society's extension of limited legal liability, there would be no business in the first place - or, at least, not one with the scale and structure of a publicly traded company. And no, society does not grant this liability protection for free. Nor does it expect to get the short end of the deal. It has a stake in the outcome, and it expects that stake to be rewarded - no less than an investor expects a return on his capital.

mhartl's implication that "only shareholders have any legitimate interest" represents a trifecta of ignorance (of the law) ingratitude (for what it grants) and arrogance (in assuming that his counter-party is irrelevant). It is supremely egocentric and inevitably destructive.

You see the same warped sense of self expressed by people who go around saying "I'm a job creator" as though they were god-like individuals who combined - in a single person - holy trinity of supply, demand, and the ability to connect them that comprise any given job. In reality, jobs - like economic growth - are a product of several interactions that create a favorable situation for employment. No one person or organization controls all of them, or even (in most cases) a majority of them.

What these "job creators" can safely say is "I hire and fire." That's a much more honest description, and one that clearly implies the existence of factors outside their control about which they simply make judgements. Their role is good and necessary, but it is not creative in the sense of having invented, built, or authored a thing. More importantly, people who hire and fire well (aka "managers") are acutely aware of the broader milieu in which they operate, the extent to which they depend on it, and the degree to which their own well-being depends on the health of those around them.

Obliviousness to this vital interdependency remains deeply stupid. And unlike a temporary impairment (e.g. getting very drunk) or a moral impairment (e.g. a propensity to steal), the ethical blindness it represents is not something that the people who have it are usually aware of. Nor is it something about which they can easily be made aware. They simply lack the frame of reference needed to understand what they lack. Just consider colorblindness; a person who cannot see a limited part of the spectrum can still grasp the idea of color, and can make allowances for what they can't detect directly. But a person who has no sense of color whatsoever has no point of reference they can use to grasp even the idea of color.

When it comes to responsibility, people like mhartl fall into the latter camp. Their minds simply cannot process the idea of social reciprocity. That is to say, they have no real ethics. In extreme cases, this makes them properly sociopathic. If you find yourself working with a person like this, distance yourself as soon as possible. They are dangerous, entirely self-serving, and prolonged exposure will get you hurt.

j_baker2• 15 years ago

Perhaps the grandparent isn't making that great of an argument. But at the same time, I don't see you doing anything but arguing. And yet, I have no idea what you're arguing for. I assume that you're making the case that companies need to be more focused on collective action, but I don't really see any alternative vision compared to the grandparent.

That said, I don't think collectivism and individuality are mutually exclusive. If a company can be individualistic in a way that benefits society, what's the problem? Clearly there need to be some limits to what company owners can get away with. That's why society has laws. But it's especially naive to think that companies can be structures that act solely for the good of society with no benefit to the people that have invested in and work for them. Clearly, there needs to be some level of individualism granted to the people who make a company work. Otherwise, you'll have companies that spend so much time focusing on the good of everyone that they end up delivering for no one.

mhartl5• 15 years ago

I'm really just asserting a tautology: Business owners determine what their businesses should do. Given the current legal status of corporations, the question "What should a company do?" is not ethical in nature (ought); it is a matter of fact (is): companies can, within the constraints imposed by law, do whatever their owners want them to do. There are certainly salient ethical questions here—"Which laws should governments enforce to constrain businesses' behavior?", for example, or "If I want to benefit others, what should I have my business do?"—but they lie outside the scope of my original comment.

blrgeek• 15 years ago

The owners can do what they want to do without a business. So why create a business? If the owners just want to have a place to park their money, they can have a trust. If they want to do good in the world they can make a non-profit, or an NGO.

The only valid definition of a business purpose - creating customers.

If they don't want customers (one, few or many), they shouldn't start a business.

http://dictionary.reference.com/browse/business

beagle311• 15 years ago

> If they don't want customers (one, few or many), they shouldn't start a business.

Legally, there is no such a thing as a "business". A corporation or LLP exists to limit liability. That's it. "Business" is not well defined in the real world.

Is an HFT proprietary trading firm, trading its own money on an anonymous exchange, with no customers or clients, not a business?

philwelch• 15 years ago

If it's really your business, and you're the one deciding what it does, and you choose what you want most from that business, then you are maximizing shareholder value, because you are the shareholder and you're maximizing the business's value in your life.

mhartl5• 15 years ago

Of course you're right in a sense, but when people say "businesses should maximize shareholder value", they use "value" specifically to mean financial value.

xinjiang• 15 years ago

Saying your business can do whatever it damn well pleases because you own it is like saying I can drive my car any way I want. Not so. Your actions affect others. You are using public infrastructure and there are rules.

Move to an island where you can be all by your lonesome and run a business any way you want there.

tomjen3• 15 years ago

First I see that you are new here, so welcome.

That isn't much of an argument you are presenting though -- you could argue against a person being allowed to do anything based on that. The reason I can't drive a car the way I want is that it represents a clear and present danger to the health of third-parties. On the other hand running my business the way I want doesn't present a clear harm to others, so I can't.

Avshalom• 15 years ago

I'm pretty sure that mhartl means that there (is|should be) no universally mandated goal of a business (e.g. maximize stock price, maximize market share, grow quarterly). Not that businesses should be allowed to break laws.

The goals of the business should be the goals of the owner not the goals of some economist or capitalist pundit.

epo• 15 years ago

"No. The one valid definition of a business purpose is this: A business should do what the owners want it to do. Otherwise, the notion of ownership loses meaning."

This is specious, not all shareholders are equal and most have no practical consequence from their shareholding because they hold too few.

Large shareholders are rarely, if ever, interested in being owners, they want short term tradeable instruments. Maximising shareholder value is pandering to the whims of these people whose goals are never in the interests of the underlying business.

Sniffnoy• 15 years ago

This wouldn't be so much a problem if "shareholder value" were taken to mean "the value one can get by holding a share" (i.e. profits) rather than "the value one can get by selling a share"...

yardie• 15 years ago

There are also dividends.

forensic14• 15 years ago

Shareholder value is just the latest politically correct justification.

Our society used to be based on concepts like honor.

Honor was something you had to earn and something you could lose. To maintain your honor you had to demonstrate certain qualities: truthfulness, earnestness, fairness, politeness, genuine service toward shared superordinate goals (e.g. the country, humanity, the community).

At some point, our society decided that lying is no longer dihonorable as long as you are doing it to maximize shareholder value or to sell your product. We no longer publically shame and dishonor those caught in bald-faced lies.

Inordinately selfish people always justify their behaviour using socially acceptable statements. What has changed is that our society now lets them get away with it.

ANY lies are now OK as long as they say "I was maximizing shareholder value." They will not be socially ostracized, will not be publicly shamed, and often will not even be criticized. People will, in fact, apologize for them.

People see Wall Street crash-creators testifying at Congress answering "I do not recall" to 100% of the questions. Instead of dishonoring those liars as the liars that they obviously are... our society just does nothing. It's okay that they lied. It's just business you know. We expect our business leaders to be dishonorable.

"It's not the CEOs fault that he knowingly polluted the entire river for 20 years. He was just maximizing shareholder value, discharging his fiduciary duty, we can't hold him personally responsible. It is wrong to shame him and his family, it is wrong to ostracize him from decent company, it is wrong to even criticize him publicly in the newspapers."

Either this mentality changes in a hurry, or the entire country is going to go the way of Detroit.

beagle311• 15 years ago

> Our society used to be based on concepts like honor.

Nostalgia isn't what it used to be.

Society was never based on honor; it was always about worshiping those who succeeded, regardless of how bad they had been, as long as they did some good at some point. see, e.g. Rockefeller, Carnegie, Mellon & Gates in recent times, and basically all fondly remembered kings and barons in earlier times.

Society adapts, in part, by giving socially acceptable deeds a normative description and concept. The socially acceptable statements lag the deeds, not lead them.

> People see Wall Street crash-creators testifying at Congress answering "I do not recall" to 100% of the questions. Instead of dishonoring those liars

"These liars" applies equally well to congress as to those wall street execs (with whom the former are figuratively, "in bed", and have been for the last century or so)

Really, the only thing that has changed is ease of access to information. Human greed, actions and norms as reflected by social response, by and large, haven't.

forensic14• 15 years ago

It's your type of cynicism that is actually an apologetic for the dishonorable behavior. If you stopped saying "everyone does it" then we could start punishing the dishonorable. It's NOT TRUE that everyone is a liar.

Rockefeller and Carnegie were liars, sure, but they had to keep it quiet, they had to buy up newspapers and physically intimate people so their lies would not be exposed, or they would lose face.

Our entire legal system is based on the concept of honor. It's a real thing that existed and people took it seriously. Of course people still lied and some people worshipped the powerful, but at least back then people hid their skeletons in the closet. Now people just blatantly lie, openly engage in what would be called bribery at any other point in history, blatantly and proudly sell out the public good for personal profit, engage in the grossest type of war-profiteering, etc.

Remember how war profiteering used to be a bad thing? Now it's a fucking virtue. Halliburton is a war-profiteering company! War-profiteers used to be hanged for treason!

There was a time in America where if you committed fraud, no matter how "technically legal", you would be lynched. Until dead. And juries would acquit your murderer.

Untitled3• 15 years ago

> it was always about worshiping those who succeeded, regardless of how bad they had been, as long as they did some good at some point.

This is extremely true! Probably the best example of this is Cecil John Roads (http://en.wikipedia.org/wiki/Cecil_Rhodes) who was a ruthless businessman who owned countries, started wars and engaged in unsavory business practices.

Yet he is fondly remembered for the Rhodes Scholarship and his donations to the University of Oxford.

LearnYouALisp3• 15 years ago

By "our society", American society is meant, and what was said is true. It would be ignorant of history to say that this country's laws and founding documents did not draw much inspiration from the Bible.

LearnYouALisp3• 15 years ago

Thank you for standing for what is upright. We need to speak the truth concerning what is right and what is not right.

dhx• 15 years ago

  The actions flowed from the company credo which is engraved in granite
  at the entry to company headquarters, which makes crystal clear that
  customers are first, then employees, and shareholders absolutely last.

Why do businesses attempt to create hierarchical order where order doesn't exist? A business with extremely happy customers, happy employees and low return on investment (including other non-monetary value) for shareholders is a failed venture. Ranking stakeholders by their importance makes it easy to create harmful (and often implicit) rules and practices that fail to address the needs of all stakeholders.

Companies should instead encourage employees to think about decisions from a wide range of perspectives including customer satisfaction, employee morale and business profitability. Creating a new procedure or rule that employees must adhere to could greatly please customers. However it may create extra menial and unappealing work for employees, lowering morale to harmful levels. It could cost the company a lot of resources that would be better spent elsewhere.

1gor• 15 years ago

The statement 'maximizing shareholders value' is meaningless without the timeframe. The correct phrasing is to 'maximize shareholders value in the long term'. The 'long term' bit is crucial, and it is not reflected in today's management incentives.

The choice that managers of public companies are facing is the well known "Consume vs. Invest". Or, in the terms of an evolutionary fitness landscape, "Exploit vs. explore".

If a manager wants to maximize his next quarter's earnings, he could stop new product development, shut down customer service and equipment maintenance departments and sell, sell, sell. He could have a short short-term spike in profitability, but in the long term the company won't survive. He has exploited his current position but has failed to explore, to look to the new opportunities and threats, and to provide for the future.

(Note: the manager could also buy a portfolio of high-yielding/high risk securities hoping that the crash will not happen before his next bonus is due. This is the same thing -- maximising short-term gains at the expense of the long-term prospects of the company).

The manager could also overexplore, that is to overinvest in customer and product development, purchase the newest equipment and end up with a croud of excited customers and an exciting new technology/product, but no liquidity left in the bank to live to see it taking over the market.

"Maximizing shareholders value" idea got a bad press, because it has become associated with the 'exploit' approach. Managers endanger the long-term prospects of the company because they can be paid well for achiving relatively short-term goals.

But the working definition should be "Maximizing shareholders value in the long term"

Let's make the law that the managers' options can only be excersized after 10 years. That'll do the trick.

shasta2• 15 years ago

Yes. The article frustratingly kept identifying "maximizing shareholder value" as the problem and the naive "delight customers" as the solution. Maximizing shareholder value would be much more closely aligned with society's interests if shareholders had the information needed to distinguish real value being built from a company being strip mined.

quanticle• 15 years ago

You need a second constraint. The shareholders have to care about long-term value. Many institutional shareholders don't care and have no incentives to care about long term value. To them, firms are not long term investments - they are merely symbols moving up and down on a price chart. If your symbol moves down too often, they'll pull money out of your firm, even when those gyrations are being caused by forces completely outside your control (natural disasters, or sector-wide trends).

yummyfajitas4• 15 years ago

Why is the long term bit crucial? Specifically, what timeframe do you define as "long term", and why do you privilege that timeframe over other timeframes?

And sometimes exploitation is better than exploration.

Microsoft is a great example of this. Currently MS dumps billions into Bing, a form of exploration. If the shareholders were given a choice, do you think the would choose this? Most likely not - if they wanted to explore search, they would probably dump billions into GOOG. Microsoft shareholders would probably be better off if MS stopped exploring, exploited current revenue streams, and allowed shareholders to invest in businesses with a brighter future.

The working definition should be "maximizing shareholder's time and risk discounted value". After all, $100 now is better than $100 over 10 years (maybe, if we are lucky). When a company focuses on creating long term value, they are gambling with shareholder wealth. They should only do this when the odds are good.

Let's make the law that the managers' options can only be excersized after 10 years. That'll do the trick.

Many companies already do this - a lot of CEO/executive comp is restricted shares.

lukeschlather• 15 years ago

>Microsoft shareholders would probably be better off if MS stopped exploring, exploited current revenue streams, and allowed shareholders to invest in businesses with a brighter future.

That's your judgment. I have to honestly say I'm thankful you're not in charge of Microsoft, because someone trying to compete with Google in the search space is a great thing. (And with Google doing a lot to make Microsoft's core markets vanish, getting into search could save Microsoft's existence in a 10-year timeframe.)

nazgulnarsil• 15 years ago

shareholder investment window is up to the shareholders. if shareholders push for short term profits at the expense of long term stability that is FINE. In a healthy market they get eaten. We have an unhealthy market where some get to maximize short term profit and then go crying to mommy when the consequences roll in.

xianshou2• 15 years ago

I notice Steve Jobs is consistently mentioned in the present tense...did the author write this a while ago and forget to run it by his editor, or did he simply miss all of October?

xianshou2• 15 years ago

Also interesting: Mr. Denning self-plagiarizes the concluding three sentences of his previous article verbatim.

http://www.forbes.com/sites/stevedenning/2011/11/16/why-are-...

Like all great obvious, radical ideas, in the first instance it will be rejected. Then it will be ridiculed. Finally it will be self-evident and no one will be able to remember why anyone ever thought otherwise.

stevedenning3• 15 years ago

Interesting? Yes hopefully. Plagiarism is "the unauthorized use or close imitation of the language and thoughts of another author and the representation of them as one's own original work." By definition, one can't plagiarize one's own writing. In the 1000+pages of stuff on the blog, it's true that some important ideas are emphasized more than once.

stevedenning3• 15 years ago

Good point. The sentences were written before his death. I've fixed them now.

pmuhar• 15 years ago

Even though I know exactly what the article is about, I wish it wasnt written in relation to football/gambling terms as a lot of people are not football fans or avid gamblers, myself included.

valuegram• 15 years ago

While I understand the idea behind this article, it was hard to get beyond the initial metaphor, which I find highly misplaced.

In sports, for the most part, the only fact that matters is a win. with the exception of rare subjective ranking systems (such as coaches polls in college football), the quality of a win doesn't matter. Of course if a coach is playing in these systems, and not doing enough to meet the expectations of the fan base, there will definitely be repercussions.

In the business world, a profit of $0.01 is very different from a profit of $1.00. Of course there are numerous valuation models, but the amount of profit/revenue/etc almost always matters, as opposed to sports which use a binary valuation system (win or loss).

I appreciate the overall message, and believe that the market is willing to embrace this sort of logic. Jeff Bezos is a great example of a leader focusing on long term performance and being rewarded for it.

TheFuture• 15 years ago

Another egghead uni prof who's spent his life getting a paycheck from the gov telling us what's wrong with capitalism that he's never participated in.

If shareholders (ie owners) want short term leadership, that's what they get. No one is forcing you to sell your shares every time the stock price moves. Buy and hold.

josh33• 15 years ago

Each of the following words opens up the door for semantic debate: "Maximizing" - when? In the short term or long term? "Shareholder" - who? People who own actual shares or the broader definition of stakeholders who have a vested interest in the company (employees, the community around the business, owners, etc.)? "Value" - what? Dollar value? Happiness? Customer satisfaction? Employee satisfaction?

pge• 15 years ago

I agree with the overall viewpoint of the article, so just adding an observation on how we got here. Tying management compensation to shareholder value is a good idea; the problem is in the measurement of shareholder value. If the public markets were efficient, and market cap was an accurate reflection of value, the system would not be as broken as it is. The public markets have become a casino, where investors are often playing a game, not investing in companies they truly understand, and whose value they have analyzed. Market cap is no longer strongly correlated with company performance (revenue, net income, cash flow, customers, etc).

A return to a rational market would realign incentives, and stock-based compensation would work, but that's a lot to ask...

yummyfajitas4• 15 years ago

If the public markets were efficient, and market cap was an accurate reflection of value, the system would not be as broken as it is.

If you believe the public markets are not efficient, how long will it be before you are rich?

Andrew_Quentin2• 15 years ago

It is inefficient for everyone not just one person or one group. An individual therefore is not able to easily exploit the inefficiencies as they are in the same position as everyone else.

GrowMap3• 15 years ago

Has it ever occurred to you that whoever has the most money can manipulate stock prices so any investor is in not one of the insiders is a mark? It boggles my mind that so few investors realize the game is certainly rigged and they ARE going to consistently lose. Why not just go to a casino? There - at least theoretically - you know what the takeout is and can decide whether you get enough "fun" from your losses to make you think it worthwhile. Gambling is gambling and the house always wins.

Vitaly• 15 years ago

He misses the point. Focusing on the customer IS maximizing shareholder value. Its just its focusing on a much longer timeframe. If you want the most money this year - you play the stock market or accounting games. If you want the most money the company will earn this century... well, you focus on very very different things. And customer's loyalty is one of the top.

GrowMap3• 15 years ago

What a marvelous discussion because it encourages the inherently self-absorbed to reveal their belief systems which nearly always include the worship of self, money, and power as their only true gods.

I highly recommend they all watch the Canadian Documentary 'The Corporation' which clearly illustrates why corporations ARE like psychopaths - and generally run by people who also meet the definition. The movie is available free online.

Corporations as they currently exist are inherently unethical and unsustainable because by focusing on short term gain and stock values they are destroying the real value they once had.

Either social responsibility and long term goals must be injected back into corporations or they need to be boycotted by everyone with a conscience or ideally have their corporate charters revoked.

scotty79• 15 years ago

What is a write-down that is being referred to in this article?

mmaunder• 15 years ago

Another example of a company in addition to J&J and P&G that the article mentions who focuses on customers is Amazon. Bezos recently was punished via a 30% drop in Amazon stock price because he is ploughing all his net income into the Kindle Fire, even though Amazon's revenue growth is exponential and has been for a decade.

Shareholders in the public market right now are focused on "value stocks" in the Buffet and Ben Graham sense and if you don't match value stock heuristics with a dividend and growing net income, you will be punished even if you're 100% focused on creating new customers.

refurb• 15 years ago

This is slightly off topic, but it's something I really hated about business school.

Sure J&J did a great job with the Tylenol poisoning case. However, they've lost over $1B in revenue in the last year or so because they consistently failed to produce drugs that meet federal guidelines. Not to mention the "unofficial recall" where they paid people to go into stores and buy up all the J&J products so that they wouldn't have to conduct an official recall.

J&J is probably the most messed up company right now.

anantzoid• 15 years ago

I wish I could understand this.

prewett• 15 years ago

A lot of what the author complains about has been around for years. Short term gains at the expense of long term growth? Yup. Executives manipulating something to make their company look good? Yup.

Read "The Intelligent Investor" or "Common Stocks and Uncommon Profits", which give examples of things companies did 50 and 30 years ago.

nonsequ• 15 years ago

Roger L. Martin, the author of the book hawked in this article, is also a director at RIM. Maximizing shareholder value indeed!

That said, Roger is correct (incidentally or not) in my book to criticize the short-term casino nature of the public equity market buyers and sellers. Too often they forget that as shareholders of a stock they are part-owners in the enterprise; rather they only desire to see the price tag on their stock certificate go up in the next minute so they can sell for a profit. That kind of thinking can poison a company.

The lesson I draw from this is that it matters who your investors are. Once you've sold part of the company, you must take into account the desires of your new partners, even if they are a teeming mass of the investing public. After all, you make the choice of whom you sell to. Some corporate leaders attempt to 'manage' their way out of this by massaging earnings the way Jack Welch did. I personally think the best way to handle this is by open education. Warren Buffett writes an elegant and informative letter each year and answers questions alongside Charlie Munger for four or five hours straight at the Berkshire meeting. If your business is too volatile, too secretive, or too sensitive to be explained to the public, you probably shouldn't be doing an IPO in the first place.

It occurs to me that Roger's best hope is to change the minds of RIM shareholders declaring open season on the board. It is naive of Roger Martin to think that his book and Denning's sensationalist hawking of it will do anything to soften the ire of RIM's shareholders. By the same token, it was naive of RIM's leaders not to take into account the fact that once they sold shares to the public, it became the public's company.

The Dumbest Idea In The World: Maximizing Shareholder Value

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