The World's Dumbest Idea: Maximizing Shareholder Value [pdf]

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBoe1yul9uERnfCmQoglFl9k5qwJSfHx8w%2fWCnFLmEb2MC9GoFnZVlslR5NzCRY1ajgn503icBv67VQg%2fNVUMWsYvi3A2%2fL%2bS28A7Pthjp7LmOfLYQfHMJc

by soundsop • 12 years ago

379 130 12 years ago

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thaddeusmt• 12 years ago

Link is down for me - is this the same article?

http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...

robmccoll• 12 years ago

No. Oddly similar title, but different article.

berberous• 12 years ago

They are both quoting Jack Welch, who called it the dumbest idea in the world.

JacobAldridge• 12 years ago

Define Value:

Person A wants long term growth of the share price so they can sell down in many years to fund their retirement.

Person B wants rapid growth in the share price (even if it eventually kills the company) so they can sell it soon.

Person C isn't much concerned by share price growth, as long as the dividends keep coming each year.

Person D invested because they want to support environmentally-friendly companies.

Person E isn't concerned about tree-huggers, but a lot of people in his town are employed by the company so he wants to support them.

Your challenge, should you choose to accept it: Which of these Shareholders' Value will you maximize?

alcari• 12 years ago

Give those shares votes, and let shareholder interests define value for you.

danbruc3• 12 years ago

Letting other people define value for you sounds like an incredible bad idea.

judk3• 12 years ago

Pure democracy is nonsense. It relies on a foundation: a constitution or charter, that entices shareholders to buy in in the first place.

klenwell• 12 years ago

Not a challenge I expect to ever really face, but if I were in a position to face it, I'm guessing my answer is:

The person with the most shares.

I suspect that that's about the only way I ever even get a chance to accept this challenge.

Jormundir• 12 years ago

The concept goes beyond the current shareholders too. In order to drive the stock price up, the company has to align itself towards the group of outside investors with the largest amount of capital.

digi_owl• 12 years ago

F, neither.

You give B a swift kick out the door, because there is where all the trouble comes from.

Once there, balancing up the interests of A, C, D and E become easier as long as nobody within A, C or E take extravagant living for granted.

bequanna• 12 years ago

Most investors are impatient. Sure, many of them invested for the long-term (whatever that means) but demand results in the short-term.

Additionally, there is no 'wrong' time horizon for an investment. If one's goal is to buy now and sell in 3 months at a profit, they can absolutely do that.

If management's goal is to maximize growth over the next quarter, even at the expense of long-term results, they can do that. Caveat emptor, my friend.

lotsofmangos• 12 years ago

Persons F through Z. Almost none of them own any shares but half of them are regular customers and the other half might be interested.

crdoconnor3• 12 years ago

All of them except B.

Unfortunately, B is the only one whose interests are commonly represented in publicly traded US companies these days. B is the prototypical Fortune 500 CEO.

bduerst3• 12 years ago

This is the reasoning behind why some companies are staying privately-traded (e.g. Epic Systems) with some success. It makes it hard to raise money, but gives more control over executive management and company direction.

It's also why the B-Corp is becoming increasingly popular, as it can shield management against being sued for not profit maximizing.

nemanja• 12 years ago

Google at some point stated they will always prioritize long term interests of their users vs. short term interests of their shareholders (paraphrasing). I think that's the key - when you focus on your users, financial success follows and stock price will reflect that.

As far as satisfying the shareholders, A and C wouldn't invest in the same company (growth vs. mature), Bs are speculators which you should almost always ignore (except when you need to throw them a bone to avoid activist situation). D/E don't really exist in the world of institutional investors, which are the investors you would have a dialog with (retail investors are generally just along for the ride).

sz4kerto3• 12 years ago

"when you focus on your users, financial success follows"

This is _extremely_ naive. Google is a good example: you could immediately find a dozen examples where everybody, including them knows that a given solution/service/feature does not serve their users' interest -- it's for money.

It's exactly the other way around, that's why free market works. You focus on financial success, and THAT is going to lead to making your users happy. There are a lot of stories where the best alternative died because of the lack of a reasonable business model; and there are almost zero examples where most successful market participant was not the one with the best _overall_ solution. (Best overall == that is chosen by most of the people. And yes, Microsoft is one of them: we all remember how crappy Win95 was, but some of us might even remember that it did things nothing else on the market was able to do.)

pdonis3• 12 years ago

Google at some point stated they will always prioritize long term interests of their users vs. short term interests of their shareholders (paraphrasing)

They say that, but they don't actually do that. If they were prioritizing the long-term interests of their users, they wouldn't be giving away their core services for free and funding them with advertising revenues. That may seem better for users in the short term, but in the long term it means that only services that promise advertising revenues are available; services that lots of users like (e.g., Google Reader), but which don't generate enough advertising revenue, get shut down, no matter what the impact is on users. The best thing for the long-term interests of users is for Google to charge users directly for services; yes, figuring out how to do this for something like Google search is a hard problem, but what is Google for if not to solve hard problems that no other company is in a position to solve?

More here:

http://blog.peterdonis.com/opinions/monopoly-money.html

sz4kerto3• 12 years ago

This choice doesn't exist.

The market is not 100% efficient, but it's not extremely far from it either.

Share prices are not something you can 'grow'. The company's future prospects change, and that affects share prices. If the companies will start targeting B, then the market will (very quickly) learn that this doesn't work (i.e. lot of people lose their money because they buy close to the top), and then share prices won't increase.

Person A, B, C don't exist in isolation. C _is_ concerned by share price growth because growing share price still means (despite all the bullshit people read and believe about investing) that the expected future dividends will increase. Person B _does_ care about long-term prospects because he's not the only smart guy in the town and if the company is doomed in the long run then chances are somebody else will sell before B sells. Person A _does_ care about short-term growth -- again because he's not the smartest all the time therefore if the share price drops today then it's usually a good signal about the prospects of tomorrow (I hope nobody argues with that -- if one does, then he's free to make a fortune on the stockmarket...).

D and E is a completely separate story.

7Figures2Commas2• 12 years ago

Share prices are not something you can 'grow'.

Tell that to companies that have used the ZIRP environment to borrow cheap money to buy back their shares. According to Barclays, companies with the largest buyback programs have outperformed the market by 20% since 2008[1].

[1] http://online.wsj.com/articles/companies-stock-buybacks-help...

hotgoldminer• 12 years ago

B promotes the bubble/burst-cycle. It is an endemic possibly extrinsic motivator in the business culture now. When did it begin?

kemitchell7• 12 years ago

Examples like the ones you give are the best way I know to point out that risk is a component of value, too.

The governance wonk's answer is that shareholders should elect board members who will guide management to the risk profile they desire from the investment ... or sell to fund purchases of alternative securities better aligned with their needs. This poses all kinds of real-world problems, from ensuring that management doesn't adopt its own preferred risk profile (where that differs from shareholders'), to the relative costs of organizing many smaller block holders, on the one hand, and consolidated institutional investors, on the other, to the existence (or non-existence) of liquidity and alternative investments.

That line of thinking leads to lots of hard questions about how micro-level market and governance structures play out in the large, as well as the extent to which small-scale investors can organize or consolidate interests (say, via funds) and stay true to their interests as scale.

Lagged2Death• 12 years ago

The "dumbest idea in the world" phrasing borrowed by the headline didn't originate with some wild-eyed lefty or academic, but is attributed to Jack Welch, celebrated former CEO of GE.

fsloth• 12 years ago

Yeah, and he admitted himself that retrospectively it was not such a good one."Shareholder value is an outcome—not a strategy." - Jack Welch http://www.businessweek.com/bwdaily/dnflash/content/mar2009/...)

calinet6• 12 years ago

That 'strategy' quote is a far more intelligent than the title quote. It completely and concisely sums up the correct argument in 8 words, and it does it better than the paper linked.

RockyMcNuts• 12 years ago

Some discussion

http://www.economist.com/blogs/buttonwood/2014/12/investing-...

http://www.businessinsider.com/gmos-montier-maximizing-share...

http://www.bloomberg.com/news/2014-12-03/shareholder-value-f...

like a lot of things in economics, a lot of things could have been going on during the switch from 'managerialism' to 'shareholder value' paradigm, so it's not necessarily true that it caused returns to go down. in context the effect Montier talks about is quite small. but it does seem clear that it didn't cause returns to go up meaningfully across the board.

in fact, the effect Montier cites seems to go away if you do a slightly more sophisticated calculation

http://3rdmoment.blogspot.com/2014/12/stock-performance-in-e...

there are a lot of studies that show companies where management has skin in the game do measurably better than companies where they don't.

that being said, there aren't data that would tell you, companies where the CEO will earn $1m or $10m depending on how well the company performs don't do as well as companies where the CEO will earn $20m or $200m.

edit: the question of impact of CEO incentives on stock performance is probably more complicated than what I said. I've seen a lot of studies that show that incentives impact management behavior. but probably most of those behaviors relate to short-term stock outperformance. whether those changes result in long-term outperformance is another question, and whether the incentives even reward long-term outperformance is complicated. https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-...

zanny• 12 years ago

management has skin in the game do measurably better than companies where they don't.

Same applies to all non-managerial staff. That is why I love the concept of coops, and I'm sad nobody does them much because they mean empowering your employees to be maximally productive at the expense of "potential profits" for founders and shareholders.

All the incentive systems in companies are all bandaids trying to make up for doing things wrong from the start. If you want to incentivize them to perform to profit, then let them profit as well from the companies success, and they will perform.

nickff3• 12 years ago

If co-ops are an effective corporate structure, why are they not more prolific? I am sure that many people would like to work in co-ops, so the question is why there are not more of them. I would suggest that co-ops don't work very well, and that if they did, employees at shareholder and closely-held corporations would found more of them.

From the examples of co-ops that I have examined, it seems that they often fail from internal politics; this is true for both companies which are bought-out by employees, and those founded as co-ops. The examples that I've looked at are only anecdotes, and I do not have a list of citations, but I'd be very interested to hear from anyone who has found differently (as I have no prejudice against them).

crdoconnor3• 12 years ago

there are a lot of studies that show companies where management has skin in the game do measurably better than companies where they don't.

There are studies that show that management 'skin in the game' compensation policies have cause an epidemic of control fraud:

http://neweconomicperspectives.org/2014/11/ceo-compensation-...

that being said, there aren't data that would tell you, companies where the CEO will earn $1m or $10m depending on how well the company performs don't do as well as companies where the CEO will earn $20m or $200m.

Actually there is data, but it demonstrates the exact opposite:

http://online.wsj.com/public/resources/documents/CEOperforma...

Lower paid CEOs perform better.

nickff3• 12 years ago

There is an alternative explanation for the data, which is that desperate companies that know they're in trouble have to pay more to hire a 'good' CEO who might be able to get them out (because the CEO does not want to be saddled with a bad track record). This explanation also jives with the fact that equity compensation is negatively correlated with stock performance, as the companies in trouble often give the executives less salary and more stock options, to incentivize sustainable growth.

mayukh• 12 years ago

While Montier makes a good (and unoriginal) point, I'm not convinced by his argument.

The first example: IBM and JnJ are in wildly different industries, competing in different markets against different competitors employing vastly different strategies. To use an arbitrary time period (who is to say IBM’s returns 10 years from now won’t trounce JnJ’s), and employ a metric (shareholder returns) that is often out of whack with reality (as Montier himself would acknowledge) isn’t persuasive enough for me.

The second macro example of comparing returns between two totally different time periods also isn't exactly apples to apples either. And also completely ignores the effects of hundreds of other potentially significant factors (interest rates, gdp levels, global trade etc)

This article seems to be a strong case of confirmation bias on his part. Ironical given that he's written a popular book on behavioral investing. (And yes this comment can also be viewed as suffering from a similar bias)

Yes SVM has pitfalls, yes focusing on the customer should be a high priority, however the agency problems Montier describes (management extracting undue value) are solved by neither.

Borrowing from churchill(?) — SVM might be the dumbest idea in how we organize our public markets, except for all the others.

lionhearted• 12 years ago

This article isn't very good.

I actually agree with the idea. The quote about shareholder value being a dumb idea from Jack Welch, yeah, sure.

This article is sloppy though. The author side-by-side compares economists speaking in abstract aggregates, press releases from PR-generating-feel-good-organizations (the CEO roundtable thing), publicly stated metrics used by companies for success (IBM), and distribution/influencer strategies (Johnson and Johnson).

It just seems like throwing a lot at the wall and seeing what sticks. Pulling out a 1980's feel-good-PR and contrasting that against Johnson and Johnson remaining focused on doctors, nurses, families...

That's before getting into cherry-picking, survivor's bias, good and bad strategy (Rumelt would savage later-day IBM, not for being profit-focused, but because "doubling earnings per share" is not a strategy)...

...ok, too many problems to list them all. Agree with the general idea; the article isn't so well-thought though.

mattlong• 12 years ago

If the link doesn't work, you can read it here: https://view-api.box.com/1/sessions/6570005e923b4513914b56fa...

jcfrei• 12 years ago

For such a bold claim I expected a more in depth analysis rather than this amalgamation of statistics. For example, nobody would argue against the fact that executive compensation has gone through the roof. However his argument for directly relating executive compensation to SVM is lackluster at best:

We can see this has been a driving force behind the rise of the 1% thanks to a study by Bakija, Cole, and Heim (2012). The rise in incomes of the top 1% has been driven largely by executives and those in finance. In fact, executives and those in finance accounted for some 58% of the expansion of the income for the top 1%, and 67% of the increase in incomes for the top 0.1% between 1979 and 2005. Thus, there can be little doubt that SVM has played a major role in the increased inequality that we have witnessed

He makes a solid argument against companies which employ flawed executive compensation programs - which are without a doubt very common. But so are companies which try to increase shareholder value. Simple correlation doesn't imply causation here. If there's any case to be made here, it's that a flawed compensation scheme leads to a short term optimization of shareholder value (ie. propagation of SVM) and not the other way around.

His argument for the decline in labour share of GDP is even more spurious:

The role of SVM in declining labour share should be obvious, because it is the flip-side of the profit share of GDP. If firms are trying to maximize profits, they will be squeezing labour at every turn (ultimately creating a fallacy of composition where they are undermining demand for their own products by destroying income).

He completely omits the rising productivity in many industries which simply require a smaller workforce for the same output.

Pointing out well known flaws in an established economic system is hardly noteworthy. Potential alternatives would be much more interesting to talk about.

mooneater• 12 years ago

Im all for questioning assumptions. But i dont see him put forward a clear alternative.

And he is comparing change in stock prices based on corporate mantras. He doesnt even adjust for industry, or compare to the overall market during that time. That makes no sense, why is this #1.

mkhalil• 12 years ago

I agree with the comparison sort of being apples to oranges, but the key point is it's bad to have the majority of CEO's pay be Stock+Options because that will lead to:

- The CEO will push the company to focus on SVM - The increase in wage gap due to high exec pay, like the 1%. - The company might not be helping it's longevity

An alternative would be not to pay exec's with Stock+Options, but focus on Salary+Bonus.

pash2• 12 years ago

The great irony is that Montier tests his argument by comparing the returns on shares of a company that claimed to be trying to maximize shareholder value with returns on shares of one that didn't. He evaluates his claim by the criterion he's railing against: "See?" he seems to say. "IBM tried to maximize shareholder value and J&J didn't, and J&J's stock did better! Therefore maximizing shareholder value is stupid!"

I'm not sure where on the list of world's stupidest ideas to put this idea that you can judge a measuring stick by using it to measure its advocates. All Montier has succeeded in demonstrating is that (a) the goal of maximizing shareholder value is so sacrosanct that even someone trying to undermine that goal naturally identifies good results with high share prices and bad with low; and that (b) Montier is really not arguing against the goal of maximizing shareholder value at all, but against the idea that explicitly trying to do so is effective.

And it does seem that maximizing shareholder value is a sort of financial anti-Heisenbug: don't worry about it and there's no problem, but the more intently you focus on it, the worse things get.

nickff3• 12 years ago

The argument put forward in the OP is rather strange, as it compares the stated goals to the actual outcomes. This is similar to saying 'experts are less knowledgeable in their specific field than average people', when the reality is that the people who claim to be experts are simply exaggerating their level of knowledge.

jal278• 12 years ago

I don't think there's necessarily any great irony here. It's certainly possible that the same metric could be both (1) foolish to optimize and (2) a reliable indicator of success.

Think of yourself trying to solve a maze -- because there are cul-de-sacs, if you took the naive strategy of directly minimizing distance to the goal, you'll just become stuck in a dead end. Yet if you do reach the goal (by another means) the distance will still be minimal (zero). This is basically the concept of local optima in optimization.

Of course, there are other situations, where through careless optimization a measure can become entirely disconnected from the holistic concept it is designed to encourage. Think for example of using "lines of code" as a heuristic for programmer productivity; I could unroll loops to maximize that measure and achieve a much higher value than the most truly productive programmer.

So the question is whether long-term shareholder value is of the first or second type. I think it may be difficult for it to be entirely disconnected from success, although I agree that it is foolish to optimize directly.

pash2• 12 years ago

Yes, I take your point, which is more precise and better argued than the author's. That is, I think your distillation of his argument misrepresents it by stripping out the logical inconsistencies (and the irony).

Montier's letter is rather more muddled than your comment. He suggests not only that optimizing returns in the short run is a poor strategy for creating long-term value for shareholders, but that the benchmark of share value (even over the long run) is a deficient measure of corporate performance. Everything Montier writes suggests that he believes companies did better (in some sense that he never quite articulates) in the era when managers ran their firms as they saw fit, before the idea took hold that they should try to maximize share value.

So the irony of his argument is the incongruity of demeaning the very benchmark he uses to suggest that J&J has somehow been a better managed company than IBM; the major arc of his argument vitiates the evidence he uses to support it. It is ironic, in the comedic sense, that Montier seems to be so imbedded in the culture of maximizing shareholder value that he invokes that criterion, seemingly reflexively, in the course of his argument against it.

But it's a logical and rhetorical mess, too. Montier's argument is analogous in your maze-solving formulation to claiming that the final distance from the exit is a poor measure of the performance of a maze-solving algorithm while at the same time maintaining that greedy algorithms are worse than random algorithms because it turns out that the greedy ones end up farther from the exit. If you accept the first claim, then the second is a non-sequitur, and advancing the second argument undermines the first.

ScottBurson• 12 years ago

OT, but I am reminded of this great quote:

[I]f we wish to count lines of code, we should not regard them as "lines produced" but as "lines spent": the current conventional wisdom is so foolish as to book that count on the wrong side of the ledger. -- E. W. Dijkstra

themartorana• 12 years ago

No no - it's the means, and the ends. When your driver is share value, it clouds everything. When your driver is delivering amazing products, services, doing great research, and so on, success in those areas is more likely, and that rising tide lifts all boats, especially shareholder value.

At its extremes, it's altruism vs. Dr. Evil. But focusing on delivering to the customer vs. delivering to the shareholder as the first order of business is the differentiator. Do the first, and the second will come naturally. Do the second, and the results of both are questionable.

kemitchell7• 12 years ago

You may be interested to know that a small counterculture of public companies has openly forsworn shareholder wealth maximization in public disclosures. So far as I can tell, Berkshire Hathaway lead the way in recent memory. Google followed suit in a letter to shareholders in the process of going public.

peteretep2• 12 years ago

Are you using a definition of maximising shareholder value that doesn't mean what it appears to say on the tin?

Berkshire Hathaway exists solely to maximise shareholder value, prima facie. Why else would people buy and hold their shares? Altruism? Warren says it exists to enrich shareholders in the long term.

Are confusing shareholder value with a short-term focus on return?

3rdMoment• 12 years ago

I don't even believe he does his main comparison correctly, since when he tries to remove the effect of valuation he doesn't account for valuation during the period in question. For more see here:

http://3rdmoment.blogspot.com/2014/12/stock-performance-in-e...

Animats6• 12 years ago

"Maximizing shareholder value" has indeed gotten out of hand. There are several reasons for this.

One is tax policy. A corporation can pay for its capital in three ways: 1) dividends on stock, 2) interest on loans, and 3) stock buybacks to increase the stock price. The first is taxed more highly than the second two. This has a huge influence on corporate behavior. Because payments on loans are not taxed, converting equity to debt increases profits. This funds the entire "private equity" industry, which is really about leveraged buyouts. This bias in favor of loans also increases the involvement of the banking industry in corporate finance.

Loans and investments aren't really that different. They once were; lenders expected to be paid back. Then came junk bonds, where the interest rate is cranked up to compensate for the risk, and the securitiziation of debt, which allowed off-loading the risk onto other investors. (See 2008 financial crisis.)

There's an occasional call to "end the double taxation of dividends". Taxing interest paid and stock buybacks at the same rate would be equally effective. This would be a good time to do that economically, because interest rates are so low.

Stock buybacks are mostly a tax dodge. But that's not the full reason for their popularity. For stockholders, they're no better than dividends. But for stock option holders, which usually include the CEO, they're a windfall. Option holders get nothing when the company pays a dividend and the stock price remains the same. But in a buyback, the stock goes up and they win big. This is one of the major factors driving CEO pay upward. (If you assume CEOs are rational actors as regards their own compensation, much corporate behavior becomes clearer.) Japan doesn't allow stock buybacks for most types of corporations. The US does. It doesn't really benefit anybody but management.

So that's the tax policy argument. It's dull, but important.

As for why companies prioritize shareholders so much, more than they used to, the reason is simple - less fear by companies. Companies used to be afraid that overdoing it would lead to government action. Their business might be nationalized, taken over by the Government. Britain did that to the rail, coal, steel, airline, power and telephone industries. The US never went quite that far, but electric power and telephone companies used to be regulated utilities with rate-of-return regulation, and the airline and trucking industries were regulated by the Civil Aeronautics Board and the Interstate Commerce Commission. In the US, this was a political compromise between big business and small business. Small businesses didn't want big monopolies to have control over their essential services, like power and transportation.

All this changed starting in the late 1970s. Nationalized and regulated businesses were stable, but seemed inefficient. They had no incentive to take risks to improve. The history of the Reagan era is well known, so that doesn't have to be repeated here, but reviewing the history of deregulation is useful. What seems to happen in deregulation of regulated monopolies is that a large number of new companies enter the field, and prices go down. Then most of the new companies go bust, and the winners consolidate. The result tends to be deregulated monopolies. Look at the last 30 years of the telephone industry, from AT&T to lots of little companies and back to AT&T.

There's another source for the decrease in corporate fear - the end of communism. It's hard to realize this now, but from the 1930s through the 1970s, there was real worry in the US that communism might beat capitalism economically. By the 1950s and 1960s, the USSR had a successful space program and was industrializing rapidly. Capitalism had serious ideological competition. In the 1980s, though, it became clear that the USSR couldn't make their system work. It worked for some of the big, centralized stuff - coal, steel, power, and such. But the rest of the economy didn't work very well. With that threat removed, companies could stop worrying about socialism and communism gaining popularity.

Related to this was the decline in labor unions. This has a lot of causes, but the biggest one is simply that unions peaked in the era when industry centered around huge plants with huge numbers of semi-skilled employees. Those were the situations in which unions had the most leverage. There were once steel mills which employed 5,000 people with shovels. If you visit a steel mill today, there will be some shovels around, but they're just for cleanup. You'll see a lot of machinery and not many people. Manufacturing employs 7% of the US workforce. It was around 40% in 1950.

Labor unions once had a big influence on working conditions. When a sizable portion of the workforce was unionized, non-union businesses tended to have working conditions not much worse than union shops. Companies didn't want a labor-organizing campaign. So the 8 hour day and the 40 hour week were standard, and pay tended to follow union levels in non-union businesses. That's disappeared.

As a result of these changes, there's no major political opposition left to "maximizing shareholder value". That's why we're where we are now.

pdonis3• 12 years ago

"Maximizing shareholder value" has indeed gotten out of hand.

None of the examples you give show this. What they show is that, because of flaws in corporate governance, things that do not maximize shareholder value are being done in the name of "maximizing shareholder value".

danieltillett• 12 years ago

I am not sure why you are being down voted as you are 100% right. It is not the stated aim that is the problem it is the implementation which is being corrupted.

peteretep2• 12 years ago

Quite!

I don't follow the logic at all; other than altruism, why would anyone buy shares of a company that wasn't trying to make an excellent sustainable profit over time / increase its share value?

aaron-lebo• 12 years ago

Everything you said sounds logical. But, it's a wide swath of information. What books/articles are you sourcing to piece this all together?

I will say that it is a complete mess. A lot of businesses today treat their customers and employees like garbage. On the other hand a lot of of the existing unions are parasitic so I understand criticisms on both sides. I can only suggest that it is because we have a very bad form of corporatism run amok in the US. Where regulation does exist it tends to support large companies (which I suppose is not much different from the picture in the 1970s).

The left is afraid of big heartless business. The right is afraid of big inefficient government. We have a wonderful mix of both. Both sides are too busy screaming about the splinter in the other's eye that they miss the log in their own.

Nationalized and regulated businesses were stable, but seemed inefficient. They had no incentive to take risks to improve. The history of the Reagan era is well known, so that doesn't have to be repeated here, but reviewing the history of deregulation is useful. What seems to happen in deregulation of regulated monopolies is that a large number of new companies enter the field, and prices go down. Then most of the new companies go bust, and the winners consolidate. The result tends to be deregulated monopolies.

How do you combat this? Both seem less than satisfactory.

Animats6• 12 years ago

Everything you said sounds logical. But, it's a wide swath of information. What books/articles are you sourcing to piece this all together?

Hacker News barely supports links, and you want footnotes?

Volatility and CEO pay, Harvard Business Review: https://hbr.org/2011/06/volatility-the-nasty-truth-abo.html

AT&T breakup and reassembly: http://gadgets.boingboing.net/gimages/atthistory.jpg

Union decline: http://www.hup.harvard.edu/catalog.php?isbn=9780674725119

quink3• 12 years ago

There's an occasional call to "end the double taxation of dividends". Taxing interest paid and stock buybacks at the same rate would be equally effective. This would be a good time to do that economically, because interest rates are so low.

I'm in Australia where there's a system of dividend imputation. That means that together with dividends one will receive franking credits representing tax that a company has already paid. This has another advantage of really benefitting shareholders on a low income, few as there may be. The corporate tax rate is 30%. The highest marginal tax rate for the median income earner is 32.5%, meaning dividends, as paid out, will typically attract an effective 2.5% tax. Wonderful.

For someone receiving 70c in dividends and earning under $18k a year, they will get another 30c back through their tax return.

It's a pretty nice system and it's astonishing to me that the vast majority of other countries don't do this. It also means that domestic shareholders are advantaged over foreign ones.

Then there's also the government restriction on mergers/acquisitions among the four big banks, which provides stability, consumer benefits, a nice dividend for the shareholders - it provides an actual desire by the banks to create value.

http://en.wikipedia.org/wiki/Dividend_imputation

http://en.wikipedia.org/wiki/Four_pillars_policy

lotyrin• 12 years ago

When it comes to taxes on lower incomes and dividends, an earner in the US under $36,900/year has a qualified dividend tax rate of 0%. (From what I understand, at least)

http://en.wikipedia.org/wiki/Qualified_dividend#cite_ref-4 http://en.wikipedia.org/wiki/Rate_schedule_(federal_income_t...

gd12• 12 years ago

among the four big banks, which provides stability

I suppose "stability" is one upside of a government supported quasi-monopoly. Australian banks are an absolute disgrace. I say that as an Australian who returns home from time to time. Charging $2.50 to withdraw money from an ATM?? They get away with gouging customers in ways that simply couldn't happen in the UK or US.

ElComradio2• 12 years ago

So if I'm understanding you correctly, a dividend is just as good as a buyback from the POV of a shareholder but a buyback is preferred because it makes options holders more money. If this is the case, can you explain why there are companies that issue dividends at all? Are these companies that are paying their execs with few options?

How are buybacks a tax dodge? If they have the desired effect of boosting share price, then there will be increased taxes paid by shareholders when those positions are exited, no?

judk3• 12 years ago

Dividends are taxed immediately. Stock buybacks are unrealized gains.

im3w1l2• 12 years ago

With buybacks your profit is taxed once. With dividends, you first pay tax on your dividends. When you reinvest your dividends, you then pay tax again on the return of those reinvested dividends, and so on.

Let's see what happens to two companies, one of which pays 10% dividend each year, and the other which increases in price 10% each year. Use a tax rate of 15%.

The first company: Every year we get 10% dividend, pay 15% tax on that, have 8.5% post tax dividend. Reinvest in company.

value = initial * (1.085)^nyears

The second company: Every year it increases in value by 10%. If we ever were to sell we would have to pay 15% tax on appreciation.

value = initial + initial * (1.1^nyears-1) * 0.85

crazycanuck4• 12 years ago

While both are indeed taxed, dividends are taxed as ordinary income, whereas gains from sale of stock are considered and taxed as capital gains. In the US at least, the capital gains rate is somewhere around 1/4 to 1/2 of the ordinary income rate, so it's much more "tax efficient" to do a buyback than to pay dividends.

sopooneo• 12 years ago

Doesn't share price typically go down after a dividend payment, by exactly the amount of the payment per share?

tinco• 12 years ago

They do, but that's a very short term logical thing. If you reason about the long term, the stock that pays a steady and steadily increasing divident is obviously worth more than one that doesn't.

crazycanuck4• 12 years ago

I think it's worth clarifying what's meant by the "double taxation of dividends". This refers to the fact that the company (at least in theory) already paid taxes on its profits, which are then taxed again as ordinary income when passed on to shareholders in the form of dividends. Arguably, this second tax occurs even when the profits are returned as capital gains (which is the case with buybacks), but in that case a) the tax rate is much lower, and b) the shareholder can choose to defer the tax payment by simply holding onto the stock until a future date. Long story short, the preference for buybacks over dividends is not about avoiding double taxation per se, but rather minimizing the tax rate of profit distributions. Per OP, one way to fix this would be to tax them the same regardless of the distribution mechanism.

jrochkind12• 12 years ago

Another example of how taxing capital gains at less than 'ordinary' income has all sorts of weird and often undesirable effects.

Of course, I guess the argument for it is that it has the favorable effect of encouraging capital investment, that's what it's supposed to do right? I am curious what evidence there is of how well it does that.

According to wikipedia, capital gains were taxed as ordinary income in the U.S. until 1921, and the history since then have gone up and down -- but are currently at their historical low. http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United....

amscanne2• 12 years ago

Stock buybacks are mostly a tax dodge. But that's not the full reason for their popularity. For stockholders, they're no better than dividends.

Aren't they better for stockholders as well?

Suppose I have 1 share of stock, and I will sell it two years from now.

If the company pays out dividends, won't those be taxed as income at my marginal rate? Whereas if the company does a stock buy back, then two years down the road the marginal value that would have been paid out in dividends is now captured in the stock price. So instead of paying the marginal rate, I pay capital gains on that amount.

I might be missing something, but it seems like a tax dodge that benefits all (except the government).

hiou• 12 years ago

Dividends are taxed at the marginal rate? US corporate "Qualified Dividends" are taxed at the same rate as Capital Gains.

krschultz• 12 years ago

Yes, but tax policy changes. If taxes were even, there would be no difference between dividends & stock buy backs for stock holders, but there would still be a difference for option holders.

WalterBright• 12 years ago

In the 1980s, though, it became clear that the USSR couldn't make their system work.

It was clear long before then. There was a lot of fear of the USSR's military capability, but not their economy. One obvious example was Kansas was shipping wheat to the USSR starting in the early 70's to make up for Soviet agricultural shortfalls.

jjoonathan• 12 years ago

"Clear" as in "the overwhelming opinion of experts operating without the benefit of hindsight" or "clear" as in "a position held by the masses primarily out patriotic faith"?

The GDP charts I've seen seem to support the latter: the USSR's developing economy grew significantly faster than the US's developed economy for a sustained period of several decades. The "collapse" of the USSR didn't look so much like an adjustment (i.e. what you would expect if those numbers were completely fictitious) but rather a leveling off of growth. As for your "obvious example," 1. importing food is not necessarily indicative of a shortfall and 2. from what I understand, the central government of the USSR occasionally starved sizable chunks of its population for political reasons rather than due to actual shortfalls (e.g. while simultaneously exporting food).

throwaway8870• 12 years ago

Animats' post is one of the best in HN history.

Most people who follow financial news know that share buybacks increase EPS, but Animats goes a whole level deeper.

As we found out from Wall Street's behavior during the recent crash, executives are rational actors, and what they want is as much as they can take, economy be damned.

kemitchell7• 12 years ago

I don't mean to take pot shots, but I picked up a few quibbles along the way. Touching just the more technical early paragraphs:

Dividends, interest, and repurchases aren't the whole picture. Especially when funders are also insiders, a variety of other (sometimes "soft") benefits reward investment. Much corporate behavior studied in the vein of management conflicts of interest relates to executive compensation and other benefits that may or may not contribute to personal tax base. There is also the matter of trade in securities based on valuation, on public markets and otherwise, by investors of all stripes. Many listed companies have never paid a dividend and probably won't ever pay a dividend. S-1s for well subscribed IPOs often warn pro forma this will be the case. Companies may also adjust the amount and kind of risk they bear to align with one constituency at the expense of another (e.g. management over outsiders, well organized institutional investors over the masses).

While leveraged buyouts are by no means dead, PE is far more than LBOs. The industry predates and has long outlived the 80s LBO boom. The term is a broad umbrella over many different kinds of operators leveraging (or suffering under) various features of our tax system.

Debt and equity still enjoy different rights in liquidation, and contractual covenants and controls accompanying credit are different than rights assigned to equity holders by statute, governing documents, financing agreements, securities laws, and exchange rules. Like the time-remote possibility of dividends from a growth company, different spots in line to the coffer of a healthy operation still affect valuation. Derivatives and public markets can facilitate decoupling of control rights from equity. Instruments can be designed to blend equity and debt characteristics. But debt and equity still confer different rights to affect operations.

It is difficult to speak of stock buybacks out of context; their use is varied, from purely financial to entirely structural. They are not entirely "unregulated", either. Background state corporate law, governing documents, exchange rules, and contracts (including debt documents) impose restrictions on when and how. The board is involved. Markets, public and private, may take note.

It is also difficult to make tax arguments out of context. Even statements about the macroeconomic effects of certain policies have to turn on the prevalence and kinds of tax situations meaningful populations of companies inhabit. Tying the tax effect to rising executive compensation requires at least time-correlating tax policy changes to compensation. I'm not sure that's borne out. There are many additional confounding variables.

Thanks for sharing your opinions. You've got some good back-and-forth started.

Edit: Changed "bankruptcy-remote", which is a term of art in bankruptcy, to "healthy", which makes the point with less risk of confusion.

Animats6• 12 years ago

I'm aware of many of those issues, but they're a bit much to explore in detail on Hacker Digest.

nandemo2• 12 years ago

Japan doesn't allow stock buybacks for most types of corporations.

Where did you get this? Stock buybacks are commonplace in Japan. Try and search "ＴＯＢ株" or "株式公開買い付け" on Google News (use Google Translate if you can't read Japanese).

Non-dividend-paying stocks are much less common than in the US, but that doesn't mean that buybacks aren't allowed.

Animats6• 12 years ago

Sorry, obsolete info. "Repurchases by firms in the open market, the main type of buy-backs today, used to be banned. America loosened its rules in 1982, Japan in 1994 and Germany in 1998." (http://www.economist.com/news/business/21616968-companies-ha...)

danbruc3• 12 years ago

Maximizing shareholder value is not the dumbest idea per se - the flaw is that maximizing shareholder value does not maximize the value of the business.

Businesses do not exist in empty space but within a society and their primary responsibility is to provide value to this society by providing jobs, goods, services, taxes, research, you name it. Investment and growth are not primary goals, they are just means to the aforementioned responsibilities.

People should invest in a business because of its intrinsic value and not define the value of business by their investments. Financial gains should only be an additional incentive and protection against the risks of investments but not the sole reason for the investment.

If you could argue that maximizing shareholder value naturally aligns with maximizing intrinsic value all would be fine but I can not see how this could be true. It may sometimes be true for long-term investments but for short-term investments the contrary seems to be true. If you only care about the next quarter cutting wages and quality is the easy way to maximize shareholder value but is diametrically opposed to maximizing intrinsic value.

sqren• 12 years ago

Cached version to those who cannot access the resource:

https://web.archive.org/web/20141206170332/https://www.gmo.c...

lisper• 12 years ago

    ➔ host www.gmo.com
    Host www.gmo.com not found: 3(NXDOMAIN)

This is using Google's DNS servers.

sp3323• 12 years ago

https://www.whatsmydns.net/#A/www.gmo.com shows two different IPs: 216.57.159.45 and 69.147.188.37, and Mountain View (Google) is giving NXDOMAIN. But if I query 8.8.8.8 from my computer on the east coast I get 69.147.188.37, so maybe some of Google's servers are giving conflicting responses?

ABS• 12 years ago

My standard reply to these posts:

I highly recommend to just get the book [1], it's written very well and in layman terms but here's an extract taken from a review [2] of the same:

"Stout traces the birth of this “fable” to the “oversized effects of a single outdated and widely misunderstood judicial opinion.” Dodge v. Ford Motor Company was a 1919 decision of the Michigan Supreme Court. The opinion’s status as a meaningful legal precedent on the issue of corporate purpose is tenuous at best. Yet, its facts “are familiar to virtually every student who has taken a course in corporate law.” As Stout has observed in the past, “[t]he case is old, it hails from a state court that plays only a marginal role in the corporate law arena, and it involves a conflict between controlling and minority shareholders” more than an issue of corporate purpose generally. The chapter explains quite well that any idea that corporate law, as a positive matter, affirmatively requires companies to maximize shareholder wealth turns out to be spurious. In fact, none of the three sources of corporate law (internal corporate law, state statutes and judicial opinions) expressly require shareholder primacy as most typically describe it. To the contrary, through the routine application of the business judgment rule, courts regularly provide prophylactic protection for the informed and non-conflicted decisions of corporate boards"

[1] "The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public" by Lynn Stout http://www.amazon.co.uk/The-Shareholder-Value-Myth-Sharehold... [2] http://arizonastatelawjournal.org/book-review-the-shareholde...

kemitchell7• 12 years ago

I also recommend Professor Stout's book, and especially to fellow specialists and governance wonks. Not because I agree with her main thrust, her characterization of the orthodox view, or her conclusions about it, but because resisting the book in good conscience requires summoning foundational primary sources that practitioners don't have to handle very often. If you lead right, it's good to fight a southpaw from time to time.

When recommending it to those who aren't corporate attorneys or otherwise involved in the subject matter, I include a caveat: If this is the only book you read on corporate governance, be aware that it's a controversial and contrarian book packaged for non-lawyers. If its subject were political, I could find and recommend a book arguing the opposite view it in a similar style. I'm not aware of any legal rebuttal that isn't presented in more traditionally legal, less approachable form. It's been reviewed in legal journals, but even most lawyers consider those long-winded and dense.

drawkbox• 12 years ago

On the flipside, this type of greedy setup actually may be much better or easier for smart companies focused on innovation and research to operate in, as long as they have trained their shareholders they can invest and innovate while others have to cut and slash.

Apple, Amazon and Facebook to name three have really set the precedent that they use their money to stay in the game. Amazon invests nearly everything back in. That is actually valuable today more than EPS/P/E Ratios in the best innovative companies. Innovate and win and the shareholders will follow, follow your shareholders only and go right off the cliff to mediocrity.

Companies should be run with stakeholders as the focus. Shareholders being one, but the products/employees/customers/economy they are just as important to success and real growth.

tslathrow• 12 years ago

GMO is the laughingstock of the HF community... trying to make a name for themselves with a permabear outlook.

Their index and commodity projections are truly hilarious and they've been claiming this sort of shit for years, generating bottom-decile returns.

Fando• 12 years ago

The concept of maximizing shareholder value being the only true purpose of a company, taken at its literal sense, is an idea that's rotten to the core. This type of thinking is a natural consequence of the selfish individuals that to some degree all of us are. Taking human natural flaws into account, it is simply irresponsible to adopt such a philosophy. It will be exploited. This type of company suffers from an inherent vulnerability. At some point, true motives, such as provision of quality services and goods, could be distorted and even replaced by fallacious motives. As is seen in the world today.

jsprogrammer• 12 years ago

Shareholders are cost centers, nothing more.

Put that into your quarterly corporate pipe and smoke it.

phkahler• 12 years ago

I always say if maximizing shareholder value is the goal, most companies should liquidate all their assets and become hedge funds investing in industries with higher returns. Yeah, it's tongue in cheek, but it make the point. Companies need to do what they do best, and if investors think that's a good idea they can invest. Then we can get away from the short term thinking, which is even better for the shareholders.

patfla• 12 years ago

Fwiw, I thought Montier to be a well-respected behavioral economist where behavioral is in reaction to the failure of previous economic models in 2008 (the Global Financial Crisis).

Behavioral puts human psychology back into the picture.

Montier argues that SVM (shareholder value maximization) is the fig leaf that covers the change in incentivization of CEOs, and one assumes other corporate officers, away from salary and bonus to stock options. Which has been key in bifurcating the 1% away from everyone else.

Or as they say in finance, when a CEO says shareholder maximization, he or she is talking their own book. They're the shareholder they want to maximize.

SVM reframes the dialog in terms of what many people consider legitimate - return money to shareholders - and away from, say, value to employees or to society more generally. Which puts me in mind of another expression, "job creators."

mikaeluman• 12 years ago

I am sorry but this seems like complete left wing rethoric bullshit. I can pick data too.

joshjkim• 12 years ago

A few early-stage-company-related thoughts (in no particular order).

Some prelim. thoughts: Maximizing shareholder value is accomplished by increasing the value of shares, and presumably share value is the most widely-agreed-upon way to value a business - whether or not it is accurate or takes into account everything it should is another matter, but if you assume that share value is intended to capture the financial value of the business, then to say I want to max. SH value is basically the same thing as saying I want to increase the value of the business, which I think for the most part is a good and acceptable goal.

Here's what I think some of the problems are:

1. Conflation of SHs/Board/Managers.

To me, the real issue here is more that people in power (who are often SHs themselves - CEOs, boards, large SHs) use the "SMV" principal to hide behind self-interested actions - I totally admit this is there prerogative, but it's pretty annoying to see them try to dress it up in some abstract corporate governance value system.

This happens a lot for public companies with activist SHs and/or PE firms - see: Carl Icahn, who buys big stock positions, then publicly pushes management to take actions like sell or spin-off segments in the name of "shareholder value" when just the act of this publishing an open letter or pushing for his own board candidates, etc. will increase the value of his holdings in that very same company - yes, he is trying to max. SH value because he is a major SH!

This also happens with public company CEOs whose comp. is tied to and/or made up of equity, as is pretty much always the case these days. Lots of interesting literature out there about how careerist CEOs (who don't plan on staying at one company for more than a few years) will take highly risky short-term-stock-value-increasing actions that are bad for long-term value, etc.

Interestingly, this is especially true in early-stage companies, where Founders/VCs are often the biggest SHs, on the board and in key management positions (VCs sometimes take operating roles in companies as they hit growth stages or if there has been founder trouble, etc.)

This conflict comes into relief w/r/t to exits where liquidation preference get triggered: sometimes happens that VCs who control the board and hold preferred stock push for a deal where the preferred get $$ back but common gets nothing, even if the common think that it's a bad deal and want to keep pushing ahead in hopes that they can improve the business and exit with some value going to all stakeholders, not just preferred. This was litigated in Trados (see link below), and the court said that in that case, it was OK that the VCs made the deal happen.

Trados summary: http://www.bingham.com/Alerts/2013/10/In-Re-Trados-Incorpora...

(Not equity related, but a new instance of this is the reverse, and plays out in acqui-hire deals: founders are given great job opportunities and RSUs from acquiring company, but VCs get very little if anything and non-technical employees are out of the job. I think in most cases it's a totally fair outcome, just interesting to think about how it works in other instances where the value measurement is different - in acquihires, skill of individuals is the value, not the business, so stock value of the co. plays a much smaller role and the power then rests in the individual holding the skills/ability, not the VCs or the employees running business operations, etc.)

2. Even if it is not the stated or intended goal (as I sincerely believe most good entrepreneurs start business for more than pure financial gain - easier to just work for a hedge fund), almost all tech startups rely on maximizing shareholder value to properly incentivize founders, early employees and attract capital to a much higher degree than public companies. The interesting difference at the early-stage as compared to public companies is that, with no public market, the constituencies are relatively few in number and far more concentrated (founders are board members, managers and SHs, VCs are SHs and board members and advisors, employees are equity holders, very few customers at first, if at all, etc. - as discussed above, this happens a bit in the public market but not in such a concentrated way), so the incentives are much more easily aligned.

VCs are pretty-much-always looking for equity upside, and founders & employees (to significantly varying degrees haha) are more-often-than-not foregoing secure/higher salaries in exchange for potential equity upside - put another way, all founders, VCs and employees pretty much hope for an exit in which their equity is 10X what they had to pay for it.

Again, no founder/VC is saying the goal is to maximize SH value, but at the end of the day we as a community more or less measure success through share value.

That all being said, I love to think about exceptions to this rule: Craiglists = awesome (I hope they beat eBay in court), Kahn Academy is amazing.

Would love to learn about some more!

kemitchell7• 12 years ago

Great stuff. Bonus karma for "w/r/t" and Trados. A few thoughts:

Risk is also a big part of shareholder value. Some stockholders may want exposure to an operation in the company's industry that isn't highly correlated to the market en masse, with higher risk and possible reward. (This is akin to the VC outlook, backed by redemption rights to pull the plug on any would-be "lifestyle businesses". It also sounds in Trados.) Others, including insiders, may have no way to diversify portfolios that are very heavy in the company's stock, and so prefer less or different risk.

You hint at this by your comment on short-termism of careerist managers, and implicitly by picking stock price (rather than, e.g., book) as value. The trouble with market value of securities is that potential purchasers are diverse in their risk appetites and so value diversely. A buyer and a seller might meet at a price by very different calculations. A price of $x per share doesn't mean that all prospective buyers would value the security at $x, or even that all current holders value at $x. Increasing $x by taking risk that's at odds with shareholder A's portfolio needs doesn't benefit A like it benefits others who need that exposure, especially if A can't efficiently trade for a more suitable substitute.

With respect to acqui-hires, I've seen enough variety and change to wonder whether I've enough firm ground to park a generalization. I've yet to hear of a structure that's purpose-built for locking in people so VCs can extract ransom on acqui-hire (perhaps using debt?). In terms of hired employee talent, there isn't much in the way of leverage against the at-will nature of employment and acqui-hirers' willingness to buy out options and sweat equity. Especially in a state like California that doesn't enforce many non-competes, that raises the question of why the hiring bother with acquiring at all. All sides involved---VCs, companies, and personnel---may be eyeing other benefits. As an entrepreneur (or an investor), "acquired" sounds much better than "abandoned". Talent likes to walk a bridge, rather than take a leap of faith, and keep good teams together. VCs would rather have a runner, but as dogs go, it's not so bad to put more of "your people" in a large company with cash to spend. It may be easier to buy with stock or options than justify an out-sized compensation plan award to existing employees. All the deals I've seen seem "personal" in these kinds of ways. Maybe the personal touch is the real story. Maybe it's just what I've seen and heard.

Concerning alignment in start-ups, I think it's worth pointing out that a lot of language goes into aligning those involved, resulting in potentially many series of diverse equity securities, plus notes and other instruments in between and all around. Everybody wants to get rich, sure, and when people are getting rich, even board meetings can be fun. Nothing like a new-money down-round to remember the house is built on fault lines.

dfragnito• 12 years ago

This relates

http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocra...

I agree with the overall statement but not necessarily all of the analysis. I believe "stakeholder capitalism" is a better corporate structure.

Corporate bylaws would need to be changed to accommodate this.

nihilnegativum• 12 years ago

I agree, that the purpose of value maximizing can only be accomplished as a side effect, but this bad orientation is only part of the problem of current application of shares, I think that the additional problem lies in their distribution (both the actual distribution, and the logic behind it). Shares could solve the tragedy of the commons problem, but their current application necessarily fails.

Dwolb• 12 years ago

The author isn't arguing against maximizing shareholder value, he's highlighting the misunderstanding of what maximizing shareholder value is. Current intro-level schools of thought on how to value projects, raise money for those projects, and what to do with the money left over, start with a perfect-world scenario [1]. This scenario's cornerstone centers around the idea markets are perfectly efficient, there are no taxes, management incentives align with shareholders, there are no taxes, there are no bankruptcy costs, and possibly one more.

In this world, there is no difference in value to a company to raise money via debt or via equity. However, if we start to violate the 5-6 founding assumptions (i.e. we enter the real world) we find that there significant differences in value of a firm in a given industry who use debt or equity to raise money (or any flavor of security between debt and equity), who pay management via different bonus structures, who keep cash on hand versus pay it out, have underlying assets which are easily saleable or not, and who have different risk profiles.

Maximizing shareholder value is a nice tool to use when evaluating key financial decisions (e.g. how levered a firm should be), but as the other points out is misused or abused due to misaligned management incentives. However, tbe idea isn't intrinsically dumb, the misunderstanding of the value of the idea and how it should be used is what's sometimes wrong and sometimes harmful.

[1] http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_the...

autokad• 12 years ago

"Yet, Johnson & Johnson has delivered considerably more return to shareholders than IBM has managed over the same time period."

good lord, treating IBM and JNJ the same? not to mention assuming companies in their various stages should have comparable growth.

you always see these days a new tech company come out 'we are different (like everyone else), we do not care about our stock price blablabla. it doesnt take them very long before they realize that their stock price is critical to their survival.

as almost every tech found out after spitting such garbage, when their stock plummets their talent leaves. they would also find it hard acquiring talent. This is especially true when stock options are a significant incentive - as it almost always is.

this is not to mention the many various social effects of a company whose stock is always in the gutter. you lose customers, become the butt of jokes, etc etc (even though these things have no direct tie to stock price).

pbreit• 12 years ago

The headline wouldn't be as provocative if it were correct: "The World's Dumbest Idea: Maximizing Short Term Shareholder Value".

The author seems to argue that switching from long term to short term shareholder value maximization hasn't really increased shareholder value (and might have decreased it). So I gather that he is in fact in favor of maximizing shareholder value but that it should be performed on a longer basis.

The World's Dumbest Idea: Maximizing Shareholder Value [pdf]

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