6 ms·

A friend told me on Monday about an idea he'd just read that in fact shareholders should be the least important of all in a company's consideration and the US/U

A friend told me on Monday about an idea he'd just read that in fact shareholders should be the least important of all in a company's consideration and the US/UK maximize share-holder value laws/attitude is actually damaging. The gist of the argument was: - Shareholders have no long-term investment in a company, they can easily move their money if they feel a company is performing badly. They can have little interest in long-term survival. - Employees and suppliers do have long-term investment, have barriers to moving their commitment Therefore you should discard the concept that a companies should maximize share-holder value and should instead incentivize companies to focus on long-term survival. The example cited was GM, which did share buybacks instead of saving cash in boom times and then went bust because it ran out of cash in a recession. I'm yet to read the book (which I can't remember the title now), but it sounds interesting and would be an effective counter to this concentration.

johanvts 9y ago
Who are "you" in this case? If "you" are the employees "you" might naturally have an entirely different view of what to optimize for than if "you" are the shareholder. The promise of capitalism is that if we all optimize for our own benefit, the invisible hand will make everyone better off.
- pc86 9y ago
  First of all, capitalism does not "promise" anything. Secondly, it says that in aggregate, society will be better off in everyone focuses more or less on their individual interests. It does not suggest that everyone in that society will be better off. In some hypothetical world, if you raise the median income 50% and increase the quality of life for 95% of the population, while causing the other 5% to end up in crippling poverty for the rest of their life, you've made that society better in aggregate but certainly not for that 5%.
- mattmanser 9y ago
  The you is society in theory, a government in reality.
EliRivers 9y ago
US/UK maximize share-holder value laws/attitude The majority of legal commentators suggest it's all attitude - not law. There are a few dissenting opinions.
- dpark 9y ago
  Who suggests that it's purely attitude? It's my understanding that executives and the board of directors have a fiduciary duty to shareholders. What they don't have is an obligation to do literally anything legal to create short term gains, as many seem to believe.
  - vonmoltke 9y ago
    Fiduciary duty != maximize shareholder value
    - dpark 9y ago
      Then what is fiduciary duty in this context? A fiduciary must act in the best interest of the one they hold a duty to. In the case of shareholders, that is essentially shareholder value. (Arguably it is literally shareholder value, since even non-monetary value is still value.)
      - deleted 9y ago
        [deleted]
      - Symmetry 9y ago
        A fiduciary is obligated to put their duty to the principal over their own interests, not to put the interests of the principal over all other duties.
        dpark 9y ago
        That seems like a pedantic and pointless distinction. No one thinks that your financial adviser is obliged to deposit embezzled funds into your accounts in order to meet his fiduciary duties to you. Obviously some obligations take priority. The fiduciary duty of board members to shareholders still seems to be mostly about maximizing shareholder value.
jrs235 9y ago
Happy employees leads to happy customers leads to happy share holders.
- TeMPOraL 9y ago
  If that was only true... For "happy employees leads to happy customers", consider almost every company in existence, of any kind, in any sector. Do customers in general mind that the people making their electronics are underpaid, abused and unhappy? That the people serving them food in the restaurants are underpaid, abused and unhappy? That their doctors are overworked and unhappy? No. The happiness of employees starts and ends with "suck it up, smile nicely, or else lose your job and/or career prospects". The more difficult to debunk is "happy customers leads to happy share holders". It is true in some cases, but it's also false in many more. Consider telcos or ISPs as a pretty stark example of companies doing totally fine with very unhappy customers.
  - fauigerzigerk 9y ago
    Customers care about the quality of the product, which is arguably influenced by how happy workers are. But of course this link is very indirect and very different for different types of workers.
    - TeMPOraL 9y ago
      I'd say this link is very indirect; in fact, a lot of structure in companies exist solely to decouple the two. On the one hand this is sound - you want the end result to be independent of moods and dramas, both internal and those of lives of individual employees. On the other hand, this decoupling is what makes consumers totally unaware of whether and how much employees are abused in the process.
      - fauigerzigerk 9y ago
        This has been studied before of course. For instance: http://www.sciencedirect.com/science/article/pii/S0022435908000456 http://www.sciencedirect.com/science/article/pii/S0022435908... A Meta-Analysis of Relationships Linking Employee Satisfaction to Customer Responses "The authors report a meta-analysis of relationships linking employee job satisfaction to customer satisfaction and perceived service quality in studies that correlate employee data with customer data. Overall, both relationships are positive and statistically and substantively significant."
andrewvc 9y ago
The whole reason companies go public is to raise capital. Without buybacks and dividends as at least potential future possibilities this would be hampered. Additionally, companies guarding mountains of cash is problematic. Sometimes companies can invest cash more wisely than the market. Often times however this is not the case. I agree short termism is a problem, but I'm not convinced of any particular solution here. I'll also point out that sometimes when the market is too short termist private equity can come in and revalue the company to free it from those constraints as in the case of Dell.
- mattmanser 9y ago
  You're pretty much begging the question, you're saying that they can only raise capital if they're willing to pillage themselves. Another consequence was that instead of investing on new cars, GM's leadership was incentivized to focus on buybacks because of compensation schemes. EDIT: The more I think about this, the more obviously broken it is. Capital markets are lauded for being able to help companies grow. You're saying that capital is the most important thing and companies should focus on returning capital instead of themselves.
  - andrewvc 9y ago
    Why should GM invest in new cars as opposed to returning capital to investors who can perhaps allocate it more efficiently? Why should I believe they can do a better job than anyone else? This is a long-standing debate over who should allocate capital. I don't think there's one exact answer. Clearly some companies, like AOL were terrible at reinvesting money, they tried and tried but wound up blowing tons of cash on worthless companies. Other companies, like say Facebook were able to make smart investments like buying Instagram. Clearly investors price stock based on whether the company can make smart investments in its own future, which is why AOL nosedived and Facebook rose. The market isn't always right but I'm not convinced that an alternative would be better
    - mattmanser 9y ago
      Pretty much the obvious answer, because the company died? All you're doing is making Ha-Joon Chang's point for him! Having not personally read "23 Things They Don't Tell You About Capitalism", I assume the argument is that companies should grow, not chase investor returns. Thus they contribute to the society and the eco-system of suppliers and employees they support. Investors don't depend on them, they can just move their capital elsewhere. One might say that it's called "investing", not "extracting". If you want to move your capital elsewhere, because you think you can get better growth elsewhere, fab! That's capitalism at work and easy to do, sell your shares. Which reminds me of all the films in the 80s about the company raiders (e.g. Pretty Woman) being bought and broken up, the pieces were worth more than the whole? Destroying companies for short-term profit. I have no idea whether it's overall a net loss for an economy, but it destroys more than just the one company.
netcan 9y ago
Everything has side-effects. First, shareholders (and their interests) are a side effect of raising money. Anything you’d do to reduce the importance of shareholder interests would impact the amount of money companies could raise. There have been some examples of industries where employee interests played a big role. Public sector companies, employee cooperatives or just private businesses with highly empowered unions. In Israel for example, during the 50s-80s there were a lot of worker-cooperative companies. The biggest bus company, bank & health care provider were co-ops. These were generally started by large multi-industry union organisations. Where unions are this powerful, union-run & state-run tend blend into each other. The bus company is still technically a cooperative, owned by members. Anyway… Here incentives can play weird roles too. One thing that happens at a successful worker co-op (famously at Egged, the bus company mentioned above) is that member-workers want to avoid dilution, so no new member-workers. This either leads to hiring workers sans-membership or avoiding hiring altogether. In both cases, the owners have a much reduced interest in growth. Shareholders are hyper-interested in growth. Shareholders can portfolio away volatility, so they're more risk tolerant. I’m not opposed to redefining the concept of a “company,” (joint stock or otherwise), it’s legal rights and such. I don’t think they should inherit the rights people have by default. I also don’t think infinitely cascading parent-child “structures” should be allowed. But, I don’t think you can make anything perfect.
mattmanser 9y ago
Can't edit my answer now, the book's called 23 things they don't tell you about capitalism. https://www.amazon.com/Things-They-Dont-About-Capitalism/dp/1608193381 https://www.amazon.com/Things-They-Dont-About-Capitalism/dp/...
kgwgk 9y ago
Shareholders means owners. Are you suggesting that companies should be managed for the benefit of their suppliers and employees and not of their owners? Probably you could have included customers as well... Why would anyone want to own a company in that case?
- clarkevans 9y ago
  Companies are creatures of the state, created for the public good and protected by the laws of the land by the citizens of the state. Companies are permitted to take advantage of the legal and regulatory mechanisms put in place to encourage growth and innovation. Companies are permitted to employ members of the population, who are often educated based upon the good will of public funding. Companies don't have to worry about employees after they are "used up" and are broken or too old to work or are problematic. All of these items are provided as the environment for the company, and the citizens of the state collectively are the ones who have made it possible. Therefore, first and foremost, Companies must serve the public good. The rights/interest of investors can be seen as a secondary interest. Not that private interests aren't crucially important; however, out of the gate there is a balance of public/private interests -- presenting it otherwise isn't correct.
  - kgwgk 9y ago
    https://webcache.googleusercontent.com/search?q=cache:TzYmnHgCskoJ:https://www.economist.com/news/business/21646742-old-debate-about-what-companies-are-has-been-revived-business-business+ https://webcache.googleusercontent.com/search?q=cache:TzYmnH... (...) Darrell West of the Brookings Institution in Washington, DC, notes the decline of the idea that companies are creatures of the state, given the privilege of incorporation in return for pursuing a broad public purpose. This all sounds very enlightened. But who will decide whether new companies are likely to serve the public good? Will a committee of the great and the good interrogate young app designers about the social benefits of their inventions? Will foreign competitors who are not required to pass a public-interest test be barred from the market? Or domestic entrepreneurs who choose to incorporate abroad? (...) As for Mr West and the supposed virtues of companies as creatures of the state, the one-word response to that is: Petrobras.
dzink 9y ago
If you focus too much on employees and thus managers, you get hoarding of cash within companies and the golden era of corporate jets and perks for corporate executives. In the 80s that led to major Private Equity activity to squeeze said cash reserves back out via leveraged buyouts.
- cat199 9y ago
  If you focus too much on shareholders and thus fund managers, you get hoarding of cash within investment firms and the golden era of corporate jets and perks for private equity executives.

johanvts 9y ago

Who are "you" in this case? If "you" are the employees "you" might naturally have an entirely different view of what to optimize for than if "you" are the shareholder. The promise of capitalism is that if we all optimize for our own benefit, the invisible hand will make everyone better off.

pc86 9y ago
First of all, capitalism does not "promise" anything. Secondly, it says that in aggregate, society will be better off in everyone focuses more or less on their individual interests. It does not suggest that everyone in that society will be better off. In some hypothetical world, if you raise the median income 50% and increase the quality of life for 95% of the population, while causing the other 5% to end up in crippling poverty for the rest of their life, you've made that society better in aggregate but certainly not for that 5%.
mattmanser 9y ago
The you is society in theory, a government in reality.

EliRivers 9y ago

US/UK maximize share-holder value laws/attitude The majority of legal commentators suggest it's all attitude - not law. There are a few dissenting opinions.

dpark 9y ago
Who suggests that it's purely attitude? It's my understanding that executives and the board of directors have a fiduciary duty to shareholders. What they don't have is an obligation to do literally anything legal to create short term gains, as many seem to believe.
- vonmoltke 9y ago
  Fiduciary duty != maximize shareholder value
  - dpark 9y ago
    Then what is fiduciary duty in this context? A fiduciary must act in the best interest of the one they hold a duty to. In the case of shareholders, that is essentially shareholder value. (Arguably it is literally shareholder value, since even non-monetary value is still value.)
    - deleted 9y ago
      [deleted]
    - Symmetry 9y ago
      A fiduciary is obligated to put their duty to the principal over their own interests, not to put the interests of the principal over all other duties.
      - dpark 9y ago
        That seems like a pedantic and pointless distinction. No one thinks that your financial adviser is obliged to deposit embezzled funds into your accounts in order to meet his fiduciary duties to you. Obviously some obligations take priority. The fiduciary duty of board members to shareholders still seems to be mostly about maximizing shareholder value.

jrs235 9y ago

Happy employees leads to happy customers leads to happy share holders.

TeMPOraL 9y ago
If that was only true... For "happy employees leads to happy customers", consider almost every company in existence, of any kind, in any sector. Do customers in general mind that the people making their electronics are underpaid, abused and unhappy? That the people serving them food in the restaurants are underpaid, abused and unhappy? That their doctors are overworked and unhappy? No. The happiness of employees starts and ends with "suck it up, smile nicely, or else lose your job and/or career prospects". The more difficult to debunk is "happy customers leads to happy share holders". It is true in some cases, but it's also false in many more. Consider telcos or ISPs as a pretty stark example of companies doing totally fine with very unhappy customers.
- fauigerzigerk 9y ago
  Customers care about the quality of the product, which is arguably influenced by how happy workers are. But of course this link is very indirect and very different for different types of workers.
  - TeMPOraL 9y ago
    I'd say this link is very indirect; in fact, a lot of structure in companies exist solely to decouple the two. On the one hand this is sound - you want the end result to be independent of moods and dramas, both internal and those of lives of individual employees. On the other hand, this decoupling is what makes consumers totally unaware of whether and how much employees are abused in the process.
    - fauigerzigerk 9y ago
      This has been studied before of course. For instance: http://www.sciencedirect.com/science/article/pii/S0022435908000456 http://www.sciencedirect.com/science/article/pii/S0022435908... A Meta-Analysis of Relationships Linking Employee Satisfaction to Customer Responses "The authors report a meta-analysis of relationships linking employee job satisfaction to customer satisfaction and perceived service quality in studies that correlate employee data with customer data. Overall, both relationships are positive and statistically and substantively significant."

andrewvc 9y ago

The whole reason companies go public is to raise capital. Without buybacks and dividends as at least potential future possibilities this would be hampered. Additionally, companies guarding mountains of cash is problematic. Sometimes companies can invest cash more wisely than the market. Often times however this is not the case. I agree short termism is a problem, but I'm not convinced of any particular solution here. I'll also point out that sometimes when the market is too short termist private equity can come in and revalue the company to free it from those constraints as in the case of Dell.

mattmanser 9y ago
You're pretty much begging the question, you're saying that they can only raise capital if they're willing to pillage themselves. Another consequence was that instead of investing on new cars, GM's leadership was incentivized to focus on buybacks because of compensation schemes. EDIT: The more I think about this, the more obviously broken it is. Capital markets are lauded for being able to help companies grow. You're saying that capital is the most important thing and companies should focus on returning capital instead of themselves.
- andrewvc 9y ago
  Why should GM invest in new cars as opposed to returning capital to investors who can perhaps allocate it more efficiently? Why should I believe they can do a better job than anyone else? This is a long-standing debate over who should allocate capital. I don't think there's one exact answer. Clearly some companies, like AOL were terrible at reinvesting money, they tried and tried but wound up blowing tons of cash on worthless companies. Other companies, like say Facebook were able to make smart investments like buying Instagram. Clearly investors price stock based on whether the company can make smart investments in its own future, which is why AOL nosedived and Facebook rose. The market isn't always right but I'm not convinced that an alternative would be better
  - mattmanser 9y ago
    Pretty much the obvious answer, because the company died? All you're doing is making Ha-Joon Chang's point for him! Having not personally read "23 Things They Don't Tell You About Capitalism", I assume the argument is that companies should grow, not chase investor returns. Thus they contribute to the society and the eco-system of suppliers and employees they support. Investors don't depend on them, they can just move their capital elsewhere. One might say that it's called "investing", not "extracting". If you want to move your capital elsewhere, because you think you can get better growth elsewhere, fab! That's capitalism at work and easy to do, sell your shares. Which reminds me of all the films in the 80s about the company raiders (e.g. Pretty Woman) being bought and broken up, the pieces were worth more than the whole? Destroying companies for short-term profit. I have no idea whether it's overall a net loss for an economy, but it destroys more than just the one company.

netcan 9y ago

Everything has side-effects. First, shareholders (and their interests) are a side effect of raising money. Anything you’d do to reduce the importance of shareholder interests would impact the amount of money companies could raise. There have been some examples of industries where employee interests played a big role. Public sector companies, employee cooperatives or just private businesses with highly empowered unions. In Israel for example, during the 50s-80s there were a lot of worker-cooperative companies. The biggest bus company, bank & health care provider were co-ops. These were generally started by large multi-industry union organisations. Where unions are this powerful, union-run & state-run tend blend into each other. The bus company is still technically a cooperative, owned by members. Anyway… Here incentives can play weird roles too. One thing that happens at a successful worker co-op (famously at Egged, the bus company mentioned above) is that member-workers want to avoid dilution, so no new member-workers. This either leads to hiring workers sans-membership or avoiding hiring altogether. In both cases, the owners have a much reduced interest in growth. Shareholders are hyper-interested in growth. Shareholders can portfolio away volatility, so they're more risk tolerant. I’m not opposed to redefining the concept of a “company,” (joint stock or otherwise), it’s legal rights and such. I don’t think they should inherit the rights people have by default. I also don’t think infinitely cascading parent-child “structures” should be allowed. But, I don’t think you can make anything perfect.

mattmanser 9y ago

Can't edit my answer now, the book's called 23 things they don't tell you about capitalism. https://www.amazon.com/Things-They-Dont-About-Capitalism/dp/1608193381 https://www.amazon.com/Things-They-Dont-About-Capitalism/dp/...

kgwgk 9y ago

Shareholders means owners. Are you suggesting that companies should be managed for the benefit of their suppliers and employees and not of their owners? Probably you could have included customers as well... Why would anyone want to own a company in that case?

clarkevans 9y ago
Companies are creatures of the state, created for the public good and protected by the laws of the land by the citizens of the state. Companies are permitted to take advantage of the legal and regulatory mechanisms put in place to encourage growth and innovation. Companies are permitted to employ members of the population, who are often educated based upon the good will of public funding. Companies don't have to worry about employees after they are "used up" and are broken or too old to work or are problematic. All of these items are provided as the environment for the company, and the citizens of the state collectively are the ones who have made it possible. Therefore, first and foremost, Companies must serve the public good. The rights/interest of investors can be seen as a secondary interest. Not that private interests aren't crucially important; however, out of the gate there is a balance of public/private interests -- presenting it otherwise isn't correct.
- kgwgk 9y ago
  https://webcache.googleusercontent.com/search?q=cache:TzYmnHgCskoJ:https://www.economist.com/news/business/21646742-old-debate-about-what-companies-are-has-been-revived-business-business+ https://webcache.googleusercontent.com/search?q=cache:TzYmnH... (...) Darrell West of the Brookings Institution in Washington, DC, notes the decline of the idea that companies are creatures of the state, given the privilege of incorporation in return for pursuing a broad public purpose. This all sounds very enlightened. But who will decide whether new companies are likely to serve the public good? Will a committee of the great and the good interrogate young app designers about the social benefits of their inventions? Will foreign competitors who are not required to pass a public-interest test be barred from the market? Or domestic entrepreneurs who choose to incorporate abroad? (...) As for Mr West and the supposed virtues of companies as creatures of the state, the one-word response to that is: Petrobras.

dzink 9y ago

If you focus too much on employees and thus managers, you get hoarding of cash within companies and the golden era of corporate jets and perks for corporate executives. In the 80s that led to major Private Equity activity to squeeze said cash reserves back out via leveraged buyouts.

cat199 9y ago
If you focus too much on shareholders and thus fund managers, you get hoarding of cash within investment firms and the golden era of corporate jets and perks for private equity executives.