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Something came up yesterday, in the discussion about business schools, that I think is also relevant here. A lot of people — as in, practically everyone — has

Something came up yesterday, in the discussion about business schools, that I think is also relevant here. A lot of people — as in, practically everyone — has been persuaded over the last half-century or so that the board of directors of a public corporation have a legal responsibility to maximize shareholder value. The general acceptance of that fiction is resulting in a tremendous amount of wealth transfer from the middle class to the rich, as the long-term performance of firms is sacrificed to making the next quarter's numbers. And it is a fiction. Here's a thorough takedown: https://hbr.org/2017/05/managing-for-the-long-term https://hbr.org/2017/05/managing-for-the-long-term This makes a lot of good points, but one I find particularly telling is that maximizing shareholder value is not even a well-defined goal, because it doesn't specify a time frame. A public company could be run in such a way as to cause wild swings in the share price, and the day traders and HFTers would love it, because surfing volatility is how they make their money. Of course no one thinks that those are the shareholders whose value should be maximized, but someone who accumulates a position over a couple of months betting on the price going up after the next quarterly earnings report, and who plans to sell shortly thereafter, really isn't that different — and yet somehow these are the people who have managed to seize the narrative that they are the shareholders whose value maximization counts. And the consequences of people believing this are just massive. Offshoring, reductions in R&D, stock buybacks, a general failure to invest in the future — all of these are driven, to some extent, by this idea that the stock price must be goosed at all costs.

mjfl 8y ago
Why does maximizing shareholder value imply a transfer of wealth from middle class to wealthy? Middle class people can and should be shareholders.
- ScottBurson 8y ago
  Most corporate stock is owned by the wealthy: https://www.investopedia.com/news/stock-ownership-slips-inequality-creeps/ https://www.investopedia.com/news/stock-ownership-slips-ineq... Furthermore, it is mostly hedge funds that benefit from short-term price gains, as they're frequently leveraged, often with options. Long-term holders like individuals and mutual funds are usually unleveraged.
  - mjfl 8y ago
    Even if most corporate stock is owned by the wealthy, in terms of relative wealth changes all that matters is a person's personal percentage investment in the stock market. For example, if you have a middle class person who has 80% of their retirement savings (wealth) in stocks and a rich person who has 50% of their wealth in stock (because of liquidity concerns for example - and this is common) then if the stock market goes up by 20%, then the middle class person's wealth increases by 16% while the rich person's wealth only increases by 10%. In that situation inequality is reduced by maximizing shareholder value, so I think it's totally incorrect to say that maximizing shareholder value increases inequality in general. People need to educate themselves on personal finance matters like this because inaccurate thinking towards seriously emotional issues like this has dangerous consequences.
    - kartan 8y ago
      You didn't took into account that rich people can use more of their income for investments, to leverage and to spend more time to use marked fluctuations in their favor. Your example looks correct. But I don't see how is the common case. Middle class investors usually don't have more percentage in the market that the 0.1%. Most middle class main investment is the home they live in.
    - laurencerowe 8y ago
      Maximizing shareholder value concentrates returns in the hands of shareholders over employees. This has a significant distributional impact as for most income from employment dwarfs income from investments.
      - mjfl 8y ago
        again, why do you treat employees as a distinct group from shareholders? At many companies, employees are the shareholders.
        FridgeSeal 8y ago
        Shareholders in that they have some shares, but not nearly on the same scale: shareholders have far more available money to invest and as such, investments pay off in a far larger way than for your average employee.
- barrkel 8y ago
  Middle class people should generally own diversified index funds, not hand-picked shares.
- TheCoelacanth 8y ago
  By definition, wealthy people own a lot more assets than middle class people. Why should any given asset class not be expected to follow the same pattern?
avs733 8y ago
> And it is a fiction. It's funny, that I came into the thread to make the same point to an extent. The problem is that it is a fiction but that fiction has become law [0]. I honestly don't know the legal system well enough to know how this gets fixed but in the interim it seems a slightly to strong effort in navel gazing to talk about how its incorrect without acknowledging that it is. It is unfortunate that such transitions happen so consistently in management. The field seeks to be treated as a science (in the paradigm sense) despite not having the basic philosophical characteristics. Findings in physics may change what I look for in future physics experiments but observing a phenomenon isn't going to change it (and grant me some grace...we aren't talking about quantum). In management, the observations are the behavior of humans and the results inform human practice. That makes research management and practice inseparable, no matter how much they want to be science. However, that is ignored an an attempt to take a scientific stance. The result even affects pedagogy with techniques designed to communicate the development of critical thinking through engagement of multiple perspectives is usurped over time into just teaching the current 'rules' of business [1]. [0] https://www.litigationandtrial.com/2010/09/articles/series/special-comment/ebay-v-newmark-al-franken-was-right-corporations-are-legally-required-to-maximize-profits/ https://www.litigationandtrial.com/2010/09/articles/series/s... [1] Bridgman, T., Cummings, S., & McLaughlin, C. (2016). Re-stating the case: How revisting the development of the case method can help us think differently about the future of the business school. https://doi.org/10.5465/amle.2015.0291 https://doi.org/10.5465/amle.2015.0291
return1 8y ago
How could that problem be solved? Is it something that market forces could somehow self-correct? It is in a sense a general cultural issue, but how does one go about correcting the culture?
- WalterBright 8y ago
  Companies that mismanage their long term prospects fail in the long term. It's self-correcting. If you're worried about investing in a company that sacrifices the long term for short term gain, don't invest in companies less than 5 years old.
Joeri 8y ago
Not that I disagree with what you’re saying, but I just want to point out R&D expenditures have been rising, not falling. It is even rising as percentage of GDP, so companies are investing an ever bigger slice of their revenue in research. http://www.oecd.org/sdd/08_Science_and_technology.pdf http://www.oecd.org/sdd/08_Science_and_technology.pdf
- 1024core 8y ago
  "R&D expenditure" is a very loosely defined term. And companies get a tax benefit from spending on "R&D". Thus, it's not obvious that R&D expenditures are truly rising, or companies are just gaming the system.
WalterBright 8y ago
> as the long-term performance of firms is sacrificed to making the next quarter's numbers. If that were true, the S&P 500 would have terrible long term performance.
- stevenwoo 8y ago
  The S&P 500 is rebalanced periodically, meaning companies are removed and added. That makes it not a good assessment of the hypothesis, one needs to find something that is pinned to the S&P 500 one year, then tracks the same 500 companies over a given period of time, including those that drop out and excluding those that grow to be included in the time period of interest.
  - WalterBright 8y ago
    If the theory was correct, you'd see companies join the stock market with high valuations, and then trend downwards to oblivion as those long term chickens come to roost. But this is just not happening. Look how richly rewarded AMZN is for long term choices.
    - dredmorbius 8y ago
      Long term return on invested capital has been declining since the 1960s. Periodic exceptions appear, almost always in winner-take-all network spaces over this period (energy companies being a possiblee exception), frequently showing a rapid rise and more precipitous fall. AT&T, IBM, Microsoft, Google, Amazon, among them. https://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/#5b98e213a6e1 https://www.forbes.com/sites/stevedenning/2012/01/25/shift-i...
      - WalterBright 8y ago
        > Long term return on invested capitalhas been declining since the 1960s. Need to take into account the ever-greater share of the GNP consumed by the government. MSFT has been around for >30 years. Still waiting for their sacrifice of the long term to produce a precipitous fall.
jaredklewis 8y ago
I can’t imagine this belief has changed much of anything. First of all, as you point out, even if it were a legal standard, the lack of timeframe makes it is such a flimsy concept as to be totally unenforceable. Cut R&D spending? The money could be better allocated elsewhere. Increased R&D spending? Increasing long term share holder value by creating new revenue streams. Even if we assume every board member is a slave to profit making on a short timeframe with no concern for the environment or human life, I can’t think of any issue before a board that would not have strong, profit oriented arguments on both sides. Buying solar panels? Screw the environment, that was just to reduce reliance on fluctuating local emergy prices. Cutting ties with your sweatshop? Just want to avoid the bad PR. And on and on. The idea that company board members would be acting in a more environmentally friendly and humane way, except that they think they have to operate under some vague legal standard just doesn’t make sense. Unlike the Internet, board members likely get their legal advice from lawyers. The answer is far simpler. Board members that act without regard for the environment and human life do so because they have none. Let’s not pretend they would all be Like Mother Theresa but got duped by Internet rumors.
T2_t2 8y ago
Isn't the answer far simpler? In a global economy, companies that operate at global scale - Amazon, Toyota, Samsung - will see outsized profits when compared to local only businesses. The vast majority of such companies are located/headquartered/listed in/in/on US bases, leading to a two speed growth rate. Google makes > 50% of its revenue outside the USA. Here is Apples's percentage: https://www.statista.com/statistics/263435/non-us-share-of-apples-revenue/ https://www.statista.com/statistics/263435/non-us-share-of-a... Apple employs 123,000 people, 80,000 in the USA (best stats I could find). Google employs 80,000, and AFAIK over 50% are US based. So what we have are companies with a growth rate far in excess of US GDP as they create wealth from the world, with the majority going to US based employees and shareholders. Doesn't it just make sense that this leads to inequality? Those that work at global scale - and the locales that house such employees (READ: Bay Area) will have outsized results vs US centric businesses and locales.
tim333 8y ago
The shareholders have the power to vote people on to or off of the board of directors, who can then fire the management so they have some control to choose people they like, who are often those who maximise the shareholders share values. This hasn't changed for the last century and I don't know if you can blame it for recent changes.

mjfl 8y ago

Why does maximizing shareholder value imply a transfer of wealth from middle class to wealthy? Middle class people can and should be shareholders.

ScottBurson 8y ago
Most corporate stock is owned by the wealthy: https://www.investopedia.com/news/stock-ownership-slips-inequality-creeps/ https://www.investopedia.com/news/stock-ownership-slips-ineq... Furthermore, it is mostly hedge funds that benefit from short-term price gains, as they're frequently leveraged, often with options. Long-term holders like individuals and mutual funds are usually unleveraged.
- mjfl 8y ago
  Even if most corporate stock is owned by the wealthy, in terms of relative wealth changes all that matters is a person's personal percentage investment in the stock market. For example, if you have a middle class person who has 80% of their retirement savings (wealth) in stocks and a rich person who has 50% of their wealth in stock (because of liquidity concerns for example - and this is common) then if the stock market goes up by 20%, then the middle class person's wealth increases by 16% while the rich person's wealth only increases by 10%. In that situation inequality is reduced by maximizing shareholder value, so I think it's totally incorrect to say that maximizing shareholder value increases inequality in general. People need to educate themselves on personal finance matters like this because inaccurate thinking towards seriously emotional issues like this has dangerous consequences.
  - kartan 8y ago
    You didn't took into account that rich people can use more of their income for investments, to leverage and to spend more time to use marked fluctuations in their favor. Your example looks correct. But I don't see how is the common case. Middle class investors usually don't have more percentage in the market that the 0.1%. Most middle class main investment is the home they live in.
  - laurencerowe 8y ago
    Maximizing shareholder value concentrates returns in the hands of shareholders over employees. This has a significant distributional impact as for most income from employment dwarfs income from investments.
    - mjfl 8y ago
      again, why do you treat employees as a distinct group from shareholders? At many companies, employees are the shareholders.
      - FridgeSeal 8y ago
        Shareholders in that they have some shares, but not nearly on the same scale: shareholders have far more available money to invest and as such, investments pay off in a far larger way than for your average employee.
barrkel 8y ago
Middle class people should generally own diversified index funds, not hand-picked shares.
TheCoelacanth 8y ago
By definition, wealthy people own a lot more assets than middle class people. Why should any given asset class not be expected to follow the same pattern?

avs733 8y ago

> And it is a fiction. It's funny, that I came into the thread to make the same point to an extent. The problem is that it is a fiction but that fiction has become law [0]. I honestly don't know the legal system well enough to know how this gets fixed but in the interim it seems a slightly to strong effort in navel gazing to talk about how its incorrect without acknowledging that it is. It is unfortunate that such transitions happen so consistently in management. The field seeks to be treated as a science (in the paradigm sense) despite not having the basic philosophical characteristics. Findings in physics may change what I look for in future physics experiments but observing a phenomenon isn't going to change it (and grant me some grace...we aren't talking about quantum). In management, the observations are the behavior of humans and the results inform human practice. That makes research management and practice inseparable, no matter how much they want to be science. However, that is ignored an an attempt to take a scientific stance. The result even affects pedagogy with techniques designed to communicate the development of critical thinking through engagement of multiple perspectives is usurped over time into just teaching the current 'rules' of business [1]. [0] https://www.litigationandtrial.com/2010/09/articles/series/special-comment/ebay-v-newmark-al-franken-was-right-corporations-are-legally-required-to-maximize-profits/ https://www.litigationandtrial.com/2010/09/articles/series/s... [1] Bridgman, T., Cummings, S., & McLaughlin, C. (2016). Re-stating the case: How revisting the development of the case method can help us think differently about the future of the business school. https://doi.org/10.5465/amle.2015.0291 https://doi.org/10.5465/amle.2015.0291

return1 8y ago

How could that problem be solved? Is it something that market forces could somehow self-correct? It is in a sense a general cultural issue, but how does one go about correcting the culture?

WalterBright 8y ago
Companies that mismanage their long term prospects fail in the long term. It's self-correcting. If you're worried about investing in a company that sacrifices the long term for short term gain, don't invest in companies less than 5 years old.

Joeri 8y ago

Not that I disagree with what you’re saying, but I just want to point out R&D expenditures have been rising, not falling. It is even rising as percentage of GDP, so companies are investing an ever bigger slice of their revenue in research. http://www.oecd.org/sdd/08_Science_and_technology.pdf http://www.oecd.org/sdd/08_Science_and_technology.pdf

1024core 8y ago
"R&D expenditure" is a very loosely defined term. And companies get a tax benefit from spending on "R&D". Thus, it's not obvious that R&D expenditures are truly rising, or companies are just gaming the system.

WalterBright 8y ago

> as the long-term performance of firms is sacrificed to making the next quarter's numbers. If that were true, the S&P 500 would have terrible long term performance.

stevenwoo 8y ago
The S&P 500 is rebalanced periodically, meaning companies are removed and added. That makes it not a good assessment of the hypothesis, one needs to find something that is pinned to the S&P 500 one year, then tracks the same 500 companies over a given period of time, including those that drop out and excluding those that grow to be included in the time period of interest.
- WalterBright 8y ago
  If the theory was correct, you'd see companies join the stock market with high valuations, and then trend downwards to oblivion as those long term chickens come to roost. But this is just not happening. Look how richly rewarded AMZN is for long term choices.
  - dredmorbius 8y ago
    Long term return on invested capital has been declining since the 1960s. Periodic exceptions appear, almost always in winner-take-all network spaces over this period (energy companies being a possiblee exception), frequently showing a rapid rise and more precipitous fall. AT&T, IBM, Microsoft, Google, Amazon, among them. https://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/#5b98e213a6e1 https://www.forbes.com/sites/stevedenning/2012/01/25/shift-i...
    - WalterBright 8y ago
      > Long term return on invested capitalhas been declining since the 1960s. Need to take into account the ever-greater share of the GNP consumed by the government. MSFT has been around for >30 years. Still waiting for their sacrifice of the long term to produce a precipitous fall.

jaredklewis 8y ago

I can’t imagine this belief has changed much of anything. First of all, as you point out, even if it were a legal standard, the lack of timeframe makes it is such a flimsy concept as to be totally unenforceable. Cut R&D spending? The money could be better allocated elsewhere. Increased R&D spending? Increasing long term share holder value by creating new revenue streams. Even if we assume every board member is a slave to profit making on a short timeframe with no concern for the environment or human life, I can’t think of any issue before a board that would not have strong, profit oriented arguments on both sides. Buying solar panels? Screw the environment, that was just to reduce reliance on fluctuating local emergy prices. Cutting ties with your sweatshop? Just want to avoid the bad PR. And on and on. The idea that company board members would be acting in a more environmentally friendly and humane way, except that they think they have to operate under some vague legal standard just doesn’t make sense. Unlike the Internet, board members likely get their legal advice from lawyers. The answer is far simpler. Board members that act without regard for the environment and human life do so because they have none. Let’s not pretend they would all be Like Mother Theresa but got duped by Internet rumors.

T2_t2 8y ago

Isn't the answer far simpler? In a global economy, companies that operate at global scale - Amazon, Toyota, Samsung - will see outsized profits when compared to local only businesses. The vast majority of such companies are located/headquartered/listed in/in/on US bases, leading to a two speed growth rate. Google makes > 50% of its revenue outside the USA. Here is Apples's percentage: https://www.statista.com/statistics/263435/non-us-share-of-apples-revenue/ https://www.statista.com/statistics/263435/non-us-share-of-a... Apple employs 123,000 people, 80,000 in the USA (best stats I could find). Google employs 80,000, and AFAIK over 50% are US based. So what we have are companies with a growth rate far in excess of US GDP as they create wealth from the world, with the majority going to US based employees and shareholders. Doesn't it just make sense that this leads to inequality? Those that work at global scale - and the locales that house such employees (READ: Bay Area) will have outsized results vs US centric businesses and locales.

tim333 8y ago

The shareholders have the power to vote people on to or off of the board of directors, who can then fire the management so they have some control to choose people they like, who are often those who maximise the shareholders share values. This hasn't changed for the last century and I don't know if you can blame it for recent changes.