3 ms·

It is anecdotes like this that make me think that the public shareholder model is fundamentally flawed and a large part of why many American companies are strug

by TylerE 3y ago

It is anecdotes like this that make me think that the public shareholder model is fundamentally flawed and a large part of why many American companies are struggling to truly build long term value, and many once great companies have been destroyed by beancounters to bleating calls of shareholder value.

andsoitis 3y ago
> public shareholder model is fundamentally flawed and a large part of why many American companies are struggling to truly build long term value This doesn’t stand up to scrutiny (there are many publicly traded companies that build immense long term value, and there are multiple reasons why companies fail to produce long-term value). It is easy to be a critic (and fine), but do you have an alternative to publicly traded companies that you think would , on balance, be better?
tough 3y ago
U just keep private and not ever get share holders if you want full control
- TylerE 3y ago
  Hard when you "have" to give VC equity to get off the ground.
  - tough 3y ago
    dont hate the player hate the game, then
  - Vicinity9635 3y ago
    Assuming you're using VC. It's not the only way to start a business.
    - hnbad 3y ago
      This is the outgrowth of a VC startup accelerator. "Startup" in these parts usually implies being VC funded, seeking VC funding or acting as if you were VC funded (i.e. growth focus rather than sustainability).
    - TylerE 3y ago
      It’s really hard not to in many fields these days. Network effects/marketshare are the whole ball of wax. You can’t scale them down beyond a certain point without making them utteerly irrelevant. You can have a viable speciality car manufacturer that employees a handful of people to build a couple of cars a year. There are tons of such shops building hot rods, doing EV conversions, building movie cars, and things like that. You can’t build a viable commercial social media site that serves 50 users.
duxup 3y ago
The long term value thing rings true. The CEO in question had been a part of building a large company and he always said his ambition was to create a company that was seen as an asset to have that country located in the US that would last for a long time. That sounds weirdly generic but I think he was honest in that. Could he? I duno, but he had helped grow it to thousands of employees and so on and they made some great products that were highly profitable. But instead it was sold to a company who specialized in breaking up companies and selling them off for parts while squeezing out the last $ they could / maximizing income and discarding the resulting nothing.
weaksauce 3y ago
we don't need shareholder growth capitalism as it stands... we need sustainable capitalism that is in it for the long term. no clue how to achieve that as it stands though and ceos have short term goals/bonuses tied to short term profits.
- TylerE 3y ago
  Exactly. It used to be a perfectly respectable thing to have a factory that made decent widgets, provided a good life for the owners and employees, and made enough profit to gradually upgrade/squirrel away for a rainy day.
- tfourb 3y ago
  You could quite simply legislate permissible compensation structures to make sure that long-term sustainability (however you want to define that) is incentivized. I.e. mandate that above a certain threshold, c-suite and board compensation is tied to long-term performance of the company. Another (perhaps more drastic) approach would be to force shareholders to hold their shares for a minimum period of time, or institute a mechanism that distributes losses across the shareholders of the last X years. That would incentivize long-term investment strategies over short-term rent-seeking. Or you use taxes. In Germany (where I live) we have a speculation tax on property, for example: If you (as a private individual) sell a property less than 10 years after you have acquired it, any profit from that sale is taxed as income. After the 10-year cut-off you don't have to tax it at all.
  - gottorf 3y ago
    > Another (perhaps more drastic) approach would be to force shareholders to hold their shares for a minimum period of time The US tax code already does this by differentiating tax treatment between short- and long-term capital gains, although you might argue that the time required to qualify as long-term (1 year) is too short.
- 93po 3y ago
  We should have capitalism but where humans and human interests come first and companies work to support a society where everyone is housed, fed, educated, and healthy. Also we shouldn't have a thousand companies all competing to do the same thing - people should work collaboratively instead of the same work getting done a thousand times over. Given the community focused nature of this system, maybe the name of it can reflect that.
ysavir 3y ago
I don't know how much of this is actually a problem with the shareholder model (though I hate it). From what I understand, the whole "legal obligation to shareholders" thing isn't actually a real thing. What's more likely, I think, is that the CEO meant was that if he declined the offer, the board may fire him and replace him with someone who won't decline it. So if it's an eventuality either way, he may as well be the one to lead it.
- 1_1xdev1 3y ago
  “Legal obligation to shareholders” is absolutely a thing, in the USA anyway. “Fiduciary duty” is the term to Google.
  - Vicinity9635 3y ago
    No it's not. I've been in discussions about it here and nobody could cite a law. If one can't cite a specific US code, it's not a legal obligation. It could be in a charter or contract, but it's not US law. Feel free to correct me if you can cite one. I believe this is a good starting point: https://www.congress.gov/advanced-search/legislation https://www.congress.gov/advanced-search/legislation Fiduciary duty doesn't apply to most non-finance related companies. It's mostly something that investment firms are required to do. And you'll know if you become their client. If Google is doing that they definitely need broken up. It means they have a duty to use your money to make more for you, and not lose any if possible.
    - hnbad 3y ago
      The US has a Common Law system so case law is as important as code (or even more so). The question isn't whether there's "a law", the question is whether there have been cases fought over it and what the outcome was. That seems harder to google. Likewise I have yet to hear a coherent legal justification for the idea of the "state monopoly on violence" that doesn't boil down to a just-so story invoking the fiction of the social contract (even the US only grants a limited exemption to this via the second amendment and even that still uses the context of "militias"). But even in Civil Law systems that doesn't mean the state won't act as if it is a thing and base legislation on that assumption.
hnbad 3y ago
I agree but I think the mistake is to think this only affects public companies. Private investors also want ROI and this means they'll be more likely to push for a profitable "exit" than let the company just be sustainable and reasonably profitable forever.
fnordprefect 3y ago
Don't worry - the conversation in the anecdote does not reflect the true position in the major common law countries at least. The public shareholder model is not doomed or flawed on this account. If an acquirer wants to acquire shares in a public company (or any company actually) it makes the offer to the shareholders and they are the ones who decide to accept or not. The proposed transaction is between the acquirer (who wants to buy the shares) and the current owner of those shares (the shareholder). The Board manages the company but is not itself an entity (it's a group of people) and cannot therefore own shares (tho individual directors can and usually do). The Board can make a recommendation to its shareholders about whether it thinks the offer is fair or not (based on their usually greater knowledge of the company and its worth), but it is the shareholder who decides whether to accept. The underlying suggestion that a Board or CEO is essentially forced to do something bad for the company because of some underlying obligation to make shareholders money etc etc is false. Directors owe fiduciary duties, but they are proscriptive, not prescriptive in this way. One of the most commonly repeated falsehoods is that the Board is under some duty to maximise profits etc - that is proved wrong not least by the existence of non-profits... The closest analogy is someone owns and investment property being managed by a real estate agent. A buyer approaches and says "I will pay you $x for the land". The agent can say "Hey I rent this out all the time, it can earn $z over t years, so I think it's worth $x + y, or $x - y" but it's up to the owner to say yes or no. The above ignores eg competition law issues (laws that prevent an acquirer buying companies where there is likely to be a substantial lessening of competition), potential conflicts for share-owning directors, and the myriad statutory considerations etc but is the basic underlying position.
- Reubend 3y ago
  Thanks for this well written and insightful post! I had a lot of misconceptions about this that are cleared up now.
- eviks 3y ago
  Non-profits don't prove anything regarding for-profits since they live explicitly under different legal regimes and obligations

by TylerE 3y ago

andsoitis 3y ago

> public shareholder model is fundamentally flawed and a large part of why many American companies are struggling to truly build long term value This doesn’t stand up to scrutiny (there are many publicly traded companies that build immense long term value, and there are multiple reasons why companies fail to produce long-term value). It is easy to be a critic (and fine), but do you have an alternative to publicly traded companies that you think would , on balance, be better?

tough 3y ago

U just keep private and not ever get share holders if you want full control

TylerE 3y ago
Hard when you "have" to give VC equity to get off the ground.
- tough 3y ago
  dont hate the player hate the game, then
- Vicinity9635 3y ago
  Assuming you're using VC. It's not the only way to start a business.
  - hnbad 3y ago
    This is the outgrowth of a VC startup accelerator. "Startup" in these parts usually implies being VC funded, seeking VC funding or acting as if you were VC funded (i.e. growth focus rather than sustainability).
  - TylerE 3y ago
    It’s really hard not to in many fields these days. Network effects/marketshare are the whole ball of wax. You can’t scale them down beyond a certain point without making them utteerly irrelevant. You can have a viable speciality car manufacturer that employees a handful of people to build a couple of cars a year. There are tons of such shops building hot rods, doing EV conversions, building movie cars, and things like that. You can’t build a viable commercial social media site that serves 50 users.

duxup 3y ago

The long term value thing rings true. The CEO in question had been a part of building a large company and he always said his ambition was to create a company that was seen as an asset to have that country located in the US that would last for a long time. That sounds weirdly generic but I think he was honest in that. Could he? I duno, but he had helped grow it to thousands of employees and so on and they made some great products that were highly profitable. But instead it was sold to a company who specialized in breaking up companies and selling them off for parts while squeezing out the last $ they could / maximizing income and discarding the resulting nothing.

weaksauce 3y ago

we don't need shareholder growth capitalism as it stands... we need sustainable capitalism that is in it for the long term. no clue how to achieve that as it stands though and ceos have short term goals/bonuses tied to short term profits.

TylerE 3y ago
Exactly. It used to be a perfectly respectable thing to have a factory that made decent widgets, provided a good life for the owners and employees, and made enough profit to gradually upgrade/squirrel away for a rainy day.
tfourb 3y ago
You could quite simply legislate permissible compensation structures to make sure that long-term sustainability (however you want to define that) is incentivized. I.e. mandate that above a certain threshold, c-suite and board compensation is tied to long-term performance of the company. Another (perhaps more drastic) approach would be to force shareholders to hold their shares for a minimum period of time, or institute a mechanism that distributes losses across the shareholders of the last X years. That would incentivize long-term investment strategies over short-term rent-seeking. Or you use taxes. In Germany (where I live) we have a speculation tax on property, for example: If you (as a private individual) sell a property less than 10 years after you have acquired it, any profit from that sale is taxed as income. After the 10-year cut-off you don't have to tax it at all.
- gottorf 3y ago
  > Another (perhaps more drastic) approach would be to force shareholders to hold their shares for a minimum period of time The US tax code already does this by differentiating tax treatment between short- and long-term capital gains, although you might argue that the time required to qualify as long-term (1 year) is too short.
93po 3y ago
We should have capitalism but where humans and human interests come first and companies work to support a society where everyone is housed, fed, educated, and healthy. Also we shouldn't have a thousand companies all competing to do the same thing - people should work collaboratively instead of the same work getting done a thousand times over. Given the community focused nature of this system, maybe the name of it can reflect that.

ysavir 3y ago

I don't know how much of this is actually a problem with the shareholder model (though I hate it). From what I understand, the whole "legal obligation to shareholders" thing isn't actually a real thing. What's more likely, I think, is that the CEO meant was that if he declined the offer, the board may fire him and replace him with someone who won't decline it. So if it's an eventuality either way, he may as well be the one to lead it.

1_1xdev1 3y ago
“Legal obligation to shareholders” is absolutely a thing, in the USA anyway. “Fiduciary duty” is the term to Google.
- Vicinity9635 3y ago
  No it's not. I've been in discussions about it here and nobody could cite a law. If one can't cite a specific US code, it's not a legal obligation. It could be in a charter or contract, but it's not US law. Feel free to correct me if you can cite one. I believe this is a good starting point: https://www.congress.gov/advanced-search/legislation https://www.congress.gov/advanced-search/legislation Fiduciary duty doesn't apply to most non-finance related companies. It's mostly something that investment firms are required to do. And you'll know if you become their client. If Google is doing that they definitely need broken up. It means they have a duty to use your money to make more for you, and not lose any if possible.
  - hnbad 3y ago
    The US has a Common Law system so case law is as important as code (or even more so). The question isn't whether there's "a law", the question is whether there have been cases fought over it and what the outcome was. That seems harder to google. Likewise I have yet to hear a coherent legal justification for the idea of the "state monopoly on violence" that doesn't boil down to a just-so story invoking the fiction of the social contract (even the US only grants a limited exemption to this via the second amendment and even that still uses the context of "militias"). But even in Civil Law systems that doesn't mean the state won't act as if it is a thing and base legislation on that assumption.

hnbad 3y ago

I agree but I think the mistake is to think this only affects public companies. Private investors also want ROI and this means they'll be more likely to push for a profitable "exit" than let the company just be sustainable and reasonably profitable forever.

fnordprefect 3y ago

Don't worry - the conversation in the anecdote does not reflect the true position in the major common law countries at least. The public shareholder model is not doomed or flawed on this account. If an acquirer wants to acquire shares in a public company (or any company actually) it makes the offer to the shareholders and they are the ones who decide to accept or not. The proposed transaction is between the acquirer (who wants to buy the shares) and the current owner of those shares (the shareholder). The Board manages the company but is not itself an entity (it's a group of people) and cannot therefore own shares (tho individual directors can and usually do). The Board can make a recommendation to its shareholders about whether it thinks the offer is fair or not (based on their usually greater knowledge of the company and its worth), but it is the shareholder who decides whether to accept. The underlying suggestion that a Board or CEO is essentially forced to do something bad for the company because of some underlying obligation to make shareholders money etc etc is false. Directors owe fiduciary duties, but they are proscriptive, not prescriptive in this way. One of the most commonly repeated falsehoods is that the Board is under some duty to maximise profits etc - that is proved wrong not least by the existence of non-profits... The closest analogy is someone owns and investment property being managed by a real estate agent. A buyer approaches and says "I will pay you $x for the land". The agent can say "Hey I rent this out all the time, it can earn $z over t years, so I think it's worth $x + y, or $x - y" but it's up to the owner to say yes or no. The above ignores eg competition law issues (laws that prevent an acquirer buying companies where there is likely to be a substantial lessening of competition), potential conflicts for share-owning directors, and the myriad statutory considerations etc but is the basic underlying position.

Reubend 3y ago
Thanks for this well written and insightful post! I had a lot of misconceptions about this that are cleared up now.
eviks 3y ago
Non-profits don't prove anything regarding for-profits since they live explicitly under different legal regimes and obligations