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Actually: ...the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Roc

Actually: ...the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure." The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf. The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker's foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders. To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering. Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom.[1] [1] http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/ http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...

jonnathanson 13y ago
Totally fair, but I don't see this as being in contradiction to what I said. I did not say Welch invented the theory, or that it started in the '80s. The '80s is roughly when the theory morphed from hot topic to corporate gospel, and Welch was its avatar.
- 127001brewer 13y ago
  True, the part of the article I previously quoted also states: ... the best managers are those who meet expectations. "During the heart of the Jack Welch era," writes Martin, "GE met or beat analysts' forecasts in forty-six of forty-eight quarters between December 31, 1989, and September 30, 2001—a 96 percent hit rate. ... So, you're right, the theory became a hot topic (and eventually into corporate gospel) in the '80s.
ChuckMcM 13y ago
My problem with that analysis (and the original paper) is that it mixed the purpose of the company and the process by which the company executed its mission. As a strawman, consider a company A which sells a cure for virus B. They can "make customers" by giving away free blankets that are carrying the virus. They should be a great company according to Drucker but the effect of their success is that nobody wants to be associated with them and so their 'value' goes down. Rather than create a problem in solve it, I read Jensen as articulating how external interest to the company with a single metric (share price) can moderate the behaviours of an otherwise free market entity in a way which reflects the values of the wider group of people. Thus allowing a 'publicly' held company to achieve its goal in a morally superior way to a company that was not required to seek approval from the general public. This very closely mimics the behaviour changes in democratic societies (elected by the public) and theocratic or monarch type societies where the set of people that need to be 'ok' with the action of the leaders is much more constrained. So what did you get out of Jensen?

jonnathanson 13y ago

Totally fair, but I don't see this as being in contradiction to what I said. I did not say Welch invented the theory, or that it started in the '80s. The '80s is roughly when the theory morphed from hot topic to corporate gospel, and Welch was its avatar.

127001brewer 13y ago
True, the part of the article I previously quoted also states: ... the best managers are those who meet expectations. "During the heart of the Jack Welch era," writes Martin, "GE met or beat analysts' forecasts in forty-six of forty-eight quarters between December 31, 1989, and September 30, 2001—a 96 percent hit rate. ... So, you're right, the theory became a hot topic (and eventually into corporate gospel) in the '80s.

ChuckMcM 13y ago

My problem with that analysis (and the original paper) is that it mixed the purpose of the company and the process by which the company executed its mission. As a strawman, consider a company A which sells a cure for virus B. They can "make customers" by giving away free blankets that are carrying the virus. They should be a great company according to Drucker but the effect of their success is that nobody wants to be associated with them and so their 'value' goes down. Rather than create a problem in solve it, I read Jensen as articulating how external interest to the company with a single metric (share price) can moderate the behaviours of an otherwise free market entity in a way which reflects the values of the wider group of people. Thus allowing a 'publicly' held company to achieve its goal in a morally superior way to a company that was not required to seek approval from the general public. This very closely mimics the behaviour changes in democratic societies (elected by the public) and theocratic or monarch type societies where the set of people that need to be 'ok' with the action of the leaders is much more constrained. So what did you get out of Jensen?