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> Although that's unlikely to be good law today. Can you explain further here? It seems to me that maximizing shareholder value is, at least today, the exclusi

by revscat 12y ago

> Although that's unlikely to be good law today. Can you explain further here? It seems to me that maximizing shareholder value is, at least today, the exclusive purpose for which corporations exist. The law seems to require this.

ChadMoran 12y ago
In what timeframe? Every quarter? Amazon is in it for the long haul and will likely make shareholders a lot of money in the end.
- hnnewguy 12y ago
  >Amazon is in it for the long haul and will likely make shareholders a lot of money in the end. I like Amazon, and also assume that they'll actually make money at some point, but the financial graveyard is filled to the brim with companies like this.
  - deleted 12y ago
    [deleted]
    - adventured 12y ago
      They do have a big problem making money. When someone says "to make money" they do not mean to generate sales, they mean to generate profit. Amazon operates on a 1% operating income basis. They are unable to "make money" with their business as it's structured today.
    - throwaway5752 12y ago
      I like Amazon and agree with your other points, but making money refers to bottom, not top line. They lost money.
- adventured 12y ago
  They've already made shareholders a lot of money. Future returns have been pulled forward substantially. The stock should have been sold by now, the returns to be had on the stock are in the past. Even being generous and giving Amazon a future 20 pe ratio, at the recent highs, would require roughly $9 billion in profit. Once again being generous and assuming they can ever reach a 5% net income margin, they need $180+ billion in sales. Let's recalculate for a 15 pe ratio and 3.5% net income margin: $342 billion in sales (that's the Walmart scenario). The stock has nowhere to go for a decade from the recent $400x levels. The party is over.
  - mendozao 12y ago
    I appreciated this quick analysis. Do you have any book recommendations that describe your method/calculations/thought process in more detail? Thanks in advance
  - brwnll 12y ago
    I'm confused why you would tie Amazon's future, an eCommerce company who also has a strong cloud (AWS) and digital media division and a growing hardware division (Kindle, Fire) to a brick and mortar retailer such as WalMart. Even discarding all other revenue streams, you want to compare the company to a retailer growing sales at 1% y/y (WalMart), while they grow sales at 22%? All this while only being in 12 international markets and citing a lack of non-English content as holding them back in the high margin area of digital content. Your evaluation seems entirely misguided and ham-handed to be honest.
jasonwocky 12y ago
I don't know about it not being "good law", but one difference between Ford and the modern CEO is that the modern CEO is significantly less likely to out-and-out say, "screw the shareholders...they're not who I'm doing this for" as Ford basically did.
jambo 12y ago
Case law (and now statute) affords a lot of discretion to management as to what is in the best interests of shareholders. http://everything2.com/title/business+judgment+rule http://everything2.com/title/business+judgment+rule
adventured 12y ago
The law does not require it. A further note: private corporations are under absolutely no obligations as to how they do or do not reinvest their profits. So your blanket statement is way off base, the private company economy is drastically larger than the publicly traded economy.
rthomas6 12y ago
I'm no expert, but I'd imagine a corporation could argue that reinvesting capital for the purpose of expansion, at the expense of immediate profit, is maximizing shareholder value over a longer period of time. Isn't this what all "growth stocks" try to do? I personally would prefer stocks that optimized for long term growth over immediate profit.
ABS 12y ago
Sorry if I copy and paste a comment I left some time ago in another thread ( https://news.ycombinator.com/item?id=7983281 https://news.ycombinator.com/item?id=7983281 ) but it's relevant: 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, Corportations, and the Public" by Lynn Stout http://www.amazon.co.uk/The-Shareholder-Value-Myth-Shareholders/dp/1605098132 http://www.amazon.co.uk/The-Shareholder-Value-Myth-Sharehold... [2] http://arizonastatelawjournal.org/book-review-the-shareholder-value-myth-how-putting-shareholders-first-harms-investors-corporations-and-the-public-by-lynn-stout/ http://arizonastatelawjournal.org/book-review-the-shareholde...
deleted 12y ago
[deleted]
scott_s 12y ago
Corporations exists because we - that is, society, through our government - allow them to. Ford saw his mandate as having the most beneficial impact on the largest number of people he could, not just his shareholders. I think it's reasonable for us to interpret the law with a similar mindset.
mitchty 12y ago
It is a myth. http://blogs.law.harvard.edu/corpgov/2012/06/26/the-shareholder-value-myth/ http://blogs.law.harvard.edu/corpgov/2012/06/26/the-sharehol...

by revscat 12y ago

ChadMoran 12y ago

In what timeframe? Every quarter? Amazon is in it for the long haul and will likely make shareholders a lot of money in the end.

hnnewguy 12y ago
>Amazon is in it for the long haul and will likely make shareholders a lot of money in the end. I like Amazon, and also assume that they'll actually make money at some point, but the financial graveyard is filled to the brim with companies like this.
- deleted 12y ago
  [deleted]
  - adventured 12y ago
    They do have a big problem making money. When someone says "to make money" they do not mean to generate sales, they mean to generate profit. Amazon operates on a 1% operating income basis. They are unable to "make money" with their business as it's structured today.
  - throwaway5752 12y ago
    I like Amazon and agree with your other points, but making money refers to bottom, not top line. They lost money.
adventured 12y ago
They've already made shareholders a lot of money. Future returns have been pulled forward substantially. The stock should have been sold by now, the returns to be had on the stock are in the past. Even being generous and giving Amazon a future 20 pe ratio, at the recent highs, would require roughly $9 billion in profit. Once again being generous and assuming they can ever reach a 5% net income margin, they need $180+ billion in sales. Let's recalculate for a 15 pe ratio and 3.5% net income margin: $342 billion in sales (that's the Walmart scenario). The stock has nowhere to go for a decade from the recent $400x levels. The party is over.
- mendozao 12y ago
  I appreciated this quick analysis. Do you have any book recommendations that describe your method/calculations/thought process in more detail? Thanks in advance
- brwnll 12y ago
  I'm confused why you would tie Amazon's future, an eCommerce company who also has a strong cloud (AWS) and digital media division and a growing hardware division (Kindle, Fire) to a brick and mortar retailer such as WalMart. Even discarding all other revenue streams, you want to compare the company to a retailer growing sales at 1% y/y (WalMart), while they grow sales at 22%? All this while only being in 12 international markets and citing a lack of non-English content as holding them back in the high margin area of digital content. Your evaluation seems entirely misguided and ham-handed to be honest.

jasonwocky 12y ago

I don't know about it not being "good law", but one difference between Ford and the modern CEO is that the modern CEO is significantly less likely to out-and-out say, "screw the shareholders...they're not who I'm doing this for" as Ford basically did.

jambo 12y ago

Case law (and now statute) affords a lot of discretion to management as to what is in the best interests of shareholders. http://everything2.com/title/business+judgment+rule http://everything2.com/title/business+judgment+rule

adventured 12y ago

The law does not require it. A further note: private corporations are under absolutely no obligations as to how they do or do not reinvest their profits. So your blanket statement is way off base, the private company economy is drastically larger than the publicly traded economy.

rthomas6 12y ago

I'm no expert, but I'd imagine a corporation could argue that reinvesting capital for the purpose of expansion, at the expense of immediate profit, is maximizing shareholder value over a longer period of time. Isn't this what all "growth stocks" try to do? I personally would prefer stocks that optimized for long term growth over immediate profit.

ABS 12y ago

Sorry if I copy and paste a comment I left some time ago in another thread ( https://news.ycombinator.com/item?id=7983281 https://news.ycombinator.com/item?id=7983281 ) but it's relevant: 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, Corportations, and the Public" by Lynn Stout http://www.amazon.co.uk/The-Shareholder-Value-Myth-Shareholders/dp/1605098132 http://www.amazon.co.uk/The-Shareholder-Value-Myth-Sharehold... [2] http://arizonastatelawjournal.org/book-review-the-shareholder-value-myth-how-putting-shareholders-first-harms-investors-corporations-and-the-public-by-lynn-stout/ http://arizonastatelawjournal.org/book-review-the-shareholde...

deleted 12y ago

[deleted]

scott_s 12y ago

Corporations exists because we - that is, society, through our government - allow them to. Ford saw his mandate as having the most beneficial impact on the largest number of people he could, not just his shareholders. I think it's reasonable for us to interpret the law with a similar mindset.

mitchty 12y ago

It is a myth. http://blogs.law.harvard.edu/corpgov/2012/06/26/the-shareholder-value-myth/ http://blogs.law.harvard.edu/corpgov/2012/06/26/the-sharehol...