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The World's Dumbest Idea: Maximizing Shareholder Value [pdf]

379 points by soundsop 12y ago

thaddeusmt 12y ago
Link is down for me - is this the same article? 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...
- robmccoll 12y ago
  No. Oddly similar title, but different article.
  - berberous 12y ago
    They are both quoting Jack Welch, who called it the dumbest idea in the world.
deleted 12y ago
[deleted]
JacobAldridge 12y ago
Define Value: Person A wants long term growth of the share price so they can sell down in many years to fund their retirement. Person B wants rapid growth in the share price (even if it eventually kills the company) so they can sell it soon. Person C isn't much concerned by share price growth, as long as the dividends keep coming each year. Person D invested because they want to support environmentally-friendly companies. Person E isn't concerned about tree-huggers, but a lot of people in his town are employed by the company so he wants to support them. Your challenge, should you choose to accept it: Which of these Shareholders' Value will you maximize?
- alcari 12y ago
  Give those shares votes, and let shareholder interests define value for you.
  - danbruc 12y ago
    Letting other people define value for you sounds like an incredible bad idea.
    - bduerst 12y ago
      Then don't sell equity? Most stock comes with contractual ownership and decision making power.
      - danbruc 12y ago
        If 1) having your definition of value dictated is a bad thing and 2) selling equity equals having your definition of value dictated then 3) selling equity is a bad thing. I believe 1) is mostly true but 2) is not necessarily true and especially should not be true.
        bduerst 12y ago
        Selling equity is a situational cost-benefit analysis, every time. It all matters on how badly you want cash. They're not a shareholder unless you've already decided to sell them equity.
  - judk 12y ago
    Pure democracy is nonsense. It relies on a foundation: a constitution or charter, that entices shareholders to buy in in the first place.
- klenwell 12y ago
  Not a challenge I expect to ever really face, but if I were in a position to face it, I'm guessing my answer is: The person with the most shares. I suspect that that's about the only way I ever even get a chance to accept this challenge.
Lagged2Death 12y ago
The "dumbest idea in the world" phrasing borrowed by the headline didn't originate with some wild-eyed lefty or academic, but is attributed to Jack Welch, celebrated former CEO of GE.
- fsloth 12y ago
  Yeah, and he admitted himself that retrospectively it was not such a good one."Shareholder value is an outcome—not a strategy." - Jack Welch http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090316_630496.htm http://www.businessweek.com/bwdaily/dnflash/content/mar2009/...)
  - calinet6 12y ago
    That 'strategy' quote is a far more intelligent than the title quote. It completely and concisely sums up the correct argument in 8 words, and it does it better than the paper linked.
RockyMcNuts 12y ago
Some discussion http://www.economist.com/blogs/buttonwood/2014/12/investing-ceo-pay-and-economy http://www.economist.com/blogs/buttonwood/2014/12/investing-... http://www.businessinsider.com/gmos-montier-maximizing-shareholder-value-is-the-worlds-worst-idea-2014-12 http://www.businessinsider.com/gmos-montier-maximizing-share... http://www.bloomberg.com/news/2014-12-03/shareholder-value-focus-seen-as-dumbest-idea-chart-of-the-day.html http://www.bloomberg.com/news/2014-12-03/shareholder-value-f... like a lot of things in economics, a lot of things could have been going on during the switch from 'managerialism' to 'shareholder value' paradigm, so it's not necessarily true that it caused returns to go down. in context the effect Montier talks about is quite small. but it does seem clear that it didn't cause returns to go up meaningfully across the board. in fact, the effect Montier cites seems to go away if you do a slightly more sophisticated calculation http://3rdmoment.blogspot.com/2014/12/stock-performance-in-era-of-shareholder.html http://3rdmoment.blogspot.com/2014/12/stock-performance-in-e... there are a lot of studies that show companies where management has skin in the game do measurably better than companies where they don't. that being said, there aren't data that would tell you, companies where the CEO will earn $1m or $10m depending on how well the company performs don't do as well as companies where the CEO will earn $20m or $200m. edit: the question of impact of CEO incentives on stock performance is probably more complicated than what I said. I've seen a lot of studies that show that incentives impact management behavior. but probably most of those behaviors relate to short-term stock outperformance. whether those changes result in long-term outperformance is another question, and whether the incentives even reward long-term outperformance is complicated. https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-pay-but-how https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-...
- zanny 12y ago
  > management has skin in the game do measurably better than companies where they don't. Same applies to all non-managerial staff. That is why I love the concept of coops, and I'm sad nobody does them much because they mean empowering your employees to be maximally productive at the expense of "potential profits" for founders and shareholders. All the incentive systems in companies are all bandaids trying to make up for doing things wrong from the start. If you want to incentivize them to perform to profit, then let them profit as well from the companies success, and they will perform.
mayukh 12y ago
While Montier makes a good (and unoriginal) point, I'm not convinced by his argument. The first example: IBM and JnJ are in wildly different industries, competing in different markets against different competitors employing vastly different strategies. To use an arbitrary time period (who is to say IBM’s returns 10 years from now won’t trounce JnJ’s), and employ a metric (shareholder returns) that is often out of whack with reality (as Montier himself would acknowledge) isn’t persuasive enough for me. The second macro example of comparing returns between two totally different time periods also isn't exactly apples to apples either. And also completely ignores the effects of hundreds of other potentially significant factors (interest rates, gdp levels, global trade etc) This article seems to be a strong case of confirmation bias on his part. Ironical given that he's written a popular book on behavioral investing. (And yes this comment can also be viewed as suffering from a similar bias) Yes SVM has pitfalls, yes focusing on the customer should be a high priority, however the agency problems Montier describes (management extracting undue value) are solved by neither. Borrowing from churchill(?) — SVM might be the dumbest idea in how we organize our public markets, except for all the others.
lionhearted 12y ago
This article isn't very good. I actually agree with the idea. The quote about shareholder value being a dumb idea from Jack Welch, yeah, sure. This article is sloppy though. The author side-by-side compares economists speaking in abstract aggregates, press releases from PR-generating-feel-good-organizations (the CEO roundtable thing), publicly stated metrics used by companies for success (IBM), and distribution/influencer strategies (Johnson and Johnson). It just seems like throwing a lot at the wall and seeing what sticks. Pulling out a 1980's feel-good-PR and contrasting that against Johnson and Johnson remaining focused on doctors, nurses, families... That's before getting into cherry-picking, survivor's bias, good and bad strategy (Rumelt would savage later-day IBM, not for being profit-focused, but because "doubling earnings per share" is not a strategy)... ...ok, too many problems to list them all. Agree with the general idea; the article isn't so well-thought though.
mattlong 12y ago
If the link doesn't work, you can read it here: https://view-api.box.com/1/sessions/6570005e923b4513914b56fa1145c4b8/view https://view-api.box.com/1/sessions/6570005e923b4513914b56fa...
jcfrei 12y ago
For such a bold claim I expected a more in depth analysis rather than this amalgamation of statistics. For example, nobody would argue against the fact that executive compensation has gone through the roof. However his argument for directly relating executive compensation to SVM is lackluster at best: > We can see this has been a driving force behind the rise of the 1% thanks to a study by Bakija, Cole, and Heim (2012). The rise in incomes of the top 1% has been driven largely by executives and those in finance. In fact, executives and those in finance accounted for some 58% of the expansion of the income for the top 1%, and 67% of the increase in incomes for the top 0.1% between 1979 and 2005. Thus, there can be little doubt that SVM has played a major role in the increased inequality that we have witnessed He makes a solid argument against companies which employ flawed executive compensation programs - which are without a doubt very common. But so are companies which try to increase shareholder value. Simple correlation doesn't imply causation here. If there's any case to be made here, it's that a flawed compensation scheme leads to a short term optimization of shareholder value (ie. propagation of SVM) and not the other way around. His argument for the decline in labour share of GDP is even more spurious: >The role of SVM in declining labour share should be obvious, because it is the flip-side of the profit share of GDP. If firms are trying to maximize profits, they will be squeezing labour at every turn (ultimately creating a fallacy of composition where they are undermining demand for their own products by destroying income). He completely omits the rising productivity in many industries which simply require a smaller workforce for the same output. Pointing out well known flaws in an established economic system is hardly noteworthy. Potential alternatives would be much more interesting to talk about.
mooneater 12y ago
Im all for questioning assumptions. But i dont see him put forward a clear alternative. And he is comparing change in stock prices based on corporate mantras. He doesnt even adjust for industry, or compare to the overall market during that time. That makes no sense, why is this #1.
- mkhalil 12y ago
  I agree with the comparison sort of being apples to oranges, but the key point is it's bad to have the majority of CEO's pay be Stock+Options because that will lead to: - The CEO will push the company to focus on SVM - The increase in wage gap due to high exec pay, like the 1%. - The company might not be helping it's longevity An alternative would be not to pay exec's with Stock+Options, but focus on Salary+Bonus.
pash 12y ago
The great irony is that Montier tests his argument by comparing the returns on shares of a company that claimed to be trying to maximize shareholder value with returns on shares of one that didn't. He evaluates his claim by the criterion he's railing against: "See?" he seems to say. "IBM tried to maximize shareholder value and J&J didn't, and J&J's stock did better! Therefore maximizing shareholder value is stupid!" I'm not sure where on the list of world's stupidest ideas to put this idea that you can judge a measuring stick by using it to measure its advocates. All Montier has succeeded in demonstrating is that (a) the goal of maximizing shareholder value is so sacrosanct that even someone trying to undermine that goal naturally identifies good results with high share prices and bad with low; and that (b) Montier is really not arguing against the goal of maximizing shareholder value at all, but against the idea that explicitly trying to do so is effective. And it does seem that maximizing shareholder value is a sort of financial anti-Heisenbug: don't worry about it and there's no problem, but the more intently you focus on it, the worse things get.
- nickff 12y ago
  The argument put forward in the OP is rather strange, as it compares the stated goals to the actual outcomes. This is similar to saying 'experts are less knowledgeable in their specific field than average people', when the reality is that the people who claim to be experts are simply exaggerating their level of knowledge.
- deleted 12y ago
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- jal278 12y ago
  I don't think there's necessarily any great irony here. It's certainly possible that the same metric could be both (1) foolish to optimize and (2) a reliable indicator of success. Think of yourself trying to solve a maze -- because there are cul-de-sacs, if you took the naive strategy of directly minimizing distance to the goal, you'll just become stuck in a dead end. Yet if you do reach the goal (by another means) the distance will still be minimal (zero). This is basically the concept of local optima in optimization. Of course, there are other situations, where through careless optimization a measure can become entirely disconnected from the holistic concept it is designed to encourage. Think for example of using "lines of code" as a heuristic for programmer productivity; I could unroll loops to maximize that measure and achieve a much higher value than the most truly productive programmer. So the question is whether long-term shareholder value is of the first or second type. I think it may be difficult for it to be entirely disconnected from success, although I agree that it is foolish to optimize directly.
Animats 12y ago
"Maximizing shareholder value" has indeed gotten out of hand. There are several reasons for this. One is tax policy. A corporation can pay for its capital in three ways: 1) dividends on stock, 2) interest on loans, and 3) stock buybacks to increase the stock price. The first is taxed more highly than the second two. This has a huge influence on corporate behavior. Because payments on loans are not taxed, converting equity to debt increases profits. This funds the entire "private equity" industry, which is really about leveraged buyouts. This bias in favor of loans also increases the involvement of the banking industry in corporate finance. Loans and investments aren't really that different. They once were; lenders expected to be paid back. Then came junk bonds, where the interest rate is cranked up to compensate for the risk, and the securitiziation of debt, which allowed off-loading the risk onto other investors. (See 2008 financial crisis.) There's an occasional call to "end the double taxation of dividends". Taxing interest paid and stock buybacks at the same rate would be equally effective. This would be a good time to do that economically, because interest rates are so low. Stock buybacks are mostly a tax dodge. But that's not the full reason for their popularity. For stockholders, they're no better than dividends. But for stock option holders, which usually include the CEO, they're a windfall. Option holders get nothing when the company pays a dividend and the stock price remains the same. But in a buyback, the stock goes up and they win big. This is one of the major factors driving CEO pay upward. (If you assume CEOs are rational actors as regards their own compensation, much corporate behavior becomes clearer.) Japan doesn't allow stock buybacks for most types of corporations. The US does. It doesn't really benefit anybody but management. So that's the tax policy argument. It's dull, but important. As for why companies prioritize shareholders so much, more than they used to, the reason is simple - less fear by companies. Companies used to be afraid that overdoing it would lead to government action. Their business might be nationalized, taken over by the Government. Britain did that to the rail, coal, steel, airline, power and telephone industries. The US never went quite that far, but electric power and telephone companies used to be regulated utilities with rate-of-return regulation, and the airline and trucking industries were regulated by the Civil Aeronautics Board and the Interstate Commerce Commission. In the US, this was a political compromise between big business and small business. Small businesses didn't want big monopolies to have control over their essential services, like power and transportation. All this changed starting in the late 1970s. Nationalized and regulated businesses were stable, but seemed inefficient. They had no incentive to take risks to improve. The history of the Reagan era is well known, so that doesn't have to be repeated here, but reviewing the history of deregulation is useful. What seems to happen in deregulation of regulated monopolies is that a large number of new companies enter the field, and prices go down. Then most of the new companies go bust, and the winners consolidate. The result tends to be deregulated monopolies. Look at the last 30 years of the telephone industry, from AT&T to lots of little companies and back to AT&T. There's another source for the decrease in corporate fear - the end of communism. It's hard to realize this now, but from the 1930s through the 1970s, there was real worry in the US that communism might beat capitalism economically. By the 1950s and 1960s, the USSR had a successful space program and was industrializing rapidly. Capitalism had serious ideological competition. In the 1980s, though, it became clear that the USSR couldn't make their system work. It worked for some of the big, centralized stuff - coal, steel, power, and such. But the rest of the economy didn't work very well. With that threat removed, companies could stop worrying about socialism and communism gaining popularity. Related to this was the decline in labor unions. This has a lot of causes, but the biggest one is simply that unions peaked in the era when industry centered around huge plants with huge numbers of semi-skilled employees. Those were the situations in which unions had the most leverage. There were once steel mills which employed 5,000 people with shovels. If you visit a steel mill today, there will be some shovels around, but they're just for cleanup. You'll see a lot of machinery and not many people. Manufacturing employs 7% of the US workforce. It was around 40% in 1950. Labor unions once had a big influence on working conditions. When a sizable portion of the workforce was unionized, non-union businesses tended to have working conditions not much worse than union shops. Companies didn't want a labor-organizing campaign. So the 8 hour day and the 40 hour week were standard, and pay tended to follow union levels in non-union businesses. That's disappeared. As a result of these changes, there's no major political opposition left to "maximizing shareholder value". That's why we're where we are now.
danbruc 12y ago
Maximizing shareholder value is not the dumbest idea per se - the flaw is that maximizing shareholder value does not maximize the value of the business. Businesses do not exist in empty space but within a society and their primary responsibility is to provide value to this society by providing jobs, goods, services, taxes, research, you name it. Investment and growth are not primary goals, they are just means to the aforementioned responsibilities. People should invest in a business because of its intrinsic value and not define the value of business by their investments. Financial gains should only be an additional incentive and protection against the risks of investments but not the sole reason for the investment. If you could argue that maximizing shareholder value naturally aligns with maximizing intrinsic value all would be fine but I can not see how this could be true. It may sometimes be true for long-term investments but for short-term investments the contrary seems to be true. If you only care about the next quarter cutting wages and quality is the easy way to maximize shareholder value but is diametrically opposed to maximizing intrinsic value.
sqren 12y ago
Cached version to those who cannot access the resource: https://web.archive.org/web/20141206170332/https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBoe1yul9uERnfCmQoglFl9k5qwJSfHx8w%2fWCnFLmEb2MC9GoFnZVlslR5NzCRY1ajgn503icBv67VQg%2fNVUMWsYvi3A2%2fL%2bS28A7Pthjp7LmOfLYQfHMJc https://web.archive.org/web/20141206170332/https://www.gmo.c...
lisper 12y ago
➔ host www.gmo.com Host www.gmo.com not found: 3(NXDOMAIN) This is using Google's DNS servers.
- sp332 12y ago
  https://www.whatsmydns.net/#A/www.gmo.com https://www.whatsmydns.net/#A/www.gmo.com shows two different IPs: 216.57.159.45 and 69.147.188.37, and Mountain View (Google) is giving NXDOMAIN. But if I query 8.8.8.8 from my computer on the east coast I get 69.147.188.37, so maybe some of Google's servers are giving conflicting responses?
ABS 12y ago
My standard reply to these posts: 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, Corporations, 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...
- kemitchell 12y ago
  I also recommend Professor Stout's book, and especially to fellow specialists and governance wonks. Not because I agree with her main thrust, her characterization of the orthodox view, or her conclusions about it, but because resisting the book in good conscience requires summoning foundational primary sources that practitioners don't have to handle very often. If you lead right, it's good to fight a southpaw from time to time. When recommending it to those who aren't corporate attorneys or otherwise involved in the subject matter, I include a caveat: If this is the only book you read on corporate governance, be aware that it's a controversial and contrarian book packaged for non-lawyers. If its subject were political, I could find and recommend a book arguing the opposite view it in a similar style. I'm not aware of any legal rebuttal that isn't presented in more traditionally legal, less approachable form. It's been reviewed in legal journals, but even most lawyers consider those long-winded and dense.
Fando 12y ago
The concept of maximizing shareholder value being the only true purpose of a company, taken at its literal sense, is an idea that's rotten to the core. This type of thinking is a natural consequence of the selfish individuals that to some degree all of us are. Taking human natural flaws into account, it is simply irresponsible to adopt such a philosophy. It will be exploited. This type of company suffers from an inherent vulnerability. At some point, true motives, such as provision of quality services and goods, could be distorted and even replaced by fallacious motives. As is seen in the world today.
drawkbox 12y ago
On the flipside, this type of greedy setup actually may be much better or easier for smart companies focused on innovation and research to operate in, as long as they have trained their shareholders they can invest and innovate while others have to cut and slash. Apple, Amazon and Facebook to name three have really set the precedent that they use their money to stay in the game. Amazon invests nearly everything back in. That is actually valuable today more than EPS/P/E Ratios in the best innovative companies. Innovate and win and the shareholders will follow, follow your shareholders only and go right off the cliff to mediocrity. Companies should be run with stakeholders as the focus. Shareholders being one, but the products/employees/customers/economy they are just as important to success and real growth.
jsprogrammer 12y ago
Shareholders are cost centers, nothing more. Put that into your quarterly corporate pipe and smoke it.
tslathrow 12y ago
GMO is the laughingstock of the HF community... trying to make a name for themselves with a permabear outlook. Their index and commodity projections are truly hilarious and they've been claiming this sort of shit for years, generating bottom-decile returns.
phkahler 12y ago
I always say if maximizing shareholder value is the goal, most companies should liquidate all their assets and become hedge funds investing in industries with higher returns. Yeah, it's tongue in cheek, but it make the point. Companies need to do what they do best, and if investors think that's a good idea they can invest. Then we can get away from the short term thinking, which is even better for the shareholders.
patfla 12y ago
Fwiw, I thought Montier to be a well-respected behavioral economist where behavioral is in reaction to the failure of previous economic models in 2008 (the Global Financial Crisis). Behavioral puts human psychology back into the picture. Montier argues that SVM (shareholder value maximization) is the fig leaf that covers the change in incentivization of CEOs, and one assumes other corporate officers, away from salary and bonus to stock options. Which has been key in bifurcating the 1% away from everyone else. Or as they say in finance, when a CEO says shareholder maximization, he or she is talking their own book. They're the shareholder they want to maximize. SVM reframes the dialog in terms of what many people consider legitimate - return money to shareholders - and away from, say, value to employees or to society more generally. Which puts me in mind of another expression, "job creators."
mikaeluman 12y ago
I am sorry but this seems like complete left wing rethoric bullshit. I can pick data too.
joshjkim 12y ago
A few early-stage-company-related thoughts (in no particular order). Some prelim. thoughts: Maximizing shareholder value is accomplished by increasing the value of shares, and presumably share value is the most widely-agreed-upon way to value a business - whether or not it is accurate or takes into account everything it should is another matter, but if you assume that share value is intended to capture the financial value of the business, then to say I want to max. SH value is basically the same thing as saying I want to increase the value of the business, which I think for the most part is a good and acceptable goal. Here's what I think some of the problems are: 1. Conflation of SHs/Board/Managers. To me, the real issue here is more that people in power (who are often SHs themselves - CEOs, boards, large SHs) use the "SMV" principal to hide behind self-interested actions - I totally admit this is there prerogative, but it's pretty annoying to see them try to dress it up in some abstract corporate governance value system. This happens a lot for public companies with activist SHs and/or PE firms - see: Carl Icahn, who buys big stock positions, then publicly pushes management to take actions like sell or spin-off segments in the name of "shareholder value" when just the act of this publishing an open letter or pushing for his own board candidates, etc. will increase the value of his holdings in that very same company - yes, he is trying to max. SH value because he is a major SH! This also happens with public company CEOs whose comp. is tied to and/or made up of equity, as is pretty much always the case these days. Lots of interesting literature out there about how careerist CEOs (who don't plan on staying at one company for more than a few years) will take highly risky short-term-stock-value-increasing actions that are bad for long-term value, etc. Interestingly, this is especially true in early-stage companies, where Founders/VCs are often the biggest SHs, on the board and in key management positions (VCs sometimes take operating roles in companies as they hit growth stages or if there has been founder trouble, etc.) This conflict comes into relief w/r/t to exits where liquidation preference get triggered: sometimes happens that VCs who control the board and hold preferred stock push for a deal where the preferred get $$ back but common gets nothing, even if the common think that it's a bad deal and want to keep pushing ahead in hopes that they can improve the business and exit with some value going to all stakeholders, not just preferred. This was litigated in Trados (see link below), and the court said that in that case, it was OK that the VCs made the deal happen. Trados summary: http://www.bingham.com/Alerts/2013/10/In-Re-Trados-Incorporated-Shareholder-Litigation http://www.bingham.com/Alerts/2013/10/In-Re-Trados-Incorpora... (Not equity related, but a new instance of this is the reverse, and plays out in acqui-hire deals: founders are given great job opportunities and RSUs from acquiring company, but VCs get very little if anything and non-technical employees are out of the job. I think in most cases it's a totally fair outcome, just interesting to think about how it works in other instances where the value measurement is different - in acquihires, skill of individuals is the value, not the business, so stock value of the co. plays a much smaller role and the power then rests in the individual holding the skills/ability, not the VCs or the employees running business operations, etc.) 2. Even if it is not the stated or intended goal (as I sincerely believe most good entrepreneurs start business for more than pure financial gain - easier to just work for a hedge fund), almost all tech startups rely on maximizing shareholder value to properly incentivize founders, early employees and attract capital to a much higher degree than public companies. The interesting difference at the early-stage as compared to public companies is that, with no public market, the constituencies are relatively few in number and far more concentrated (founders are board members, managers and SHs, VCs are SHs and board members and advisors, employees are equity holders, very few customers at first, if at all, etc. - as discussed above, this happens a bit in the public market but not in such a concentrated way), so the incentives are much more easily aligned. VCs are pretty-much-always looking for equity upside, and founders & employees (to significantly varying degrees haha) are more-often-than-not foregoing secure/higher salaries in exchange for potential equity upside - put another way, all founders, VCs and employees pretty much hope for an exit in which their equity is 10X what they had to pay for it. Again, no founder/VC is saying the goal is to maximize SH value, but at the end of the day we as a community more or less measure success through share value. That all being said, I love to think about exceptions to this rule: Craiglists = awesome (I hope they beat eBay in court), Kahn Academy is amazing. Would love to learn about some more!
deleted 12y ago
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dfragnito 12y ago
This relates http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocra... I agree with the overall statement but not necessarily all of the analysis. I believe "stakeholder capitalism" is a better corporate structure. Corporate bylaws would need to be changed to accommodate this.
nihilnegativum 12y ago
I agree, that the purpose of value maximizing can only be accomplished as a side effect, but this bad orientation is only part of the problem of current application of shares, I think that the additional problem lies in their distribution (both the actual distribution, and the logic behind it). Shares could solve the tragedy of the commons problem, but their current application necessarily fails.
Dwolb 12y ago
The author isn't arguing against maximizing shareholder value, he's highlighting the misunderstanding of what maximizing shareholder value is. Current intro-level schools of thought on how to value projects, raise money for those projects, and what to do with the money left over, start with a perfect-world scenario [1]. This scenario's cornerstone centers around the idea markets are perfectly efficient, there are no taxes, management incentives align with shareholders, there are no taxes, there are no bankruptcy costs, and possibly one more. In this world, there is no difference in value to a company to raise money via debt or via equity. However, if we start to violate the 5-6 founding assumptions (i.e. we enter the real world) we find that there significant differences in value of a firm in a given industry who use debt or equity to raise money (or any flavor of security between debt and equity), who pay management via different bonus structures, who keep cash on hand versus pay it out, have underlying assets which are easily saleable or not, and who have different risk profiles. Maximizing shareholder value is a nice tool to use when evaluating key financial decisions (e.g. how levered a firm should be), but as the other points out is misused or abused due to misaligned management incentives. However, tbe idea isn't intrinsically dumb, the misunderstanding of the value of the idea and how it should be used is what's sometimes wrong and sometimes harmful. [1] http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_the...
autokad 12y ago
"Yet, Johnson & Johnson has delivered considerably more return to shareholders than IBM has managed over the same time period." good lord, treating IBM and JNJ the same? not to mention assuming companies in their various stages should have comparable growth. you always see these days a new tech company come out 'we are different (like everyone else), we do not care about our stock price blablabla. it doesnt take them very long before they realize that their stock price is critical to their survival. as almost every tech found out after spitting such garbage, when their stock plummets their talent leaves. they would also find it hard acquiring talent. This is especially true when stock options are a significant incentive - as it almost always is. this is not to mention the many various social effects of a company whose stock is always in the gutter. you lose customers, become the butt of jokes, etc etc (even though these things have no direct tie to stock price).
pbreit 12y ago
The headline wouldn't be as provocative if it were correct: "The World's Dumbest Idea: Maximizing Short Term Shareholder Value". The author seems to argue that switching from long term to short term shareholder value maximization hasn't really increased shareholder value (and might have decreased it). So I gather that he is in fact in favor of maximizing shareholder value but that it should be performed on a longer basis.

379 points by soundsop 12y ago

Link is down for me - is this the same article? 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...

robmccoll 12y ago
No. Oddly similar title, but different article.
- berberous 12y ago
  They are both quoting Jack Welch, who called it the dumbest idea in the world.

deleted 12y ago

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JacobAldridge 12y ago

Define Value: Person A wants long term growth of the share price so they can sell down in many years to fund their retirement. Person B wants rapid growth in the share price (even if it eventually kills the company) so they can sell it soon. Person C isn't much concerned by share price growth, as long as the dividends keep coming each year. Person D invested because they want to support environmentally-friendly companies. Person E isn't concerned about tree-huggers, but a lot of people in his town are employed by the company so he wants to support them. Your challenge, should you choose to accept it: Which of these Shareholders' Value will you maximize?

alcari 12y ago
Give those shares votes, and let shareholder interests define value for you.
- danbruc 12y ago
  Letting other people define value for you sounds like an incredible bad idea.
  - bduerst 12y ago
    Then don't sell equity? Most stock comes with contractual ownership and decision making power.
    - danbruc 12y ago
      If 1) having your definition of value dictated is a bad thing and 2) selling equity equals having your definition of value dictated then 3) selling equity is a bad thing. I believe 1) is mostly true but 2) is not necessarily true and especially should not be true.
      - bduerst 12y ago
        Selling equity is a situational cost-benefit analysis, every time. It all matters on how badly you want cash. They're not a shareholder unless you've already decided to sell them equity.
- judk 12y ago
  Pure democracy is nonsense. It relies on a foundation: a constitution or charter, that entices shareholders to buy in in the first place.
klenwell 12y ago
Not a challenge I expect to ever really face, but if I were in a position to face it, I'm guessing my answer is: The person with the most shares. I suspect that that's about the only way I ever even get a chance to accept this challenge.

Lagged2Death 12y ago

The "dumbest idea in the world" phrasing borrowed by the headline didn't originate with some wild-eyed lefty or academic, but is attributed to Jack Welch, celebrated former CEO of GE.

fsloth 12y ago
Yeah, and he admitted himself that retrospectively it was not such a good one."Shareholder value is an outcome—not a strategy." - Jack Welch http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090316_630496.htm http://www.businessweek.com/bwdaily/dnflash/content/mar2009/...)
- calinet6 12y ago
  That 'strategy' quote is a far more intelligent than the title quote. It completely and concisely sums up the correct argument in 8 words, and it does it better than the paper linked.

RockyMcNuts 12y ago

Some discussion http://www.economist.com/blogs/buttonwood/2014/12/investing-ceo-pay-and-economy http://www.economist.com/blogs/buttonwood/2014/12/investing-... http://www.businessinsider.com/gmos-montier-maximizing-shareholder-value-is-the-worlds-worst-idea-2014-12 http://www.businessinsider.com/gmos-montier-maximizing-share... http://www.bloomberg.com/news/2014-12-03/shareholder-value-focus-seen-as-dumbest-idea-chart-of-the-day.html http://www.bloomberg.com/news/2014-12-03/shareholder-value-f... like a lot of things in economics, a lot of things could have been going on during the switch from 'managerialism' to 'shareholder value' paradigm, so it's not necessarily true that it caused returns to go down. in context the effect Montier talks about is quite small. but it does seem clear that it didn't cause returns to go up meaningfully across the board. in fact, the effect Montier cites seems to go away if you do a slightly more sophisticated calculation http://3rdmoment.blogspot.com/2014/12/stock-performance-in-era-of-shareholder.html http://3rdmoment.blogspot.com/2014/12/stock-performance-in-e... there are a lot of studies that show companies where management has skin in the game do measurably better than companies where they don't. that being said, there aren't data that would tell you, companies where the CEO will earn $1m or $10m depending on how well the company performs don't do as well as companies where the CEO will earn $20m or $200m. edit: the question of impact of CEO incentives on stock performance is probably more complicated than what I said. I've seen a lot of studies that show that incentives impact management behavior. but probably most of those behaviors relate to short-term stock outperformance. whether those changes result in long-term outperformance is another question, and whether the incentives even reward long-term outperformance is complicated. https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-pay-but-how https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-...

zanny 12y ago
> management has skin in the game do measurably better than companies where they don't. Same applies to all non-managerial staff. That is why I love the concept of coops, and I'm sad nobody does them much because they mean empowering your employees to be maximally productive at the expense of "potential profits" for founders and shareholders. All the incentive systems in companies are all bandaids trying to make up for doing things wrong from the start. If you want to incentivize them to perform to profit, then let them profit as well from the companies success, and they will perform.

mayukh 12y ago

While Montier makes a good (and unoriginal) point, I'm not convinced by his argument. The first example: IBM and JnJ are in wildly different industries, competing in different markets against different competitors employing vastly different strategies. To use an arbitrary time period (who is to say IBM’s returns 10 years from now won’t trounce JnJ’s), and employ a metric (shareholder returns) that is often out of whack with reality (as Montier himself would acknowledge) isn’t persuasive enough for me. The second macro example of comparing returns between two totally different time periods also isn't exactly apples to apples either. And also completely ignores the effects of hundreds of other potentially significant factors (interest rates, gdp levels, global trade etc) This article seems to be a strong case of confirmation bias on his part. Ironical given that he's written a popular book on behavioral investing. (And yes this comment can also be viewed as suffering from a similar bias) Yes SVM has pitfalls, yes focusing on the customer should be a high priority, however the agency problems Montier describes (management extracting undue value) are solved by neither. Borrowing from churchill(?) — SVM might be the dumbest idea in how we organize our public markets, except for all the others.

lionhearted 12y ago

This article isn't very good. I actually agree with the idea. The quote about shareholder value being a dumb idea from Jack Welch, yeah, sure. This article is sloppy though. The author side-by-side compares economists speaking in abstract aggregates, press releases from PR-generating-feel-good-organizations (the CEO roundtable thing), publicly stated metrics used by companies for success (IBM), and distribution/influencer strategies (Johnson and Johnson). It just seems like throwing a lot at the wall and seeing what sticks. Pulling out a 1980's feel-good-PR and contrasting that against Johnson and Johnson remaining focused on doctors, nurses, families... That's before getting into cherry-picking, survivor's bias, good and bad strategy (Rumelt would savage later-day IBM, not for being profit-focused, but because "doubling earnings per share" is not a strategy)... ...ok, too many problems to list them all. Agree with the general idea; the article isn't so well-thought though.

mattlong 12y ago

If the link doesn't work, you can read it here: https://view-api.box.com/1/sessions/6570005e923b4513914b56fa1145c4b8/view https://view-api.box.com/1/sessions/6570005e923b4513914b56fa...

jcfrei 12y ago

For such a bold claim I expected a more in depth analysis rather than this amalgamation of statistics. For example, nobody would argue against the fact that executive compensation has gone through the roof. However his argument for directly relating executive compensation to SVM is lackluster at best: > We can see this has been a driving force behind the rise of the 1% thanks to a study by Bakija, Cole, and Heim (2012). The rise in incomes of the top 1% has been driven largely by executives and those in finance. In fact, executives and those in finance accounted for some 58% of the expansion of the income for the top 1%, and 67% of the increase in incomes for the top 0.1% between 1979 and 2005. Thus, there can be little doubt that SVM has played a major role in the increased inequality that we have witnessed He makes a solid argument against companies which employ flawed executive compensation programs - which are without a doubt very common. But so are companies which try to increase shareholder value. Simple correlation doesn't imply causation here. If there's any case to be made here, it's that a flawed compensation scheme leads to a short term optimization of shareholder value (ie. propagation of SVM) and not the other way around. His argument for the decline in labour share of GDP is even more spurious: >The role of SVM in declining labour share should be obvious, because it is the flip-side of the profit share of GDP. If firms are trying to maximize profits, they will be squeezing labour at every turn (ultimately creating a fallacy of composition where they are undermining demand for their own products by destroying income). He completely omits the rising productivity in many industries which simply require a smaller workforce for the same output. Pointing out well known flaws in an established economic system is hardly noteworthy. Potential alternatives would be much more interesting to talk about.

mooneater 12y ago

Im all for questioning assumptions. But i dont see him put forward a clear alternative. And he is comparing change in stock prices based on corporate mantras. He doesnt even adjust for industry, or compare to the overall market during that time. That makes no sense, why is this #1.

mkhalil 12y ago
I agree with the comparison sort of being apples to oranges, but the key point is it's bad to have the majority of CEO's pay be Stock+Options because that will lead to: - The CEO will push the company to focus on SVM - The increase in wage gap due to high exec pay, like the 1%. - The company might not be helping it's longevity An alternative would be not to pay exec's with Stock+Options, but focus on Salary+Bonus.

pash 12y ago

The great irony is that Montier tests his argument by comparing the returns on shares of a company that claimed to be trying to maximize shareholder value with returns on shares of one that didn't. He evaluates his claim by the criterion he's railing against: "See?" he seems to say. "IBM tried to maximize shareholder value and J&J didn't, and J&J's stock did better! Therefore maximizing shareholder value is stupid!" I'm not sure where on the list of world's stupidest ideas to put this idea that you can judge a measuring stick by using it to measure its advocates. All Montier has succeeded in demonstrating is that (a) the goal of maximizing shareholder value is so sacrosanct that even someone trying to undermine that goal naturally identifies good results with high share prices and bad with low; and that (b) Montier is really not arguing against the goal of maximizing shareholder value at all, but against the idea that explicitly trying to do so is effective. And it does seem that maximizing shareholder value is a sort of financial anti-Heisenbug: don't worry about it and there's no problem, but the more intently you focus on it, the worse things get.

nickff 12y ago
The argument put forward in the OP is rather strange, as it compares the stated goals to the actual outcomes. This is similar to saying 'experts are less knowledgeable in their specific field than average people', when the reality is that the people who claim to be experts are simply exaggerating their level of knowledge.
deleted 12y ago
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jal278 12y ago
I don't think there's necessarily any great irony here. It's certainly possible that the same metric could be both (1) foolish to optimize and (2) a reliable indicator of success. Think of yourself trying to solve a maze -- because there are cul-de-sacs, if you took the naive strategy of directly minimizing distance to the goal, you'll just become stuck in a dead end. Yet if you do reach the goal (by another means) the distance will still be minimal (zero). This is basically the concept of local optima in optimization. Of course, there are other situations, where through careless optimization a measure can become entirely disconnected from the holistic concept it is designed to encourage. Think for example of using "lines of code" as a heuristic for programmer productivity; I could unroll loops to maximize that measure and achieve a much higher value than the most truly productive programmer. So the question is whether long-term shareholder value is of the first or second type. I think it may be difficult for it to be entirely disconnected from success, although I agree that it is foolish to optimize directly.

Animats 12y ago

"Maximizing shareholder value" has indeed gotten out of hand. There are several reasons for this. One is tax policy. A corporation can pay for its capital in three ways: 1) dividends on stock, 2) interest on loans, and 3) stock buybacks to increase the stock price. The first is taxed more highly than the second two. This has a huge influence on corporate behavior. Because payments on loans are not taxed, converting equity to debt increases profits. This funds the entire "private equity" industry, which is really about leveraged buyouts. This bias in favor of loans also increases the involvement of the banking industry in corporate finance. Loans and investments aren't really that different. They once were; lenders expected to be paid back. Then came junk bonds, where the interest rate is cranked up to compensate for the risk, and the securitiziation of debt, which allowed off-loading the risk onto other investors. (See 2008 financial crisis.) There's an occasional call to "end the double taxation of dividends". Taxing interest paid and stock buybacks at the same rate would be equally effective. This would be a good time to do that economically, because interest rates are so low. Stock buybacks are mostly a tax dodge. But that's not the full reason for their popularity. For stockholders, they're no better than dividends. But for stock option holders, which usually include the CEO, they're a windfall. Option holders get nothing when the company pays a dividend and the stock price remains the same. But in a buyback, the stock goes up and they win big. This is one of the major factors driving CEO pay upward. (If you assume CEOs are rational actors as regards their own compensation, much corporate behavior becomes clearer.) Japan doesn't allow stock buybacks for most types of corporations. The US does. It doesn't really benefit anybody but management. So that's the tax policy argument. It's dull, but important. As for why companies prioritize shareholders so much, more than they used to, the reason is simple - less fear by companies. Companies used to be afraid that overdoing it would lead to government action. Their business might be nationalized, taken over by the Government. Britain did that to the rail, coal, steel, airline, power and telephone industries. The US never went quite that far, but electric power and telephone companies used to be regulated utilities with rate-of-return regulation, and the airline and trucking industries were regulated by the Civil Aeronautics Board and the Interstate Commerce Commission. In the US, this was a political compromise between big business and small business. Small businesses didn't want big monopolies to have control over their essential services, like power and transportation. All this changed starting in the late 1970s. Nationalized and regulated businesses were stable, but seemed inefficient. They had no incentive to take risks to improve. The history of the Reagan era is well known, so that doesn't have to be repeated here, but reviewing the history of deregulation is useful. What seems to happen in deregulation of regulated monopolies is that a large number of new companies enter the field, and prices go down. Then most of the new companies go bust, and the winners consolidate. The result tends to be deregulated monopolies. Look at the last 30 years of the telephone industry, from AT&T to lots of little companies and back to AT&T. There's another source for the decrease in corporate fear - the end of communism. It's hard to realize this now, but from the 1930s through the 1970s, there was real worry in the US that communism might beat capitalism economically. By the 1950s and 1960s, the USSR had a successful space program and was industrializing rapidly. Capitalism had serious ideological competition. In the 1980s, though, it became clear that the USSR couldn't make their system work. It worked for some of the big, centralized stuff - coal, steel, power, and such. But the rest of the economy didn't work very well. With that threat removed, companies could stop worrying about socialism and communism gaining popularity. Related to this was the decline in labor unions. This has a lot of causes, but the biggest one is simply that unions peaked in the era when industry centered around huge plants with huge numbers of semi-skilled employees. Those were the situations in which unions had the most leverage. There were once steel mills which employed 5,000 people with shovels. If you visit a steel mill today, there will be some shovels around, but they're just for cleanup. You'll see a lot of machinery and not many people. Manufacturing employs 7% of the US workforce. It was around 40% in 1950. Labor unions once had a big influence on working conditions. When a sizable portion of the workforce was unionized, non-union businesses tended to have working conditions not much worse than union shops. Companies didn't want a labor-organizing campaign. So the 8 hour day and the 40 hour week were standard, and pay tended to follow union levels in non-union businesses. That's disappeared. As a result of these changes, there's no major political opposition left to "maximizing shareholder value". That's why we're where we are now.

danbruc 12y ago

Maximizing shareholder value is not the dumbest idea per se - the flaw is that maximizing shareholder value does not maximize the value of the business. Businesses do not exist in empty space but within a society and their primary responsibility is to provide value to this society by providing jobs, goods, services, taxes, research, you name it. Investment and growth are not primary goals, they are just means to the aforementioned responsibilities. People should invest in a business because of its intrinsic value and not define the value of business by their investments. Financial gains should only be an additional incentive and protection against the risks of investments but not the sole reason for the investment. If you could argue that maximizing shareholder value naturally aligns with maximizing intrinsic value all would be fine but I can not see how this could be true. It may sometimes be true for long-term investments but for short-term investments the contrary seems to be true. If you only care about the next quarter cutting wages and quality is the easy way to maximize shareholder value but is diametrically opposed to maximizing intrinsic value.

sqren 12y ago

Cached version to those who cannot access the resource: https://web.archive.org/web/20141206170332/https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBoe1yul9uERnfCmQoglFl9k5qwJSfHx8w%2fWCnFLmEb2MC9GoFnZVlslR5NzCRY1ajgn503icBv67VQg%2fNVUMWsYvi3A2%2fL%2bS28A7Pthjp7LmOfLYQfHMJc https://web.archive.org/web/20141206170332/https://www.gmo.c...

lisper 12y ago

➔ host www.gmo.com Host www.gmo.com not found: 3(NXDOMAIN) This is using Google's DNS servers.

sp332 12y ago
https://www.whatsmydns.net/#A/www.gmo.com https://www.whatsmydns.net/#A/www.gmo.com shows two different IPs: 216.57.159.45 and 69.147.188.37, and Mountain View (Google) is giving NXDOMAIN. But if I query 8.8.8.8 from my computer on the east coast I get 69.147.188.37, so maybe some of Google's servers are giving conflicting responses?

ABS 12y ago

My standard reply to these posts: 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, Corporations, 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...

kemitchell 12y ago
I also recommend Professor Stout's book, and especially to fellow specialists and governance wonks. Not because I agree with her main thrust, her characterization of the orthodox view, or her conclusions about it, but because resisting the book in good conscience requires summoning foundational primary sources that practitioners don't have to handle very often. If you lead right, it's good to fight a southpaw from time to time. When recommending it to those who aren't corporate attorneys or otherwise involved in the subject matter, I include a caveat: If this is the only book you read on corporate governance, be aware that it's a controversial and contrarian book packaged for non-lawyers. If its subject were political, I could find and recommend a book arguing the opposite view it in a similar style. I'm not aware of any legal rebuttal that isn't presented in more traditionally legal, less approachable form. It's been reviewed in legal journals, but even most lawyers consider those long-winded and dense.

Fando 12y ago

The concept of maximizing shareholder value being the only true purpose of a company, taken at its literal sense, is an idea that's rotten to the core. This type of thinking is a natural consequence of the selfish individuals that to some degree all of us are. Taking human natural flaws into account, it is simply irresponsible to adopt such a philosophy. It will be exploited. This type of company suffers from an inherent vulnerability. At some point, true motives, such as provision of quality services and goods, could be distorted and even replaced by fallacious motives. As is seen in the world today.

drawkbox 12y ago

On the flipside, this type of greedy setup actually may be much better or easier for smart companies focused on innovation and research to operate in, as long as they have trained their shareholders they can invest and innovate while others have to cut and slash. Apple, Amazon and Facebook to name three have really set the precedent that they use their money to stay in the game. Amazon invests nearly everything back in. That is actually valuable today more than EPS/P/E Ratios in the best innovative companies. Innovate and win and the shareholders will follow, follow your shareholders only and go right off the cliff to mediocrity. Companies should be run with stakeholders as the focus. Shareholders being one, but the products/employees/customers/economy they are just as important to success and real growth.

jsprogrammer 12y ago

Shareholders are cost centers, nothing more. Put that into your quarterly corporate pipe and smoke it.

tslathrow 12y ago

GMO is the laughingstock of the HF community... trying to make a name for themselves with a permabear outlook. Their index and commodity projections are truly hilarious and they've been claiming this sort of shit for years, generating bottom-decile returns.

phkahler 12y ago

I always say if maximizing shareholder value is the goal, most companies should liquidate all their assets and become hedge funds investing in industries with higher returns. Yeah, it's tongue in cheek, but it make the point. Companies need to do what they do best, and if investors think that's a good idea they can invest. Then we can get away from the short term thinking, which is even better for the shareholders.

patfla 12y ago

Fwiw, I thought Montier to be a well-respected behavioral economist where behavioral is in reaction to the failure of previous economic models in 2008 (the Global Financial Crisis). Behavioral puts human psychology back into the picture. Montier argues that SVM (shareholder value maximization) is the fig leaf that covers the change in incentivization of CEOs, and one assumes other corporate officers, away from salary and bonus to stock options. Which has been key in bifurcating the 1% away from everyone else. Or as they say in finance, when a CEO says shareholder maximization, he or she is talking their own book. They're the shareholder they want to maximize. SVM reframes the dialog in terms of what many people consider legitimate - return money to shareholders - and away from, say, value to employees or to society more generally. Which puts me in mind of another expression, "job creators."

mikaeluman 12y ago

I am sorry but this seems like complete left wing rethoric bullshit. I can pick data too.

joshjkim 12y ago

A few early-stage-company-related thoughts (in no particular order). Some prelim. thoughts: Maximizing shareholder value is accomplished by increasing the value of shares, and presumably share value is the most widely-agreed-upon way to value a business - whether or not it is accurate or takes into account everything it should is another matter, but if you assume that share value is intended to capture the financial value of the business, then to say I want to max. SH value is basically the same thing as saying I want to increase the value of the business, which I think for the most part is a good and acceptable goal. Here's what I think some of the problems are: 1. Conflation of SHs/Board/Managers. To me, the real issue here is more that people in power (who are often SHs themselves - CEOs, boards, large SHs) use the "SMV" principal to hide behind self-interested actions - I totally admit this is there prerogative, but it's pretty annoying to see them try to dress it up in some abstract corporate governance value system. This happens a lot for public companies with activist SHs and/or PE firms - see: Carl Icahn, who buys big stock positions, then publicly pushes management to take actions like sell or spin-off segments in the name of "shareholder value" when just the act of this publishing an open letter or pushing for his own board candidates, etc. will increase the value of his holdings in that very same company - yes, he is trying to max. SH value because he is a major SH! This also happens with public company CEOs whose comp. is tied to and/or made up of equity, as is pretty much always the case these days. Lots of interesting literature out there about how careerist CEOs (who don't plan on staying at one company for more than a few years) will take highly risky short-term-stock-value-increasing actions that are bad for long-term value, etc. Interestingly, this is especially true in early-stage companies, where Founders/VCs are often the biggest SHs, on the board and in key management positions (VCs sometimes take operating roles in companies as they hit growth stages or if there has been founder trouble, etc.) This conflict comes into relief w/r/t to exits where liquidation preference get triggered: sometimes happens that VCs who control the board and hold preferred stock push for a deal where the preferred get $$ back but common gets nothing, even if the common think that it's a bad deal and want to keep pushing ahead in hopes that they can improve the business and exit with some value going to all stakeholders, not just preferred. This was litigated in Trados (see link below), and the court said that in that case, it was OK that the VCs made the deal happen. Trados summary: http://www.bingham.com/Alerts/2013/10/In-Re-Trados-Incorporated-Shareholder-Litigation http://www.bingham.com/Alerts/2013/10/In-Re-Trados-Incorpora... (Not equity related, but a new instance of this is the reverse, and plays out in acqui-hire deals: founders are given great job opportunities and RSUs from acquiring company, but VCs get very little if anything and non-technical employees are out of the job. I think in most cases it's a totally fair outcome, just interesting to think about how it works in other instances where the value measurement is different - in acquihires, skill of individuals is the value, not the business, so stock value of the co. plays a much smaller role and the power then rests in the individual holding the skills/ability, not the VCs or the employees running business operations, etc.) 2. Even if it is not the stated or intended goal (as I sincerely believe most good entrepreneurs start business for more than pure financial gain - easier to just work for a hedge fund), almost all tech startups rely on maximizing shareholder value to properly incentivize founders, early employees and attract capital to a much higher degree than public companies. The interesting difference at the early-stage as compared to public companies is that, with no public market, the constituencies are relatively few in number and far more concentrated (founders are board members, managers and SHs, VCs are SHs and board members and advisors, employees are equity holders, very few customers at first, if at all, etc. - as discussed above, this happens a bit in the public market but not in such a concentrated way), so the incentives are much more easily aligned. VCs are pretty-much-always looking for equity upside, and founders & employees (to significantly varying degrees haha) are more-often-than-not foregoing secure/higher salaries in exchange for potential equity upside - put another way, all founders, VCs and employees pretty much hope for an exit in which their equity is 10X what they had to pay for it. Again, no founder/VC is saying the goal is to maximize SH value, but at the end of the day we as a community more or less measure success through share value. That all being said, I love to think about exceptions to this rule: Craiglists = awesome (I hope they beat eBay in court), Kahn Academy is amazing. Would love to learn about some more!

deleted 12y ago

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dfragnito 12y ago

This relates http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocra... I agree with the overall statement but not necessarily all of the analysis. I believe "stakeholder capitalism" is a better corporate structure. Corporate bylaws would need to be changed to accommodate this.

nihilnegativum 12y ago

I agree, that the purpose of value maximizing can only be accomplished as a side effect, but this bad orientation is only part of the problem of current application of shares, I think that the additional problem lies in their distribution (both the actual distribution, and the logic behind it). Shares could solve the tragedy of the commons problem, but their current application necessarily fails.

Dwolb 12y ago

The author isn't arguing against maximizing shareholder value, he's highlighting the misunderstanding of what maximizing shareholder value is. Current intro-level schools of thought on how to value projects, raise money for those projects, and what to do with the money left over, start with a perfect-world scenario [1]. This scenario's cornerstone centers around the idea markets are perfectly efficient, there are no taxes, management incentives align with shareholders, there are no taxes, there are no bankruptcy costs, and possibly one more. In this world, there is no difference in value to a company to raise money via debt or via equity. However, if we start to violate the 5-6 founding assumptions (i.e. we enter the real world) we find that there significant differences in value of a firm in a given industry who use debt or equity to raise money (or any flavor of security between debt and equity), who pay management via different bonus structures, who keep cash on hand versus pay it out, have underlying assets which are easily saleable or not, and who have different risk profiles. Maximizing shareholder value is a nice tool to use when evaluating key financial decisions (e.g. how levered a firm should be), but as the other points out is misused or abused due to misaligned management incentives. However, tbe idea isn't intrinsically dumb, the misunderstanding of the value of the idea and how it should be used is what's sometimes wrong and sometimes harmful. [1] http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_the...

autokad 12y ago

"Yet, Johnson & Johnson has delivered considerably more return to shareholders than IBM has managed over the same time period." good lord, treating IBM and JNJ the same? not to mention assuming companies in their various stages should have comparable growth. you always see these days a new tech company come out 'we are different (like everyone else), we do not care about our stock price blablabla. it doesnt take them very long before they realize that their stock price is critical to their survival. as almost every tech found out after spitting such garbage, when their stock plummets their talent leaves. they would also find it hard acquiring talent. This is especially true when stock options are a significant incentive - as it almost always is. this is not to mention the many various social effects of a company whose stock is always in the gutter. you lose customers, become the butt of jokes, etc etc (even though these things have no direct tie to stock price).

pbreit 12y ago

The headline wouldn't be as provocative if it were correct: "The World's Dumbest Idea: Maximizing Short Term Shareholder Value". The author seems to argue that switching from long term to short term shareholder value maximization hasn't really increased shareholder value (and might have decreased it). So I gather that he is in fact in favor of maximizing shareholder value but that it should be performed on a longer basis.