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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

by 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
[deleted]
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.
- pash 12y ago
  Yes, I take your point, which is more precise and better argued than the author's. That is, I think your distillation of his argument misrepresents it by stripping out the logical inconsistencies (and the irony). Montier's letter is rather more muddled than your comment. He suggests not only that optimizing returns in the short run is a poor strategy for creating long-term value for shareholders, but that the benchmark of share value (even over the long run) is a deficient measure of corporate performance. Everything Montier writes suggests that he believes companies did better (in some sense that he never quite articulates) in the era when managers ran their firms as they saw fit, before the idea took hold that they should try to maximize share value. So the irony of his argument is the incongruity of demeaning the very benchmark he uses to suggest that J&J has somehow been a better managed company than IBM; the major arc of his argument vitiates the evidence he uses to support it. It is ironic, in the comedic sense, that Montier seems to be so imbedded in the culture of maximizing shareholder value that he invokes that criterion, seemingly reflexively, in the course of his argument against it. But it's a logical and rhetorical mess, too. Montier's argument is analogous in your maze-solving formulation to claiming that the final distance from the exit is a poor measure of the performance of a maze-solving algorithm while at the same time maintaining that greedy algorithms are worse than random algorithms because it turns out that the greedy ones end up farther from the exit. If you accept the first claim, then the second is a non-sequitur, and advancing the second argument undermines the first.
- ScottBurson 12y ago
  OT, but I am reminded of this great quote: [I]f we wish to count lines of code, we should not regard them as "lines produced" but as "lines spent": the current conventional wisdom is so foolish as to book that count on the wrong side of the ledger. -- E. W. Dijkstra
themartorana 12y ago
No no - it's the means, and the ends. When your driver is share value, it clouds everything. When your driver is delivering amazing products, services, doing great research, and so on, success in those areas is more likely, and that rising tide lifts all boats, especially shareholder value. At its extremes, it's altruism vs. Dr. Evil. But focusing on delivering to the customer vs. delivering to the shareholder as the first order of business is the differentiator. Do the first, and the second will come naturally. Do the second, and the results of both are questionable.
kemitchell 12y ago
You may be interested to know that a small counterculture of public companies has openly forsworn shareholder wealth maximization in public disclosures. So far as I can tell, Berkshire Hathaway lead the way in recent memory. Google followed suit in a letter to shareholders in the process of going public.
- peteretep 12y ago
  Are you using a definition of maximising shareholder value that doesn't mean what it appears to say on the tin? Berkshire Hathaway exists solely to maximise shareholder value, prima facie. Why else would people buy and hold their shares? Altruism? Warren says it exists to enrich shareholders in the long term. Are confusing shareholder value with a short-term focus on return?
  - sp332 12y ago
    It gives them leeway to do some things that don't explicitly or obviously increase shareholder value. Or I suppose they could do something "ethical" instead of profitable, but I don't think that's very likely.
  - kemitchell 12y ago
    I was! Forgive me for playing loose with my terms after one too many comments. I understood BH/Google to be implicitly criticizing the myopia of "shareholder value" as that term is usually meant.
3rdMoment 12y ago
I don't even believe he does his main comparison correctly, since when he tries to remove the effect of valuation he doesn't account for valuation during the period in question. For more see here: http://3rdmoment.blogspot.com/2014/12/stock-performance-in-era-of-shareholder.html http://3rdmoment.blogspot.com/2014/12/stock-performance-in-e...

by pash 12y ago

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

[deleted]

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.

pash 12y ago
Yes, I take your point, which is more precise and better argued than the author's. That is, I think your distillation of his argument misrepresents it by stripping out the logical inconsistencies (and the irony). Montier's letter is rather more muddled than your comment. He suggests not only that optimizing returns in the short run is a poor strategy for creating long-term value for shareholders, but that the benchmark of share value (even over the long run) is a deficient measure of corporate performance. Everything Montier writes suggests that he believes companies did better (in some sense that he never quite articulates) in the era when managers ran their firms as they saw fit, before the idea took hold that they should try to maximize share value. So the irony of his argument is the incongruity of demeaning the very benchmark he uses to suggest that J&J has somehow been a better managed company than IBM; the major arc of his argument vitiates the evidence he uses to support it. It is ironic, in the comedic sense, that Montier seems to be so imbedded in the culture of maximizing shareholder value that he invokes that criterion, seemingly reflexively, in the course of his argument against it. But it's a logical and rhetorical mess, too. Montier's argument is analogous in your maze-solving formulation to claiming that the final distance from the exit is a poor measure of the performance of a maze-solving algorithm while at the same time maintaining that greedy algorithms are worse than random algorithms because it turns out that the greedy ones end up farther from the exit. If you accept the first claim, then the second is a non-sequitur, and advancing the second argument undermines the first.
ScottBurson 12y ago
OT, but I am reminded of this great quote: [I]f we wish to count lines of code, we should not regard them as "lines produced" but as "lines spent": the current conventional wisdom is so foolish as to book that count on the wrong side of the ledger. -- E. W. Dijkstra

themartorana 12y ago

No no - it's the means, and the ends. When your driver is share value, it clouds everything. When your driver is delivering amazing products, services, doing great research, and so on, success in those areas is more likely, and that rising tide lifts all boats, especially shareholder value. At its extremes, it's altruism vs. Dr. Evil. But focusing on delivering to the customer vs. delivering to the shareholder as the first order of business is the differentiator. Do the first, and the second will come naturally. Do the second, and the results of both are questionable.

kemitchell 12y ago

You may be interested to know that a small counterculture of public companies has openly forsworn shareholder wealth maximization in public disclosures. So far as I can tell, Berkshire Hathaway lead the way in recent memory. Google followed suit in a letter to shareholders in the process of going public.

peteretep 12y ago
Are you using a definition of maximising shareholder value that doesn't mean what it appears to say on the tin? Berkshire Hathaway exists solely to maximise shareholder value, prima facie. Why else would people buy and hold their shares? Altruism? Warren says it exists to enrich shareholders in the long term. Are confusing shareholder value with a short-term focus on return?
- sp332 12y ago
  It gives them leeway to do some things that don't explicitly or obviously increase shareholder value. Or I suppose they could do something "ethical" instead of profitable, but I don't think that's very likely.
- kemitchell 12y ago
  I was! Forgive me for playing loose with my terms after one too many comments. I understood BH/Google to be implicitly criticizing the myopia of "shareholder value" as that term is usually meant.

3rdMoment 12y ago

I don't even believe he does his main comparison correctly, since when he tries to remove the effect of valuation he doesn't account for valuation during the period in question. For more see here: http://3rdmoment.blogspot.com/2014/12/stock-performance-in-era-of-shareholder.html http://3rdmoment.blogspot.com/2014/12/stock-performance-in-e...