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It's so ironic to me that some large corporations only focus on shareholders. Focusing on customer satisfaction, and product quality leads to greater sales mor
by AdamFernandez 12y ago
It's so ironic to me that some large corporations only focus on shareholders. Focusing on customer satisfaction, and product quality leads to greater sales more than anything else. A byproduct of this is...wait for it...higher value to shareholders!
- TylerE 12y agoThey are, in most cases, legally required to place shareholder value over all else.
- yuhong 12y agolegally required?
- BigChiefSmokem 12y agoNo that is a myth told by all investors to the people they invest in. However, good luck when the shareholders sue you to try to recover their loses. That's the real meaning of that threat.
- AdamFernandez 12y agoFocusing on the first two elements I mentioned is the best way to accomplish that. Shareholders should be saying 'please ignore us and focus on the other stuff'.
- untog 12y agoNo they aren't. Time to put that misconception to bed: http://www.washingtonpost.com/opinions/harold-meyerson-the-myth-of-maximizing-shareholder-value/2014/02/11/00cdfb14-9336-11e3-84e1-27626c5ef5fb_story.html http://www.washingtonpost.com/opinions/harold-meyerson-the-m...
- sbierwagen 12y agoRelated: 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... http://www.nakedcapitalism.com/2013/10/why-the-maximizing-shareholder-value-theory-of-corporate-governance-is-bogus.html http://www.nakedcapitalism.com/2013/10/why-the-maximizing-sh... http://www.nakedcapitalism.com/2014/01/myth-maximizing-shareholder-value.html http://www.nakedcapitalism.com/2014/01/myth-maximizing-share...
- ashwinaj 12y agoTrue, they aren't obligated. Another thing to note is that most executives get paid with equity more than cash. So it is in their self interest to have the stock stay steady or go up and not take a nose dive.
- gaius 12y agoSo it is in their self interest to have the stock stay steady or go up Until they are ready to cash out, which might be as soon as a year away. It needs to be redesigned with long-term incentives in mind.
- eli 12y agoI'm pretty sure that's a myth. Which specific law requires that? What are the penalties for not following it?
- fennecfoxen 12y agoIt's in most corporation's charters, and I believe that it's contract law that requires them to follow the charter -- and the alternative is to face shareholder lawsuits, especially if it's a sudden and controversial deviation that they don't have a really solid explanation for.
- mitchty 12y agoHow does that jive with stuff like this? http://blogs.law.harvard.edu/corpgov/2012/06/26/the-shareholder-value-myth/ http://blogs.law.harvard.edu/corpgov/2012/06/26/the-sharehol... https://hbr.org/2010/04/the-myth-of-shareholder-capitalism https://hbr.org/2010/04/the-myth-of-shareholder-capitalism Because it seems that generally isn't correct as viewed by the law (i'm not a lawyer blah blah...).
- smackfu 12y agoTrue, but not as meaningful as it sounds. As long as you are taking actions with good intentions, you're on solid ground. And you can justify almost any actions under employee satisfaction (which reduces hiring expenses) or goodwill (which reduces advertising expenses.)
- smsm42 12y agoThat's a myth. There's no legal requirement to "place shareholder value over all else". There are situations where one has to prefer value over other considerations, but that applies to acquisitions and such, not daily business conduct. E.g. see: http://www.washingtonpost.com/opinions/harold-meyerson-the-myth-of-maximizing-shareholder-value/2014/02/11/00cdfb14-9336-11e3-84e1-27626c5ef5fb_story.html http://www.washingtonpost.com/opinions/harold-meyerson-the-m... and many other places.
- TeMPOraL 12y agoThey aren't (as explained by others), but while it's a myth the fact itself isn't that significant - the corporations don't have to maximize shareholder value and yet they mostly tend to. How this happens? bduerst explained it nicely upthread. https://news.ycombinator.com/item?id=8993907 https://news.ycombinator.com/item?id=8993907
- TeMPOraL 12y agoCorporations (and generally capitalism by its very nature) run on a greedy[0] algorithm - they pick locally optimal solutions. Which, in some cases, can lead to great results, but in others the algorithm will get stupidly stuck on a suboptimal choice. Focusing on shareholders instead of customers is a local optimum here. [0] - I mean "greedy" in CS terms, without attaching moral baggage to the word.
- thanksgiving 12y agoIBM came into our .NET shop and jammed in a one-off Java applications that our developers have to support. It sticks out as a sore thumb. If the management learned anything, they will never bring IBM back for anything. :(
- bduerst 12y agoShareholders vote on the board, the board hires the CEO, and the CEO hires execs who make decisions for the different parts of the company. The shareholders rarely see or care about the day to day operations of a company, but do see the quarterly filings. It's very hard to quantize customer satisfaction on a financial report. You may say this is a broken system, and for many B2C companies it can be. This is why I think that the benefit corporations are quite possibly one of the single best things to happen to corporate business in almost a century. It allows a company to focus on a mission statement, and protects it from shareholders who only want to focus on profits.
- chrisbennet 12y agoI had never heard of "benefit corporations" until you mentioned it. Thanks.
- TeMPOraL 12y agoMe neither, so I join in thanking the GP. Something interesting to Google tonight. EDIT: TL;DR from Wikipedia for the lazier of us: In the United States, a benefit corporation or B-corporation is a type of for-profit corporate entity, legislated in 28 U.S. states, that includes positive impact on society and the environment in addition to profit as its legally defined goals. B corps differ from traditional corporations in purpose, accountability, and transparency, but not in taxation.
- dbarlett 12y agoSome you've probably heard of: * Etsy https://www.etsy.com/about/ https://www.etsy.com/about/ * Patagonia http://www.patagonia.com/us/patagonia.go?assetid=68413 http://www.patagonia.com/us/patagonia.go?assetid=68413 * Seventh Generation http://www.seventhgeneration.com/responsibility/certifications http://www.seventhgeneration.com/responsibility/certificatio... * Warby Parker https://www.warbyparker.com/culture https://www.warbyparker.com/culture
- TeMPOraL 12y ago
- Nicholas_C 12y agoI think this happens a lot when huge, mature companies are pressured to grow. Management becomes desperate to make the company into something it isn't to stay on top of the earnings treadmill and keep the board/investors happy. At some point it seems it's just about squeezing earnings out of the firm and claiming to be developing a great product and a winning environment while not actually doing that at all. It would be interesting to see how employees view a firm over time during periods of beating earnings expectations and earnings misses. I don't have any real data on this but I've got a hypothesis that once a firm misses earnings a few times they "get serious", lay people off, and get rid of parts of the culture that made the firm great in an effort to expand margins for shareholders and say, "Look! See? We're getting better!". This really creates a toxic culture that causes a negative feedback loop and makes it even harder to be an innovative firm that grows like shareholders want. This is probably a huge challenge for firms that do have excess employees, or need to change their employees to pivot strategies, and it would seem to be hard to do this without inducing the aforementioned effects.
- psychometry 12y agoIt's the "wait for it" part that you're not paying attention to. A company's leadership is primarily tasked with maximizing the immediate value of their share price because that's the expectation in a capitalist system. Long-term growth is secondary to this goal.
- _delirium 12y agoI think that particular bit is more specific to the publicly traded corporation model of ownership. The structure of capitalism in general is to maximize return on capital, but it doesn't inherently focus on maximizing short-term market prices at any given instant. Other ownership models, like the old industrial trusts, or modern private equity, play a somewhat different game.
- TheOtherHobbes 12y agoThe real problem is that there are huge incentives for company leadership to maximise their own earnings, even if - or especially if - it destroys the company. Beyond a certain social level failure no longer counts against you. But income certainly counts for you. So there's a small but unrealistically influential group who can hop from consultancy to executive job to consultancy. They're never held to account in the same way that employees of lower social status are. Shareholders have no incentive to support a company either. They can sell up at the first sniff of a difficult quarter and look for higher returns elsewhere. >Long-term growth is secondary to this goal. Not always, but CEOs need to inspire investors with confidence and charisma to keep them from selling up. Sometimes this works, but it's rarely related to the actual commercial value of a strategy. Basically it's all about perceived status and social signalling, not about objective ability. That disconnect is the big failure. It means the wrong things get rewarded for the wrong reasons, collective and strategic intelligence happens by exception, not by design, and the economy as a whole suffers badly.
- agumonkey 12y agoCapitalism really sounds like a bad fever.
- oldmanjay 12y agoI'm not saying you're wrong but you sure didn't provide any evidence to back up your opinion on how to run a fortune 100.
- jcslzr 12y agoEver notice how sociopaths end at the top in big companies, the reason is because they are the most willing to fire anybody, check out the Gervais Principle
- mhuffman 12y agoShareholders want their profits now, like Apple -- not in some imaginary future, like Amazon!
- aceperry 12y agoI had no idea that Amazon shareholders were patiently waiting for future profits.
- wdr1 12y agoThat's more or less the only way to justify an infinite P/E ratio.
- aceperry 12y agoWhich brings the question of: How does Amazon get away with not showing immediate and growing profits while other companies claim they need to do so.
- tonyedgecombe 12y agoThe idea that lack of profit is acceptable while revenue grows, the expectation is that once revenue flattens profits can be unlocked. I'm sceptical this will ever happen with Amazon.
- mmf 12y agoMeanwhile society benefits from its large economy of scale running on low margin. I dread the day Amazon will start running significant profits...
- tonyedgecombe 12y agoDistribution is inherently a low margin business, that's why I don't think they ever will start making significant profits.
- adventured 12y agoYou can condition shareholders, and or build your company such that you target specific types of shareholders. Too often I see people lump shareholders into one group, as though they're all the same. You can focus on long-term shareholders, or you can focus on short-term shareholders - IBM chose the latter, and as usual they're paying the price for it in expectations (and those shareholders will be nowhere to be found if the stock erodes later). Berkshire Hathaway, as an example, chose the former. Buffett carefully cultivated very long term shareholders. To say that Buffett is concerned with creating shareholder value (he is), means something different than to say that IBM is focused on creating shareholder value (they are) - because they have different types of shareholders, and go about it differently. Jeff Bezos has talked about this concept a few times in relation to Amazon. He'd rather short-term shareholders just move along to the next stock.