Tag Archives: Shareholder value

Where Friedman Was Wrong

A new paper by Oliver Hart and Luigi Zingales argues that a company’s objective should be the maximization of shareholders’ welfare, not value.
By Asher Schechter – In 1970, Milton Friedman famously argued that corporate managers should “conduct the business in accordance with [shareholders’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Since then, Friedman’s view that the sole social responsibility of the firm is to maximize profits—leaving ethical questions to individuals and governments—has become dominant both in finance and law. It also laid the intellectual foundations for the “shareholder value” revolution of the 1980s.

Friedman’s position has been attacked by many critics on the grounds that corporate boards should consider other stakeholders in their decisions.

Yet, if the owner of a privately held firm is under no obligation to care about anybody’s interest but her own, why should it be different for a publicly traded company? more> https://goo.gl/8y3wWZ

HBR Defends ‘The World’s Dumbest Idea’

By Steve Denning – The professors miss the third option enunciated by Peter Drucker as long ago as 1954: that the purpose of a firm is to create a customer by continuously delivering value to customers, as shown by the experience of firms like Apple, Google and Amazon.

The suggestion is that the true goal of the firm is to maximize the discounted value of long-term cash flow. The practical problem is that no firm can make day-to-day decisions based on the discounted value of the long-term cash flow implications of each individual decision.

Despite its flaws, shareholder value dealt with these problems in a fashion by creating a single unifying goal that could be understood throughout the whole organization and so overcome the “garbage can” syndrome.

The idea of having a single unifying focus therefore was good. Unfortunately, the goal chosen was bad.

In its sophisticated form of “long-term discounted cash flows,” it is unimplementable. And in its bastardized form as “the current stock price,” it leads to rampant short-termism, excessive share buybacks to the neglect of investment, skyrocketing C-suite compensation and misallocation of resources in the economy. more> http://goo.gl/SfqIpx

Washington Post Joins Foes Of ‘The World’s Dumbest Idea’

English: Map of the first European corporation...

English: Map of the first European corporations and the timeline of their creation Español: Mapa de las primeras corporaciones europeas y la cronología de su creación. (Photo credit: Wikipedia)

By Steve Denning – Now in September 2013, the Washington Post has joined the chorus of critics and published an article by Steven Pearlstein entitled, “How the cult of shareholder value wrecked American business“.

“In the recent history of management ideas, few have had a more profound” or pernicious” effect than the one that says corporations should be run in a manner that ‘maximizes shareholder value.’

“What began in the 1970s and ’80s as a useful corrective to self-satisfied managerial mediocrity has become a corrupting, self-interested dogma peddled by finance professors, money managers and over-compensated corporate executives.” more> http://tinyurl.com/nhvs7a4

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The Economist Advocates The ‘World’s Dumbest Idea’ In Pricing

By Steve Denning – As in most economics textbooks, all profits are good. The possibility of such a thing as “bad profits” is almost inconceivable. There is little awareness of some thirty years of research done by Fred Reichheld and his colleagues summarized in The Ultimate Question 2.0, which shows that if the firm is making profits while leaving customers disgruntled, then the profits generating brand liabilities that will have to be repaid one day.

In a world in which power in the marketplace has shifted from seller to buyer, pursuing bad profits can have disastrous consequences for the firm. The phenomenon of bad profits helps explain the paradox of today’s economy where firms are registering record profits and executives are getting extravagant bonuses, while the economy sputters or stagnates and the life expectancy of big firms steadily declines. more> http://tinyurl.com/m2vy2zs

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How The ‘World’s Dumbest Idea’ Killed The US Economic Recovery

By Steve Denning – Why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?

As Matthew Yglesias at Slate writes:

“On this account we are reaping the bitter fruits of the “shareholder value” revolution. Executives at publicly traded companies are paid to generate higher share prices, which is done by hitting quarterly earnings targets. This leads to underinvestment relative to the behavior of managers of privately held firms.” more> http://tinyurl.com/nfqba3g

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The world has changed and economics hasn’t

By Steve Denning – The challenge is massive because shareholder value is now deeply embedded in the basic economics that is taught in business schools and economics faculties around the world. Moving on from the shareholder value theory, which even its foremost exemplar, Jack Welch, has called “the dumbest idea in the world”, will entail re-thinking and re-writing much of the basics of modern economics. more> http://tinyurl.com/n3btoca

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When Will ‘The World’s Dumbest Idea’ Die?

By Steve Denning – Why will it take businesses so long to embrace what looks like an overwhelming case for change, supported even by original proponents like Jack Welch?  The sad fact is that the shareholder value idea is still a very widely-held view in both businesses and business schools.

Their whole understanding about how the world works is embedded in that ideology. Views held so deeply are not going to disappear rapidly. more> http://tinyurl.com/kpqu722

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Global Drucker Forum Foments A Revolution In Capitalism

By Steve Denning – Among many other speakers, Roger Martin, Dean of the Rotman School of Management, will discuss the shift from maximizing shareholder value to customer capitalism. He will talk about: what went wrong with capitalism? Can it be reformed? What are the main axes to pursue?

My own contribution comes in an article on the Global Drucker Forum this morning, “The Revolutionary Tenets of Management 2.0“. more> http://tinyurl.com/8ejc7cd

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