The World's Dumbest Idea: Maximizing Shareholder Value

[derspiess]

I think the problem is not maximising shareholder value but maximising short-term shareholder value.

This.

[CountDeMoney]

Ironically insisting executives have 'skin in the game' is probably one of the problems.

Why not;  Taleb argues that if it's a function in so many other professions, why not the captains of industry?  Why should they get a pass on the damage done?

Because while there is the perception they have "skin" in the game the really dont.  Bad year?  Just dont exercise your options until you get another spike in share value.  Stock options were created by the managerial elite for the managerial elite to allow quick profit taking.   

Thank you, Sheilbh.     

[crazy canuck]

Though I've done it before, I am going to post this again for these types of threads.  Some ideas are never that new. 

https://www.youtube.com/watch?v=vcEOsGvT0qA

[crazy canuck]

Though I've done it before, I am going to post this again for these types of threads.  Some ideas are never that new. 

https://www.youtube.com/watch?v=vcEOsGvT0qA

Yeah, that's what I was saying upthread.  I'd argue that this is not a business problem, though; it is a bureaucracy problem.  The further the top-level decision-makers get from those producing the product, the more their decisions are based on factors other than what is best for their organization (i.e. "bureaucratic imperatives").  It is often most visible in business, but is probably even more powerful in government and the military.

It might be a bureaucratic problem in the public sector but in the private sector managers think more about their stock option grants and other bonuses which are calculated on short term metrics and may be very different from what is best in the long term interest of the company. 

[Neil]

I think the problem is not maximising shareholder value but maximising short-term shareholder value. Perhaps we need CRD-style regulations for all listed companies, not just financial institutions (it requires that a substantial portion of listed companies' CEOs' remunration to be deferred over a period of 5 years and based on performance over such period).

Human and short term are synonymous Martinus.  Human maggots shouldn't be allowed a free rein in anything other their their private lives, which they can spend, or expand, or wreck, however they see fit.  Anything else that transcend their narrow, limited an egotistical existences should be heavily regulated. 

A corporation is nothing more than a fulcrum for those who control it; multiplying their strengths and/or their weaknesses.  Therefore, granting those entities anything beyond limited latitude is a recipe for disaster.  The implosion of 2008 should be evocative enough to illustrate my point...

Why not regulate their personal lives too?  This all sounds awfully convenient for you.

[grumbler]

Yeah, that's what I was saying upthread.  I'd argue that this is not a business problem, though; it is a bureaucracy problem.  The further the top-level decision-makers get from those producing the product, the more their decisions are based on factors other than what is best for their organization (i.e. "bureaucratic imperatives").  It is often most visible in business, but is probably even more powerful in government and the military.

It might be a bureaucratic problem in the public sector but in the private sector managers think more about their stock option grants and other bonuses which are calculated on short term metrics and may be very different from what is best in the long term interest of the company.

It is a bureaucratic problem in the private sector because private sector managers often think more about their stock option grants and other bonuses which are calculated on short term metrics and may be different from what is best for the long term interests of the company.  This is an example of a "bureaucratic imperative," which I mentioned in the post you responded to.  And, as I said, this is nothing new or unique to the private sector.

[Sheilbh]

Thank you, Sheilbh.     

What CC said. Plus executives used to receive a salary and a cash bonus often tied to strategic targets set by the board, as well as all the great perks and benefits. Now lots of their pay and especially the bonuses are share-based and are linked to earnings per share or a metric like that. So the metric they're judged on and the remuneration they receive are tied to shareholder value - according to VM's paper around two-thirds of executive pay is now options or share-based.

[CountDeMoney]

Thank you, Sheilbh.     

What CC said. Plus executives used to receive a salary and a cash bonus often tied to strategic targets set by the board, as well as all the great perks and benefits. Now lots of their pay and especially the bonuses are share-based and are linked to earnings per share or a metric like that. So the metric they're judged on and the remuneration they receive are tied to shareholder value - according to VM's paper around two-thirds of executive pay is now options or share-based.

Then why did you write "Ironically insisting executives have 'skin in the game' is probably one of the problems"?

So re you fer it, or agin' it?

[Sheilbh]

Against it. Don't tie their rewards to shareholder value (which didn't really happen prior to the 80s) and you'll get them focusing a lot less on shareholder value.

[crazy canuck]

Against it. Don't tie their rewards to shareholder value (which didn't really happen prior to the 80s) and you'll get them focusing a lot less on shareholder value.

And then they might focus a lot more on the business itself which in turn will benefit shareholders.

[crazy canuck]

Yeah, that's what I was saying upthread.  I'd argue that this is not a business problem, though; it is a bureaucracy problem.  The further the top-level decision-makers get from those producing the product, the more their decisions are based on factors other than what is best for their organization (i.e. "bureaucratic imperatives").  It is often most visible in business, but is probably even more powerful in government and the military.

It might be a bureaucratic problem in the public sector but in the private sector managers think more about their stock option grants and other bonuses which are calculated on short term metrics and may be very different from what is best in the long term interest of the company.

It is a bureaucratic problem in the private sector because private sector managers often think more about their stock option grants and other bonuses which are calculated on short term metrics and may be different from what is best for the long term interests of the company.  This is an example of a "bureaucratic imperative," which I mentioned in the post you responded to.  And, as I said, this is nothing new or unique to the private sector.

While there may be some similarity between bureaucratic imperatives and executives enriching themselves you miss the point badly if you treat them as being the same.

[OttoVonBismarck]

Yeah it probably is not solely to maximize shareholder values but to what extent is it true?  I mean how massive is the strawman?  Since companies are supposed to be beholden to the shareholders surely it is not entirely a fabricated idea?  I mean those leftists have plenty of anecdotes they can haul out whenever they want to discuss this topic.

I think it's largely all derived from one or two business writers in the 80s and caught steam from there. Actual CEOs largely will say this is not their goal in running their companies. So I would say it's mostly a strawman.

I think that what the shareholders want collectively is a factor in corporate behavior, but I think that the ownership scheme for large publicly traded corporations that have a diffuse ownership base (i.e. not Wal-Mart or Ford in which a founding family has a huge chunk of voting shares such that outside investors cannot actually prevail in any up or down vote) means that what the shareholders want is not easily or effectively translated into how the corporation behaves. I would instead say an amalgamation of what upper management, larger institutional investors, the board of directors and a few other stakeholders influence how corporations behavior, and they all largely behave differently.

When used as a derisive the concept of "maximizing shareholder value" is largely read to mean a corporation is a slave to its total return (combination of share price increase and dividends) to investors, often in a short term manner.

Corporations all seem to have different strategies. Some really want to maximize market share, even when it means lower profits and thus lower return. Some want to minimize volatility at the cost of losing greater profit potential. AEP (major electric power utility) for example has said it will not build more power plants in "rate deregulated" states. Even though deregulation may offer the potential for greater profits, AEP wants to be a rate regulated utility, which means essentially guaranteed profits (and no direct competition) but at more controlled rates. AEP has said it intends to start moving in to other rate regulated businesses like pipelines and transmission in States where energy deregulation has already happened or appears likely to happen.

I don't think there is any one set "goal" of all CEOs of say, Fortune 500 companies. Instead there are diverse types of investors who invest in these companies and lots of different managers and directors who have different goals in mind for their businesses.

[grumbler]

While there may be some similarity between bureaucratic imperatives and executives enriching themselves you miss the point badly if you treat them as being the same.

While there may be some similarities between intellectual arguments and arguments by assertion, you miss the point badly if you think that arguments by assertion are persuasive.

[Tamas]

Against it. Don't tie their rewards to shareholder value (which didn't really happen prior to the 80s) and you'll get them focusing a lot less on shareholder value.

We agree on something economy-related with Sheilbh

[crazy canuck]

While there may be some similarity between bureaucratic imperatives and executives enriching themselves you miss the point badly if you treat them as being the same.

While there may be some similarities between intellectual arguments and arguments by assertion, you miss the point badly if you think that arguments by assertion are persuasive.

Your rabbit hole is never far away is it Grumbles.

You should take what you think are clever linguistic tricks and go elsewhere.  The adults are talking.