The World's Dumbest Idea: Maximizing Shareholder Value

[garbon]

Why people worry so much about what corporations do with their money?
Economic darwinism. A corporation that does not balance short term earnings with long term will fail, and if it doesn't then it is ok.
I want the US to have the most effective corporations, the ones that advance the technology the fastest and farthest, not the most ineffective corporations, controlled by the gubmint.
Whenever politicians are in charge, we all lose.

Many of us work for corporations and would rather not be ground into the mud and/or lose our jobs.

[sbr]

Why people worry so much about what corporations do with their money?
Economic darwinism. A corporation that does not balance short term earnings with long term will fail, and if it doesn't then it is ok.
I want the US to have the most effective corporations, the ones that advance the technology the fastest and farthest, not the most ineffective corporations, controlled by the gubmint.
Whenever politicians are in charge, we all lose.

Many of us work for corporations and would rather not be ground into the mud and/or lose our jobs.

Of course Siegy doesn't need to worry about that, sucking at the gubmint teat as hard as he does.

[OttoVonBismarck]

Why people worry so much about what corporations do with their money?
Economic darwinism. A corporation that does not balance short term earnings with long term will fail, and if it doesn't then it is ok.
I want the US to have the most effective corporations, the ones that advance the technology the fastest and farthest, not the most ineffective corporations, controlled by the gubmint.
Whenever politicians are in charge, we all lose.

Because we all have a stake in corporate performance to one degree or another. Either as direct or indirect employees, direct or indirect investors, or just as participants in an economy whose fortunes are largely shaped by the performance of corporate America. When corporations largely lost billions in the financial crisis and the economy tanked, it even affected government employees. We had pay freezes, positions budgeted for were removed and there was a hiring freeze, resulting in less people available to do increasing workload. Even the military has seen cuts to manpower levels, ships, and various retention and recruitment incentives.

[Martinus]

I love how Siegy argues about deregulation and corporate Darwinism while working a cushion government job.

[Admiral Yi]

Nothing says cushion like getting shot at every day.

[Martinus]

Nothing says cushion like getting shot at every day.

Only because it lets him indulge his sociopathic tendencies it does not make it less cushion.

[PJL]

I love how Siegy argues about deregulation and corporate Darwinism while working a cushion government job.

Much like Freidman himself, though at least he acknowledged it.

[Admiral Yi]

BTW Marty, it's "cushy."

[Berkut]

• Third, maximizing shareholder's value is a general concept that has nothing to do with a specific time horizon, short or long.  Nothing is implied there, only that you should seek to increase the shareholder's value, meaning you should refrain from chosing projects that don't generate enough value, i.e., project with a negative net present value (though it's not the only measure used to evaluate a project).  Wich kinda makes sense.  A corporation with no profits goes nowhere.
  

www.amazon.com

[Berkut]

Corporations, at least publically traded ones, do in fact have a responsibility to their shareholders. Those are the owners of the company. At some point in the companies past, the company tradedd ownership rights to human beings in return for capital, with the presumption that they would use that capital to increase the value of those shares.

If this is a model you object to, simply don't make the deal. Don't sell your company off to investors in return for capital, and you can do whatever you like and worry not about shareholders.

You won't get the capital of course, but why should someone give you capital except with the expectation that you would in fact do what is promised, ie, increase it's value?

Now, I suppose one can argue that the people who run the companies intentions in regards to shareholder value can and ought to be included in the valuation - ie, if you want to buy some Facebook or Amazon stock, you should know that those people who run those companies don't give a shit about your shareholder value in the direct sense, so you should consider that in how much you are willing to pay. And in fact...the valuation appears to be that this makes that stock MORE valuable.

It seems to me in fact, that those who demand and pressure those who run companies to consider short term valuation over long term health are in fact demanding that the company be run in a predatory manner that cannot possibly have long term beneficial outcomes in most cases.

A truely resposnive market ought to in fact respond to that by de-valuing those stocks. But I suspect our market is opaque enough that that doesn't happen nearly as often or consistently as it should.

[Martinus]

The "opacity" problem is compounded by vague accounting standards and the fact that the big four run both audit and consulting companies, with audit being more important in terms of public interest, but paying much much less than consulting. Sure, they cannot act for the same company on both audit and consulting at the same time but given that there are only four of them, this is by far insufficient to ensure lack of conflict of interest situations (and of course they are still being paid for the audit work by the very company they are supposed to investigate).

Not to mention, if, say, Deloitte auditors start making waves by challenging financial reports of a large multinational, other large multinationals will take notice as well.

It is quite telling that, apparently, of all the big scandals taking place in recent decades (Enron, LIBOR, etc.), none was discovered by auditors - they were all revealed by whistleblowers.

Personally, I think audit should be effectively nationalised, with auditors being given positions (and structure) not unlike that of judges (rather than being private practicioners the way they are now), and being paid by the government, not by the companies they are supposed to audit.

[Admiral Yi]

How in the world were the auditors supposed to know about LIBOR? 

[Tamas]

My wife worked for IBM for almost three years (2010-2013).  During that time I think the belt tightening/short sighted focus got worse and worse each year.  By the end she was told that she'd be taking on 1 1/2 additional people's roles, and the promised option to switch positions at the end of three years wasn't there anymore.  She couldn't get out of there fast enough.

Hey I was distant colleagues with your wife then for almost 3 years!

The thing with IBM and I imagine with most companies of similar size is that they are slow to turn. Yes, a lot of bad things were happening due to bad direction, but there were some pretty logical intentions behind a good number of changes. But then those got mingled in the web of the overhead and the understandably increasingly undermotivated workforce, and the end results were, well, mixed at best.

[Caliga]

No company as large as IBM can possibly function well.  It's basically a government agency once it gets to that size.  Another example of a completely dysfunctional behemoth is AT&T, who both my brother and I interact with for work (in totally different capacities).

[crazy canuck]

Corporations, at least publically traded ones, do in fact have a responsibility to their shareholders. Those are the owners of the company. At some point in the companies past, the company tradedd ownership rights to human beings in return for capital, with the presumption that they would use that capital to increase the value of those shares.

No one is arguing that corporations don't have some responsibilities to their shareholders.  But what has been lost in many discussions around this topic are the duties that are also owed to the company itself.  The mantra of maximizing shareholder value is a good illustration of the problem as it usually results in short term decisions to boost quarterly results.  ie there can be a conflict between the short term interests of shareholders and the long term interest of the company.

I am not sure what you mean by "the company traded ownership rights to human beings in return for capital".  The company didn't trade any rights.  The trade off being made is that the first shareholders made the decision that they wished to create a company (rather then become direct owners) and obtain the protection of limited liability.  In return for that limited liability the shareholders gave up control of running the company to the management who were hired by the company to run the company's affairs.  The duties of that management team are to the company.  Somehow those very basic principles have been lost.

The choice to incorporate isn't necessarily driven by the chance to increase share value.  The primary reason has always been to create a vehicle for business investment that limits the liability of the investor to the amount invested.

To be clear the only thing a shareholder owns is whatever rights the shares they own give them (not all shares have the same rights).  In most instances the rights of a shareholder are limited and certainly do not equate to "owning the company" which implies the power to make the company do their bidding.  They own shares in the company and that is a subtle but very important distinction.

It seems to me in fact, that those who demand and pressure those who run companies to consider short term valuation over long term health are in fact demanding that the company be run in a predatory manner that cannot possibly have long term beneficial outcomes in most cases.
A truely resposnive market ought to in fact respond to that by de-valuing those stocks. But I suspect our market is opaque enough that that doesn't happen nearly as often or consistently as it should.

You are assuming that all shareholders are long term investors in the company and so all shareholders would punish the management of a company that makes short term decisions for short term profit.  But of course not all shareholders are long term investors.  Rather stocks are traded on the basis of what company is likely to go up or down in a particular time frame.  Therefore the pressure on management (both by the market and their own short term self interest) is to act with an eye to short term results. ie the market is responding exactly as one would expect.