The World's Dumbest Idea: Maximizing Shareholder Value

[Baron von Schtinkenbutt]

The World's Dumbest Idea

When it comes to bad ideas, finance certainly offers up an embarrassment of riches – CAPM, Efficient Market
Hypothesis, Beta, VaR, portfolio insurance, tail risk hedging, smart beta, leverage, structured finance products, benchmarks, hedge funds, risk premia, and risk parity to name but a few. Whilst I have expressed my ire at these concepts and poured scorn upon many of these ideas over the years, they aren't the topic of this paper.

Rather in this essay I want to explore the problems that surround the concept of shareholder value and its maximization. I'm aware that expressing skepticism over this topic is a little like criticizing motherhood and apple pie. I grew up in the U.K. watching a wonderful comedian named Kenny Everett. Amongst his many comic creations was a U.S. Army general whose solution to those who "didn't like Apple Pie on Sundays, and didn't love their mothers" was "to round them up, put them in a field, and bomb the bastards," so it is with no small amount of trepidation that I embark on this critique.

Before you dismiss me as a raving "red under the bed," you might be surprised to know that I am not alone in questioning the mantra of shareholder value maximization. Indeed the title of this essay is taken from a direct quotation from none other than that stalwart of the capitalist system, Jack Welch. In an interview in the Financial Times from March 2009, Welch said "Shareholder value is the dumbest idea in the world."

Sorry, it's a PDF and rather long.  It makes a couple points in detail that I thought I had observed to be true of the market: first, that companies that explicitly try to maximize shareholder value don't generally deliver better shareholder value than those that do not; second and related, that trying to maximize short-term gains actually hurts shareholders in the long run.

[CountDeMoney]

You're posting this on the wrong board, man.  It's the wrong choir to preach.

[grumbler]

BvS, both of those points are quite trite.  The guy sounds in that one paragraph like he is setting up the world's biggest strawman, so I didn't bother reading on.  Did he have any insights that were not blindingly obvious?

[The Brain]

I don't believe it's the dumbest idea in the world.

[OttoVonBismarck]

I agree that the concept of companies operating solely to "Maximize Shareholder Value" is the world's dumbest idea, in that it's a massive strawman created by liberals/leftists and is not a reflection of how companies in the wild actually operate.

[DGuller]

His first paragraph kind of discredits him.  He seems to be incapable of appreciating the "all models are wrong, but some are useful" concept.

[Valmy]

I agree that the concept of companies operating solely to "Maximize Shareholder Value" is the world's dumbest idea, in that it's a massive strawman created by liberals/leftists and is not a reflection of how companies in the wild actually operate.

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.

[Tamas]

I agree that the concept of companies operating solely to "Maximize Shareholder Value" is the world's dumbest idea, in that it's a massive strawman created by liberals/leftists and is not a reflection of how companies in the wild actually operate.

Well there are companies like IBM who seem to be burning bridges and risking serious long term issues just to appear a bit better on the next quarterly report thanks to cutting on wage costs.

I think the problem is that managers who are payed after such reports are not motivated to think long-term.

[Valmy]

I agree that the concept of companies operating solely to "Maximize Shareholder Value" is the world's dumbest idea, in that it's a massive strawman created by liberals/leftists and is not a reflection of how companies in the wild actually operate.

Well there are companies like IBM who seem to be burning bridges and risking serious long term issues just to appear a bit better on the next quarterly report thanks to cutting on wage costs.

I think the problem is that managers who are payed after such reports are not motivated to think long-term.

Right.  So the contention is that it is not a reflection seems to be counterbalanced by plenty of anecdotes that it is a reflection.  But hey I am no expert on corporate behavior.  I can only go by what people tell me.

[The Brain]

IBM also helped Hitlar!!!1111 wah wah wah

[Valmy]

BvS, both of those points are quite trite.  The guy sounds in that one paragraph like he is setting up the world's biggest strawman, so I didn't bother reading on.  Did he have any insights that were not blindingly obvious?

What is blindingly obvious and how is this trite?  I don't think so but I am aware I do not share your genius.  Mind stating what is blindingly obvious and why his points are trite?

[Valmy]

IBM also helped Hitlar!!!1111 wah wah wah

That is why if I boys get any IBM products I am going to wait until they are asleep and then burn them.  Boy will they learn their lesson when their new server array gets torched.

[grumbler]

BvS, both of those points are quite trite.  The guy sounds in that one paragraph like he is setting up the world's biggest strawman, so I didn't bother reading on.  Did he have any insights that were not blindingly obvious?

What is blindingly obvious and how is this trite?  I don't think so but I am aware I do not share your genius.  Mind stating what is blindingly obvious and why his points are trite?

It trite to observe that companies that "explicitly try to maximize shareholder value don't generally deliver better shareholder value than those that do not," both because there are very few companies that explicitly try to do this, and because making some goal explicit doesn't actually change anything.  It is policies and decisions that matter, not explicitly-stated goals.  It doesn't take genius to realize that. 

It is trite to observe that companies which pursue short-term gain do so at the expense of long-term gain.  Even subgeniuses can see this. 

Hell, even you'd have probably seen both of these points if you had just put a peepsight in your belly button instead of making an asshat post on Languish. 

[mongers]

I don't believe it's the dumbest idea in the world.

Yeah agreed, I have like a couple each week way worse the one than in the OP. 



Some of them sometimes involve women, those seem to be particularly bad ones.   

[Martinus]

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).