The World's Dumbest Idea: Maximizing Shareholder Value

[Admiral Yi]

And our white women.

[Siege]

Regulations will kill us all, and our economy,  and hand over our collective head to China in a platter.

You overvalue your collective heads.  China only wants your money

You are wrong.
They want power, and like all primitive cultures, the prestige of power.
They want recognition of being the greatest power, and they want the world to speak Chinese and consume their culture.
Of course, they don't recognize the reason the world speaks englese is the end of a long process in which the British enjoyed a large technological advantage that China just doesn't have.

The only good news is that Chinese population is growing old and that will eventually turn down their aggressiveness.
We just need to survive the next 30 years or so. Then they will be old weak, senile and lame people just like Europe.
While America still have a 2.5 pop grow.

[Valmy]

And our white women.

Too bad they usually just get the white men.

[Valmy]

Regulations will kill us all, and our economy,  and hand over our collective head to China in a platter.

Yeah no government interference in the Chinese Economy.

[CountDeMoney]

If maximising shareholder value should not be the top priority, then what should be?

There ya go, Mono.  Explain it to them.

[Martinus]

Another solution would be to nationalise and centralise auditing. Because what the big four allow companies to get away with is a disgrace.

[Sheilbh]

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.

Sort of.  I think it's got to do to a large extent with the almighty bonus.  I have seen horrible business decisions made because someone had 'x' on their goals list so 'x' had to be achieved no matter the risk in order to guarantee the massive bonus that person thinks they are entitled to.

I agree.  I've come to believe that quantifying the goals is often a disastrous mistake, unless you're running a factory or something.  What eventually happens is that only quantifiable goals get the love, and intangible assets get destroyed in the pursuit of tangible numbers.

Yeah. The Economist covered this paper too:

No value
Dec 3rd 2014, 13:02 BY BUTTONWOOD
Timekeeper
DO companies exist merely to generate economic returns to their owners? The concept of "shareholder value" suggests this should be their primary focus. But in a hard-hitting note, James Montier of GMO, the fund management group, suggests this is "The World's Dumbest Idea".

As Mr Montier argues, the shareholder value concept arose in part as a way to get round the agent-principal problem - that executives will run firms for their own benefit, rather than for that of their owners. The idea goes back to Adam Smith who wrote that
being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own......Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

In the 1980s, the worry was that executives were too focused on their own perks (jets, pensions etc) and on empire-building. From this arose the idea that executive pay should be linked to the share price, in the form of options. And what has been the result? Mr Montier defines the era of "managerialism" as from 1940-1990 and the sharehoder value era as the period since then. (One could argue with this timing, although he claims the results are robust as to the timing of the cross-over.) Real returns were slightly higher in the era of managerialism and much higher if one focuses on earnings growth rather than valuation. (A share price increase can either be the result of earnings growth, or the market placing a higher value on a given level of earnings. Such higher valuations can be transitory.)

So shareholder returns haven't gone up in the era of "shareholder value". CEO pay has, though. Hard to believe but CEOs got by in the 1970s on $1m or so; their total remuneration has grown eightfold in real terms since then. The focus on the share price has led to an unhealthy concentration on meeting the short term earnings per share target; surveys have shown that executives will reject a project with a positive rate of return if it damages the ability to meet the next quarter's eps. Money has been returned to shareholders (in the form of buy-backs) while business investment has declined; as a proportion of GDP, it is still lower than at any time in the 1947-2007 period.

CEOs can be forgiven for pursuing a "get rich quick" strategy; since the 1970s, the average tenure of a CEO has fallen from almost 12 years to six. Why would they care about long-term value? And while buy-backs may return money to those shareholders who take advantage of them, they may damage long-term investors; the peak for buy-backs was in early 2008, just when the market was about to crash. As Warren Buffett has said, this was the equivalent of buying dollar bills for $1.10.

So the whole concept should really be renamed "CEO value"; they have been the main beneficiaries. And all this has led to growing inequality; two-thirds of those in the top 0.1% of earners have been executives or those working in finance. And that trend, which has spilled out to the rest of the developed world, is leading to the growing anger of voters and the resistance to globalisation which may eventually cause even more damage to business and investors.

I think it is linked to the whole super-manager idea of Piketty's. In general I don't think we should care about remuneration beyond having a minimum wage, but I think if pay structures are also having effects like historically low levels of investment and of real pay for workers then that's a concern. Ironically insisting executives have 'skin in the game' is probably one of the problems.

[Martinus]

Well as I said earlier, they should have a skin in a game, it's just a question of how you define the game. Making their bonuses dependent on long term performance is one idea. Taking auditing out of the hands of private consultancies (so there is less chance to get away with massaging the numbers so that you meet short term targets) is another.

[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?

[Tonitrus]

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

[grumbler]

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.

[crazy canuck]

It is simple economic Darwinism.

Companies pass on genetic mutations to their offspring?

I knew some people believe companies are people but this is getting a bit ridiculous dont you think.

[crazy canuck]

I think it is linked to the whole super-manager idea of Piketty's. In general I don't think we should care about remuneration beyond having a minimum wage, but I think if pay structures are also having effects like historically low levels of investment and of real pay for workers then that's a concern. Ironically insisting executives have 'skin in the game' is probably one of the problems.

It depends who "we" are.  If we as shareholders dont care then we get over paid executives that dont return any value for the premium - which comes right out of our pockets.

If we as political group don't properly regulated properly around the manner in which managerial perks and remuneration are taxed then we get the very odd result of low income earners paying more in tax than high income earners with the undesireable effects that come with that.

[crazy canuck]

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.   

[CountDeMoney]

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

Your Barbara Stanwyk boner still hasn't gone down, that's all.