
The Dumbest Idea In The World: Maximizing Shareholder Value - DanielRibeiro
http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/
======
mhartl

      There is only one valid definition of a business purpose:
      to create a customer.
    

No. The one valid definition of a business purpose is this: _A business should
do what the owners want it to do._ Otherwise, the notion of ownership loses
meaning.

If the owners want to create lots of customers, they do that. If they would
rather have a smaller number of highly profitable customers, they do that. If
they want to create a nice side business so that they can surf in the summer
and snowboard in the winter, they do that.

Scottish philosopher David Hume drew an essential distinction between factual
matters— _is_ —and moral matters— _ought_. Asking "What should a business do?"
looks like a Humean _ought_ , but it's actually a Humean _is_. A business _is_
a vehicle for achieving the ends of its owners. How then can we make sense of
the maxim "a business should maximize shareholder value"? In certain kinds of
businesses—especialy those owned by a large number of shareholders—the
interests of the owners may generally conflict, but they can usually agree on
one thing: _maximize the value of the company_. This describes virtually all
publicly traded companies and many family businesses as well. It doesn't
describe, e.g., my present business (the _Ruby on Rails Tutorial_ ), which I
created as a 4-Hour Work Week–style product company to let me relax for a
while, travel the world in style, and have the financial freedom to develop
longer-range plans for world domination. Its purpose is definitely _not_ to
maximize shareholder value; I'm the only shareholder, so it does whatever I
damn well tell it to do.

Let the owners worry about what a company _ought_ to do. Unless you're an
owner, it's none of your business.

~~~
barrkel
Incorporation is a privilege granted by society; and property rights are never
absolute. What you state is extremely individualistic, but it is unrealistic
and naive for the same reason. I understand your exhortation, but it does not
amount to an argument. For example, most large companies with broad
shareholder bases have no owner interests that you can easily point to; the
shareholder base has collective action problems, and frequently cannot
meaningfully affect the company.

I think you're at risk of deriving an ought from an is yourself. You take
capitalist ownership structures, which exist for the hopeful progress of
society at large, but you infer an ought from them, that the only thing that
is fair is that ownership is absolute in control over what it owns.

~~~
alexqgb
This is a much more civilized response than my initial reaction, which was "go
fuck yourself, mhartl".

The reason for that indignation was, as you pointed out, the obvious truth
that without society's extension of limited legal liability, there would be no
business in the first place - or, at least, not one with the scale and
structure of a publicly traded company. And no, society does not grant this
liability protection for free. Nor does it expect to get the short end of the
deal. It has a stake in the outcome, and it expects that stake to be rewarded
- no less than an investor expects a return on his capital.

mhartl's implication that "only shareholders have any legitimate interest"
represents a trifecta of ignorance (of the law) ingratitude (for what it
grants) and arrogance (in assuming that his counter-party is irrelevant). It
is supremely egocentric and inevitably destructive.

You see the same warped sense of self expressed by people who go around saying
"I'm a job creator" as though they were god-like individuals who combined - in
a single person - holy trinity of supply, demand, and the ability to connect
them that comprise any given job. In reality, jobs - like economic growth -
are a product of several interactions that create a favorable situation for
employment. No one person or organization controls all of them, or even (in
most cases) a majority of them.

What these "job creators" can safely say is "I hire and fire." That's a much
more honest description, and one that clearly implies the existence of factors
outside their control about which they simply make judgements. Their role is
good and necessary, but it is not creative in the sense of having invented,
built, or authored a thing. More importantly, people who hire and fire well
(aka "managers") are acutely aware of the broader milieu in which they
operate, the extent to which they depend on it, and the degree to which their
own well-being depends on the health of those around them.

Obliviousness to this vital interdependency remains deeply stupid. And unlike
a temporary impairment (e.g. getting very drunk) or a moral impairment (e.g. a
propensity to steal), the ethical blindness it represents is not something
that the people who have it are usually aware of. Nor is it something about
which they can easily be made aware. They simply lack the frame of reference
needed to understand what they lack. Just consider colorblindness; a person
who cannot see a limited part of the spectrum can still grasp the idea of
color, and can make allowances for what they can't detect directly. But a
person who has no sense of color whatsoever has no point of reference they can
use to grasp even the _idea_ of color.

When it comes to responsibility, people like mhartl fall into the latter camp.
Their minds simply cannot process the idea of social reciprocity. That is to
say, they have no real ethics. In extreme cases, this makes them properly
sociopathic. If you find yourself working with a person like this, distance
yourself as soon as possible. They are dangerous, entirely self-serving, and
prolonged exposure will get you hurt.

~~~
bricestacey
I think you may have valid criticisms, but were out of line to call mhartl a
man of "no real ethics, a sociopath, dangerous, self-serving, and someone to
distance yourself from." I have only exchanged emails briefly, regarding his
book, and he is nothing short of an honest, well-intentioned, and generous
man.

Let's avoid the attacks and keep the conversation civil.

~~~
alexqgb
Please note, I did not call mhartl a man of "no real ethics, a sociopath,
dangerous, self-serving, and someone to distance yourself from."

I did say his ethics are weak, and I stand by this. Assuming he believes what
he says, his anti-social position on the obligations of the corporation speak
for themselves. And I did note that, when carried to the extreme, blind spots
like the one shared by mhartl do, in fact, produce the litany of wrong that I
mentioned (a position I REALLY stand by, having worked for people I wish I
hadn't).

I did not, however, say that mhartl himself represents these extremes. That's
an important distinction. And if, as you say, he is an honest, well-
intentioned, and generous man, then perhaps he arrived at his current position
for some benign reason - a lack of careful thought, or maybe an insufficiency
of experience. In any case, people who share his lack of concern have become
responsible for some very major damage. This aspect of his thought is not
incidental to the problem, it IS the problem. Or, rather, it is an essential
component of the problem.

Just consider what the OP is arguing. The faults of shareholder capitalism are
not minor. Indeed, they have demonstrated a destructive power that has
decimated companies, portfolios, and - at this late stage in the experiment -
entire economies. This is not "creative destruction". It's shoot-yourself-in-
both-feet-then-wonder-why-you-can't-walk destruction. And while we can
demonstrate how bad it is now, there was no need to learn by doing. Had we
considered the ethical failures inherent in mhartl's arguments sooner and more
seriously, the crash of 2007/8 may have never come to pass.

Again, we're talking about a line of thought that has produced deep and
lasting harm in the lives of billions - but not without racking up billion
dollar gains for a microscopic minority who have responded by using their
inordinate power to capture and corrupt the government we all depend on. This
is really bad stuff. Historically speaking, this trajectory reduces citizens
to subjects, and the weakest to slaves. Whether he realizes it or not,
thinking like martl's supported the wrong side of political situation that has
made itself the dominant evil of the day.

It needs to end, and the generation that does end it will probably spend the
remainder of their lives cleaning up the mess. The sooner people disabuse
themselves of the notions that allowed shareholder capitalism to spin so
wildly out of control in the first place, the better off everyone is going to
be - mhartl included.

~~~
jacoblyles
In my experience, people who can't accept that others might hold beliefs that
differ from theirs for good reasons are giant assholes.

------
forensic
Shareholder value is just the latest politically correct justification.

Our society used to be based on concepts like honor.

Honor was something you had to earn and something you could lose. To maintain
your honor you had to demonstrate certain qualities: truthfulness,
earnestness, fairness, politeness, genuine service toward shared superordinate
goals (e.g. the country, humanity, the community).

At some point, our society decided that lying is no longer dihonorable as long
as you are doing it to maximize shareholder value or to sell your product. We
no longer publically shame and dishonor those caught in bald-faced lies.

Inordinately selfish people always justify their behaviour using socially
acceptable statements. What has changed is that our society now lets them get
away with it.

ANY lies are now OK as long as they say "I was maximizing shareholder value."
They will not be socially ostracized, will not be publicly shamed, and often
will not even be criticized. People will, in fact, apologize for them.

People see Wall Street crash-creators testifying at Congress answering "I do
not recall" to 100% of the questions. Instead of dishonoring those liars as
the liars that they obviously are... our society just does nothing. It's okay
that they lied. It's just business you know. We expect our business leaders to
be dishonorable.

"It's not the CEOs fault that he knowingly polluted the entire river for 20
years. He was just maximizing shareholder value, discharging his fiduciary
duty, we can't hold him personally responsible. It is wrong to shame him and
his family, it is wrong to ostracize him from decent company, it is wrong to
even criticize him publicly in the newspapers."

Either this mentality changes in a hurry, or the entire country is going to go
the way of Detroit.

~~~
beagle3
> Our society used to be based on concepts like honor.

Nostalgia isn't what it used to be.

Society was never based on honor; it was always about worshiping those who
succeeded, regardless of how bad they had been, as long as they did some good
at some point. see, e.g. Rockefeller, Carnegie, Mellon & Gates in recent
times, and basically all fondly remembered kings and barons in earlier times.

Society adapts, in part, by giving socially acceptable deeds a normative
description and concept. The socially acceptable statements lag the deeds, not
lead them.

> People see Wall Street crash-creators testifying at Congress answering "I do
> not recall" to 100% of the questions. Instead of dishonoring those liars

"These liars" applies equally well to congress as to those wall street execs
(with whom the former are figuratively, "in bed", and have been for the last
century or so)

Really, the only thing that has changed is ease of access to information.
Human greed, actions and norms as reflected by social response, by and large,
haven't.

~~~
forensic
It's your type of cynicism that is actually an apologetic for the dishonorable
behavior. If you stopped saying "everyone does it" then we could start
punishing the dishonorable. It's NOT TRUE that everyone is a liar.

Rockefeller and Carnegie were liars, sure, but they had to keep it quiet, they
had to buy up newspapers and physically intimate people so their lies would
not be exposed, or they would lose face.

Our entire legal system is based on the concept of honor. It's a real thing
that existed and people took it seriously. Of course people still lied and
some people worshipped the powerful, but at least back then people hid their
skeletons in the closet. Now people just blatantly lie, openly engage in what
would be called bribery at any other point in history, blatantly and proudly
sell out the public good for personal profit, engage in the grossest type of
war-profiteering, etc.

Remember how war profiteering used to be a bad thing? Now it's a fucking
virtue. Halliburton is a war-profiteering company! War-profiteers used to be
hanged for treason!

There was a time in America where if you committed fraud, no matter how
"technically legal", you would be lynched. Until dead. And juries would acquit
your murderer.

~~~
beagle3
> If you stopped saying "everyone does it" then we could start punishing the
> dishonorable.

If you stopped putting words in my mouth, we might actually have a two sided
discussion. I did not say "everyone is a liar" or anything that could remotely
be interpreted to mean the same.

> Our entire legal system is based on the concept of honor.

What country is that? Is that the US system that a hundred years ago decided
that corporations are people? Can you demonstrate what you mean by "based on
the concept of honor".

> but at least back then people hid their skeletons in the closet.

People still try, by and large. They stay there for shorter, due to easier
dissemination of information, but that doesn't change dynamics much.

> Now people just blatantly lie, openly engage in what would be called bribery
> at any other point in history, blatantly and proudly sell out the public
> good for personal profit, engage in the grossest type of war-profiteering,
> etc.

They always did, but these things were not as easy to track, as they are now.
Can you point to a resource like opensecrets.org-like resource in 1900?

> Remember how war profiteering used to be a bad thing?

No. Do you? I mean, I think it's a bad thing, but I am not aware of any point
in the US history where it was socially unacceptable. On the contrary - thanks
to the "right to bear arms", weapons manufacturers were always "men of honor",
and no one is more of a war profiteer than these guys.

> War-profiteers used to be hanged for treason!

Are we living on the same planet? Earth, 3rd rock from the sun? They would
only be hanged by other war profiteers when falling out of favor with the
politicians, who were often war profiteers themselves. And they still are, for
a modern definition of "hanged". E.g. Rupert Morduch has recently been thrown
under the bus after going a bit too far. And it wouldn't have been different
at any other time in history.

> There was a time in America where if you committed fraud, no matter how
> "technically legal", you would be lynched. Until dead. And juries would
> acquit your murderer.

Do you have examples? Charles Ponzi, for example, was still admired when he
went to jail, and wasn't lynched.

On the other hand, in the south they would acquit you for real undisputed
murder, as long as the killer was white and the victim was black -- to the
point that nowadays mentioning "jury nullification" in court would get you
thrown in jail for contempt of court, because of how it was misused 100 years
ago.

I'm not sure that how mobs treated people 100 years ago is how what you want
to look up to.

forensic, you are incredibly naive, I think. You have an ideal of history, and
you somehow assume it is an indisputable, to the point of being enraged that
people disagree. Calm down, look around. The world is not dogmatic, and never
was.

~~~
forensic
1\. You aren't refuting the existence of honor or the fact that virtues of
truthfulness and fairness had to be displayed in order to retain respect in
the past. You are just saying sociopaths still existed and still lied. The
difference is that in the past they had to maintain an image of truthfulness,
which limited their criminal activity.

2\. No social system is perfect and the honor system of course was not either.
However, if an American aristocrat in, say, 1830, was openly and publicly
caught in a lie that was obviously selling out the nation, he would likely be
convicted of something, or he would be publicly shamed, or he would receive
vigilante reprisals.

It wasn't a perfect system - honor systems by definition are not - but the
reprisals demonstrate that there was a code of honor that went beyond the law.
Honor by definition is a code of conduct with social reprisals that goes
beyond the law.

American social conduct was heavily policed by codes of honor. Maybe you think
codes are stupid but nevertheless they had a tremendous influence on social
behavior, as they do in any society where a code is implemented.

Not everyone follows the code of honor, but those who blatently break the code
are usually dishonored, shamed, ostracized, and face physical and finanical
vigilante justice. The existence of this "street justice" worked as a
deterrent so that the Dick Cheneys and Lloyd Blankfeins of the time had to
work really hard to keep their skeletons in their closet.

Trial by jury is only one step removed from mob justice. Individuals should be
tried by the court of public opinion and punished by that court. If public
opinion widely sees Blankfein as a treasonous fraudster, it is right that he
be lynched. And if the courts are too corrupt to charge him then the duty
falls to the general public.

It's not naive to recognize that brutal and swift vigilante street justice
keeps outrageous criminal activity in check. You want to paint me as some kind
of utopian but I'm actually saying society needs more bloodshed, more
violence, more vigilantism, more lynching, more mob rule. Mob rule and the
judgment of the mob is the basis of democracy. Legal technicalities are not.

<http://en.wikipedia.org/wiki/Honour>

"Even personal shame and humiliation was preferable to a tarnished honor or
the hint of corruption. When Treasury Secretary Alexander Hamilton was accused
of corruption for making secret payments to a man named James Reynolds,
Hamilton revealed he had been set up and was paying blackmail to Reynolds
following an affair with Mrs. Reynolds. Duels over honor were common in the
era--Hamilton was killed in one, as was Hamilton's son."

\- <http://conservapedia.com/Founding_Fathers>

“Nobody can acquire honor by doing what is wrong”

\- Thomas Jefferson

"Some men who are not real men love other things about themselves, but the
real man believes that his honor is dearer than his life; and a nation is
merely all of us put together, and the nation's honor is dearer than the
nation's comfort and the nation's peace and the nation's life itself."

\- Woodrow Wilson

“No person was ever honored for what he received. Honor has been the reward
for what he gave.”

\- Calvin Coolidge

"All the great things are simple, and many can be expressed in a single word:
freedom, justice, honor, duty, mercy, hope."

\- Winston Churchill

"There are three classes of men; lovers of wisdom, lovers of honor, and lovers
of gain. "

\- Plato

"Who sows virtue reaps honor."

\- Leonardo da Vinci

"I love the name of honor, more than I fear death. "

\- Julius Caesar

"Leadership to me means duty, honor, country. It means character, and it means
listening from time to time."

\- George W. Bush

"The difference between a moral man and a man of honor is that the latter
regrets a discreditable act, even when it has worked and he has not been
caught. "

\- H. L. Mencken

"You will never do anything in this world without courage. It is the greatest
quality of the mind next to honor."

\- Aristotle

"Life every man holds dear; but the dear man holds honor far more precious
dear than life."

\- William Shakespeare

~~~
beagle3
I agree with you about how society should work - more shaming, harsher public
response towards repeat offenders. I disagree about your rose tinted view of
the past. We could both pick a few historical events that would support our
conflicting view of the past.

But I find it hard to take you seriously. Quotes from political speeches, from
the likes of George Bush and the conservapedia? Are those supposed to be
reliable?

If these are the sources you base your view on then we really do live in
different planets.

~~~
forensic
Jefferson is a poor source to you? Those quotes demonstrate the cache that the
concept of honor had.

~~~
beagle3
No. Quotes are in general a poor source, especially one line quotes which were
probably taken out of context (I don't blame you for taking them out of
context on purpose, but time is an important context for e.g. what "honor"
actually means, as you agreed earlier on this thread).

If you trust quotes - Bush said "No new taxes" (and there were), Obama said
he'll close guantanamo as soon as he goes into office -- he even signed such
an order in his first month -- but guantanamo is still operating.

Quotes are PR. Actions speak louder than words. And the actions had always
been to worship the successful, as in the examples I gave, the Cheney example
you gave, and the Burr/Hamilton I wasn't even aware of.

~~~
forensic
It's overly simplistic to say people always worship the powerful. Caesar was
assassinated by the entire senate. Democracy in America was created on the
basis of the rejection of power-worship.

You seem to have your pet way of interpreting history. I'm not arguing that
honor and other values were some kind of omnipotent force for good I'm just
saying they existed.

When you assume that I'm a complete idiot you're failing to "assume good
faith" which is one of the conduct requirements to maintain your honor. In a
court of law, a lawyer who fails to assume good faith is dishonored and his
arguments are automatically invalid. Honor is still used in our justice
system.

~~~
beagle3
Funny !

When was the last time you observed real court proceedings and saw a laywer
dishonored? Many of them act in bad faith every day.

You ignore historical examples dismissing them with excuses, your references
are (essentially) PR speeches and the conservapedia (this thread
[http://www.halflife2.net/forums/showthread.php?121000-Conser...](http://www.halflife2.net/forums/showthread.php?121000-Conservapedia-
Because-Reality-Has-a-Liberal-Bias)! might enlighten other readers, but it is
irrelevant to reality in your own planet).

If courts worked as you believe, the SCO/Novell fiasco would not have dragged
for the years it has (it's still not dead!).

Yes, honor exists. But you have failed to demonstrate that the course of
american society was significantly influenced by the concept of honor.

~~~
forensic
Lawyers go to great lengths to maintain honor in the courtroom. They learn in
law school. It's just become so embedded in the practice that now its
inconsequential.

------
1gor
The statement 'maximizing shareholders value' is meaningless without the
timeframe. The correct phrasing is to 'maximize shareholders value _in the
long term_ '. The 'long term' bit is crucial, and it is not reflected in
today's management incentives.

The choice that managers of public companies are facing is the well known
"Consume vs. Invest". Or, in the terms of an evolutionary fitness landscape,
"Exploit vs. explore".

If a manager wants to maximize his next quarter's earnings, he could stop new
product development, shut down customer service and equipment maintenance
departments and sell, sell, sell. He could have a short short-term spike in
profitability, but in the long term the company won't survive. He has
__exploited __his current position but has failed to explore, to look to the
new opportunities and threats, and to provide for the future.

(Note: the manager could also buy a portfolio of high-yielding/high risk
securities hoping that the crash will not happen before his next bonus is due.
This is the same thing -- maximising short-term gains at the expense of the
long-term prospects of the company).

The manager could also __overexplore __, that is to overinvest in customer and
product development, purchase the newest equipment and end up with a croud of
excited customers and an exciting new technology/product, but no liquidity
left in the bank to live to see it taking over the market.

"Maximizing shareholders value" idea got a bad press, because it has become
associated with the 'exploit' approach. Managers endanger the long-term
prospects of the company because they can be paid well for achiving relatively
short-term goals.

But the working definition should be "Maximizing shareholders value in the
long term"

Let's make the law that the managers' options can only be excersized after 10
years. That'll do the trick.

~~~
yummyfajitas
Why is the long term bit crucial? Specifically, what timeframe do you define
as "long term", and why do you privilege that timeframe over other timeframes?

And sometimes exploitation is better than exploration.

Microsoft is a great example of this. Currently MS dumps billions into Bing, a
form of exploration. If the shareholders were given a choice, do you think the
would choose this? Most likely not - if they wanted to explore search, they
would probably dump billions into GOOG. Microsoft shareholders would probably
be better off if MS stopped exploring, exploited current revenue streams, and
allowed shareholders to invest in businesses with a brighter future.

The working definition should be "maximizing shareholder's time and risk
discounted value". After all, $100 now is better than $100 over 10 years
(maybe, if we are lucky). When a company focuses on creating long term value,
they are gambling with shareholder wealth. They should only do this when the
odds are good.

 _Let's make the law that the managers' options can only be excersized after
10 years. That'll do the trick._

Many companies already do this - a lot of CEO/executive comp is restricted
shares.

~~~
lukeschlather
>Microsoft shareholders would probably be better off if MS stopped exploring,
exploited current revenue streams, and allowed shareholders to invest in
businesses with a brighter future.

That's your judgment. I have to honestly say I'm thankful you're not in charge
of Microsoft, because someone trying to compete with Google in the search
space is a great thing. (And with Google doing a lot to make Microsoft's core
markets vanish, getting into search could save Microsoft's existence in a
10-year timeframe.)

~~~
yummyfajitas
The two scenarios, supposing that MS's current product line is dead in 10
years, and pretending share prices cost $1 right now):

Own MS now. $10 investment yields $20 in profits, all invested in Bing. Net
result, in 10 years, you have 20 shares of Bing.

Own MS now. $10 investment yields $20 cash in your hands. You buy google. Net
result, in 10 years, you own 20 shares of Google.

Unless you think Bing is a better investment than Google, you are better off
taking the cash and reinvesting in Google.

And as an investor, I don't care if MS exists in 10 years. I care whether my
portfolio is up or down in 10 years. And I care about liquidity - all else
held equal, I'd rather have $1 cash in my hands than $1 cash in MS's hands
with me owning shares. If I can invest $10 into MS, take $20 cash out, and
have the company die, that's not a bad thing.

------
acslater00
"Meanwhile real performance was declining. From 1933 to 1976, real compound
annual return on the S&P 500 was 7.5 percent. Since 1976, Martin writes, the
total real return on the S&P 500 was 6.5 percent (compound annual)."

Hmm...where have I seen those numbers before. Oh right! He's measuring his
control period from the bottom of the great depression. Sounds legitimate to
me!

This is so hacky it makes me laugh. You can argue that a focus on short-term
shareholder value is bad for various reasons, but a focus on long-term
shareholder value is incontrovertibly good for shareholders, long-term. In
practice, it is also basically equivalent to the author's other view of
focusing on "customers", whatever the hell that means. Or focusing on "real
performance" metrics like profit, as though you can do one without doing the
other.

If CEO pay is tied to long-term stock performance, the problem of gaming the
short term earning expectations goes away. Full stop.

My new years resolution is to not click on link-bait anymore.

~~~
adamtmca
This guy was on the CBC a few months ago and I was basically screaming at my
radio.

One choice portion of the show was when the interviewer (who was lapping it
up) asked what would be a good alternative to the stock market. He proposed
bonds. He even went so far as to say that bonds would reduce the amount of
volatility we see in the economy by reducing the impact of the "expectations
market".

Yes. Replacing equity financing with debt sounds like a reasonable solution to
reducing volatility.

What an absolute fraud.

~~~
maigret
But ultimately stocks have to pay a dividend. I agree that a bond-only system
would lead to a lot of junk bonds, but mainly because lot of stocks are also
junk. In any case, some bonds belong to a balanced portfolio. Too much people
have too much of stock in their portfolio (also too much real estate, but
that's another topic).

------
mixmax
_"In today’s paradoxical world of maximizing shareholder value, which Jack
Welch himself has called the dumbest idea in the world, the situation is the
reverse. CEOs and their top managers have massive incentives to focus most of
their attentions on the expectations market, rather than the real job of
running the company producing real products and services."_

Maybe the real genius of Steve Jobs was to actually spend his time running
Apple, creating real products and services instead of playing the expectations
game with investors and shareholders.

~~~
WalterBright
Jobs certainly wound up maximizing shareholder value.

Maybe the shareholders aren't so easily fooled.

~~~
yuhong
But the key thing is that Jobs did it the right way instead of meeting short-
term expectations.

~~~
alexqgb
Exactly. Healthy profits are the (inevitable?) result of a well run business,
which requires attention being paid to a variety of factors, not just the
bottom line.

Failing to understand this, and focusing exclusively - or even
disproportionally - on the bottom line, is likely to improve it in the short
run, diminish it in the medium run, and destroy it in the long run.

~~~
WalterBright
Take a look at the P/E values for various companies. Ones with a high P/E are
clearly those where the shareholders believe there is long term growth in the
profits, and are willing to forego current profits to get it.

I really do not buy into the popular idea that shareholders are only
interested in short term results. If that were true, then marginally smarter
investors would regularly make themselves huge fortunes by buying undervalued
stocks.

------
tokenadult
First I slogged through the submitted article. It had some interesting
anecdotes about betting on professional football in the early 1960s in the
United States, which the author takes as an analogy to the current stock
market. I searched back through the list of earlier Steve Denning articles on
Forbes to try to find one previously posted to HN that I remember for its
silliness and lack of connection with reality. On my part, I can't see I
disagree a lot with the idea that publicly traded joint-stock companies do
well to attend to the needs of customers, to build long-term value, but the
author seems to embroider that claim with a lot of hysteria about the future
of capitalism. Precisely because he can point to successful examples (Johnson
and Johnson, Procter & Gamble, and Apple), it seems to me that what he
identifies as an idea that leads companies astray can be responded to as a
market opportunity for other companies to achieve the goal of maximizing
shareholder value (over the long term) by the instrumental means of attending
to customer needs. I'm not sure that the author has added any new insight here
that isn't well known to owners and operators of businesses. (Has the author
ever owned any business in the real economy besides promoting his own
writing?)

------
Hominem
Yep, it is easier to increase profit by cutting costs, so that is what people
will do to hit their numbers.In the long term, it is akin to burning your
clothes to stay warm.

~~~
plainOldText
Cutting costs alone is not necessarily a bad thing. Cutting costs at the
expense of the customer is though. And when I say expense I mean the customer
gets a crappier service or product.

I just wanted to make it clear for people reading around here. I don't think
they should regard strategies that involve cutting costs necessarily evil.

~~~
Hominem
Oh, of course I agree you should not be profligate. And there are times you
have no choice if you are hemorrhaging money.

I work with middle managers who let contractors go and sit on projects months
at a time in order to get cost cutting bonuses. It is just working the same
numbers on a smaller scale.

------
cbr
This argues against maximizing the stock price in the short term. Nothing
about shareholder value beimg the wrong metric.

~~~
rayiner
It argues against using shareholder value as the metric for the purposes of
incentivizing managers.

------
Sniffnoy
This wouldn't be so much a problem if "shareholder value" were taken to mean
"the value one can get by holding a share" (i.e. profits) rather than "the
value one can get by selling a share"...

~~~
yardie
There are also dividends.

------
fmkamchatka
I'm not familiar with football betting but it seems to me that the initial
example is not a very good analogy. In the case of shareholders, someone
initially lent money to the company in exchange for shares (owning part of the
company) from which the company benefits. On the other hand, betting on a
football team's success doesn't increase its odds of winning, hence it
wouldn't make sense for the team to comment or apologize on the outcome of the
bet.

------
nonsequ
Roger L. Martin, the author of the book hawked in this article, is also a
director at RIM. Maximizing shareholder value indeed!

That said, Roger is correct (incidentally or not) in my book to criticize the
short-term casino nature of the public equity market buyers and sellers. Too
often they forget that as shareholders of a stock they are part-owners in the
enterprise; rather they only desire to see the price tag on their stock
certificate go up in the next minute so they can sell for a profit. That kind
of thinking can poison a company.

The lesson I draw from this is that it matters who your investors are. Once
you've sold part of the company, you must take into account the desires of
your new partners, even if they are a teeming mass of the investing public.
After all, you make the choice of whom you sell to. Some corporate leaders
attempt to 'manage' their way out of this by massaging earnings the way Jack
Welch did. I personally think the best way to handle this is by open
education. Warren Buffett writes an elegant and informative letter each year
and answers questions alongside Charlie Munger for four or five hours straight
at the Berkshire meeting. If your business is too volatile, too secretive, or
too sensitive to be explained to the public, you probably shouldn't be doing
an IPO in the first place.

It occurs to me that Roger's best hope is to change the minds of RIM
shareholders declaring open season on the board. It is naive of Roger Martin
to think that his book and Denning's sensationalist hawking of it will do
anything to soften the ire of RIM's shareholders. By the same token, it was
naive of RIM's leaders not to take into account the fact that once they sold
shares to the public, it became the public's company.

------
dhx

      The actions flowed from the company credo which is engraved in granite
      at the entry to company headquarters, which makes crystal clear that
      customers are first, then employees, and shareholders absolutely last.
    

Why do businesses attempt to create hierarchical order where order doesn't
exist? A business with extremely happy customers, happy employees and low
return on investment (including other non-monetary value) for shareholders is
a failed venture. Ranking stakeholders by their importance makes it easy to
create harmful (and often implicit) rules and practices that fail to address
the needs of _all_ stakeholders.

Companies should instead encourage employees to think about decisions from a
wide range of perspectives including customer satisfaction, employee morale
and business profitability. Creating a new procedure or rule that employees
must adhere to could greatly please customers. However it may create extra
menial and unappealing work for employees, lowering morale to harmful levels.
It could cost the company a lot of resources that would be better spent
elsewhere.

------
valuegram
While I understand the idea behind this article, it was hard to get beyond the
initial metaphor, which I find highly misplaced.

In sports, for the most part, the only fact that matters is a win. with the
exception of rare subjective ranking systems (such as coaches polls in college
football), the quality of a win doesn't matter. Of course if a coach is
playing in these systems, and not doing enough to meet the expectations of the
fan base, there will definitely be repercussions.

In the business world, a profit of $0.01 is very different from a profit of
$1.00. Of course there are numerous valuation models, but the amount of
profit/revenue/etc almost always matters, as opposed to sports which use a
binary valuation system (win or loss).

I appreciate the overall message, and believe that the market is willing to
embrace this sort of logic. Jeff Bezos is a great example of a leader focusing
on long term performance and being rewarded for it.

------
mmaunder
Another example of a company in addition to J&J and P&G that the article
mentions who focuses on customers is Amazon. Bezos recently was punished via a
30% drop in Amazon stock price because he is ploughing all his net income into
the Kindle Fire, even though Amazon's revenue growth is exponential and has
been for a decade.

Shareholders in the public market right now are focused on "value stocks" in
the Buffet and Ben Graham sense and if you don't match value stock heuristics
with a dividend and growing net income, you will be punished even if you're
100% focused on creating new customers.

~~~
refurb
This is slightly off topic, but it's something I really hated about business
school.

Sure J&J did a great job with the Tylenol poisoning case. However, they've
lost over $1B in revenue in the last year or so because they consistently
failed to produce drugs that meet federal guidelines. Not to mention the
"unofficial recall" where they paid people to go into stores and buy up all
the J&J products so that they wouldn't have to conduct an official recall.

J&J is probably the most messed up company right now.

------
Vitaly
He misses the point. Focusing on the customer IS maximizing shareholder value.
Its just its focusing on a much longer timeframe. If you want the most money
_this year_ \- you play the stock market or accounting games. If you want the
most money the company will earn _this century_... well, you focus on very
very different things. And customer's loyalty is one of the top.

------
TheFuture
Another egghead uni prof who's spent his life getting a paycheck from the gov
telling us what's wrong with capitalism that he's never participated in.

If shareholders (ie owners) want short term leadership, that's what they get.
No one is forcing you to sell your shares every time the stock price moves.
Buy and hold.

------
josh33
Each of the following words opens up the door for semantic debate:
"Maximizing" - when? In the short term or long term? "Shareholder" - who?
People who own actual shares or the broader definition of stakeholders who
have a vested interest in the company (employees, the community around the
business, owners, etc.)? "Value" - what? Dollar value? Happiness? Customer
satisfaction? Employee satisfaction?

------
chrismealy
It's called Enronitis. If you expect managers to be ruthless about shareholder
value you'll wind up with managers who are ruthless about benefitting
themselves.

 _The Enron problem is ... the predictable result of too strong of a share-
centered view of the public corporation... Corporate law demands that managers
simultaneously be selfless servants and selfish masters. On the one hand, it
directs managers to be faithful agents, setting aside their own interests
entirely in order to act only on behalf of their principals, the shares. On
the other hand, in the service of this extreme altruism, they must ruthlessly
exploit everyone around them, projecting on to the shares an extreme
selfishness that takes no account of any interests but the shares themselves.
Having maximally exploited their fellow human corporate participants, managers
are then expected to selflessly hand over their gains..._

 _Altruism and rationally self-interested exploitation are extreme and
radically opposed positions, psychologically and politically. ... For
managers, one easy resolution of these tensions is a simple, cynical
selfishness in which managers see themselves as entitled, and perhaps even
required, to exploit shareholders as ruthlessly as they understand the law to
require them to exploit everyone else. ..._

 _Internally, the share-centered paradigm is just as self-destructive.
Corporations succeed because they are not markets and do not follow market
norms of behavior. Rather, they operate under fiduciary norms as a matter of
law and team norms as a matter of sociology. However, the share-centered
paradigm of corporate law teaches managers to treat employees as outsiders and
tools to corporate ends with no intrinsic value. Just as managers are unlikely
to learn simultaneously to be selfish maximizers and selfless altruists, they
are unlikely to be simultaneously cooperative team players and self-interested
defectors. Thus, the share-centered view undermines the prerequisite to
operating the firm in the interests of shareholders. ..._

 _Managers constructing the firm as a tool to the end of share value
maximization treat the people with whom they work as means, not ends. ...they
learn as part of their ordinary life to break ordinary social solidarity.
Learning to exploit ruthlessly is surprisingly difficult. ... But cynicism can
be learned, and managers subjected to the powerful incentives of the share
value maximization principle do eventually learn it. ... This training,
however, surely creates cynics, not faithful agents. ... A manager whose lived
experience is a pretense of selflessness (with respect to employees, customers
and business partners) covering real disinterested exploitation (on behalf of
shares) is unlikely to suddenly see himself as “in a position in which thought
of self was to be renounced, however hard the abnegation” and voluntarily hand
over these hard-won gains of competitive practice to his principal. If you can
properly lie to your subordinates, why not lie to your superior as well? ...
In the end, the cynicism of the share value maximization view must eat itself
alive._

\-- [http://slackwire.blogspot.com/2011/04/selfish-masters-
selfle...](http://slackwire.blogspot.com/2011/04/selfish-masters-selfless-
servants.html)

------
prewett
A lot of what the author complains about has been around for years. Short term
gains at the expense of long term growth? Yup. Executives manipulating
something to make their company look good? Yup.

Read "The Intelligent Investor" or "Common Stocks and Uncommon Profits", which
give examples of things companies did 50 and 30 years ago.

------
pge
I agree with the overall viewpoint of the article, so just adding an
observation on how we got here. Tying management compensation to shareholder
value is a good idea; the problem is in the measurement of shareholder value.
If the public markets were efficient, and market cap was an accurate
reflection of value, the system would not be as broken as it is. The public
markets have become a casino, where investors are often playing a game, not
investing in companies they truly understand, and whose value they have
analyzed. Market cap is no longer strongly correlated with company performance
(revenue, net income, cash flow, customers, etc).

A return to a rational market would realign incentives, and stock-based
compensation would work, but that's a lot to ask...

~~~
yummyfajitas
_If the public markets were efficient, and market cap was an accurate
reflection of value, the system would not be as broken as it is._

If you believe the public markets are not efficient, how long will it be
before you are rich?

~~~
Andrew_Quentin
It is inefficient for everyone not just one person or one group. An individual
therefore is not able to easily exploit the inefficiencies as they are in the
same position as everyone else.

~~~
yummyfajitas
I think you are using the word "efficient" in a nonstandard way. Could you
please define your terms?

------
pmuhar
Even though I know exactly what the article is about, I wish it wasnt written
in relation to football/gambling terms as a lot of people are not football
fans or avid gamblers, myself included.

------
xianshou
I notice Steve Jobs is consistently mentioned in the present tense...did the
author write this a while ago and forget to run it by his editor, or did he
simply miss all of October?

~~~
xianshou
Also interesting: Mr. Denning self-plagiarizes the concluding three sentences
of his previous article verbatim.

[http://www.forbes.com/sites/stevedenning/2011/11/16/why-
are-...](http://www.forbes.com/sites/stevedenning/2011/11/16/why-are-fannie-
freddie-ceos-paid-so-much/2/)

Like all great obvious, radical ideas, in the first instance it will be
rejected. Then it will be ridiculed. Finally it will be self-evident and no
one will be able to remember why anyone ever thought otherwise.

~~~
stevedenning
Interesting? Yes hopefully. Plagiarism is "the unauthorized use or close
imitation of the language and thoughts of another author and the
representation of them as one's own original work." By definition, one can't
plagiarize one's own writing. In the 1000+pages of stuff on the blog, it's
true that some important ideas are emphasized more than once.

~~~
sless
No, it is plagiarism. It is a blatant copy of Arthur Schopenhauer, "All truth
passes through three stages: First, it is ridiculed; Second, it is violently
opposed; and Third, it is accepted as self-evident."

~~~
stevedenning
Thanks for the reference. I've added a note..

------
rayiner
Coincidentally, I just read about this in "Animal Spirits" a recent book on
behavioral economics and the market. It mentions Welch's view and analyzes a
lot of similar situations.

------
scotty79
What is a write-down that is being referred to in this article?

------
anantzoid
I wish I could understand this.

------
GrowMap
What a marvelous discussion because it encourages the inherently self-absorbed
to reveal their belief systems which nearly always include the worship of
self, money, and power as their only true gods.

I highly recommend they all watch the Canadian Documentary 'The Corporation'
which clearly illustrates why corporations ARE like psychopaths - and
generally run by people who also meet the definition. The movie is available
free online.

Corporations as they currently exist are inherently unethical and
unsustainable because by focusing on short term gain and stock values they are
destroying the real value they once had.

Either social responsibility and long term goals must be injected back into
corporations or they need to be boycotted by everyone with a conscience or
ideally have their corporate charters revoked.

