
The World's Dumbest Idea: Maximizing Shareholder Value [pdf] - soundsop
https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBoe1yul9uERnfCmQoglFl9k5qwJSfHx8w%2fWCnFLmEb2MC9GoFnZVlslR5NzCRY1ajgn503icBv67VQg%2fNVUMWsYvi3A2%2fL%2bS28A7Pthjp7LmOfLYQfHMJc
======
pash
The great irony is that Montier tests his argument by comparing the returns on
shares of a company that claimed to be trying to maximize shareholder value
with returns on shares of one that didn't. He evaluates his claim by the
criterion he's railing against: "See?" he seems to say. "IBM tried to maximize
shareholder value and J&J didn't, and J&J's stock did better! Therefore
maximizing shareholder value is stupid!"

I'm not sure where on the list of world's stupidest ideas to put this idea
that you can judge a measuring stick by using it to measure its advocates. All
Montier has succeeded in demonstrating is that (a) the goal of maximizing
shareholder value is so sacrosanct that even someone trying to undermine that
goal naturally identifies good results with high share prices and bad with
low; and that (b) Montier is really not arguing against the goal of maximizing
shareholder value at all, but against the idea that explicitly trying to do so
is effective.

And it does seem that maximizing shareholder value is a sort of financial
anti-Heisenbug: don't worry about it and there's no problem, but the more
intently you focus on it, the worse things get.

~~~
jal278
I don't think there's necessarily any great irony here. It's certainly
possible that the same metric could be both (1) foolish to optimize and (2) a
reliable indicator of success.

Think of yourself trying to solve a maze -- because there are cul-de-sacs, if
you took the naive strategy of directly minimizing distance to the goal,
you'll just become stuck in a dead end. Yet if you do reach the goal (by
another means) the distance will still be minimal (zero). This is basically
the concept of local optima in optimization.

Of course, there are other situations, where through careless optimization a
measure can become entirely disconnected from the holistic concept it is
designed to encourage. Think for example of using "lines of code" as a
heuristic for programmer productivity; I could unroll loops to maximize that
measure and achieve a much higher value than the most truly productive
programmer.

So the question is whether long-term shareholder value is of the first or
second type. I think it may be difficult for it to be entirely disconnected
from success, although I agree that it is foolish to optimize directly.

~~~
pash
Yes, I take your point, which is more precise and better argued than the
author's. That is, I think your distillation of his argument misrepresents it
by stripping out the logical inconsistencies (and the irony).

Montier's letter is rather more muddled than your comment. He suggests not
only that optimizing returns in the short run is a poor strategy for creating
long-term value for shareholders, but that the benchmark of share value (even
over the long run) is a deficient measure of corporate performance. Everything
Montier writes suggests that he believes companies did better (in some sense
that he never quite articulates) in the era when managers ran their firms as
they saw fit, before the idea took hold that they should try to maximize share
value.

So the irony of his argument is the incongruity of demeaning the very
benchmark he uses to suggest that J&J has somehow been a better managed
company than IBM; the major arc of his argument vitiates the evidence he uses
to support it. It is ironic, in the comedic sense, that Montier seems to be so
imbedded in the culture of maximizing shareholder value that he invokes that
criterion, seemingly reflexively, in the course of his argument against it.

But it's a logical and rhetorical mess, too. Montier's argument is analogous
in your maze-solving formulation to claiming that the final distance from the
exit is a poor measure of the performance of a maze-solving algorithm while at
the same time maintaining that greedy algorithms are worse than random
algorithms because it turns out that the greedy ones end up farther from the
exit. If you accept the first claim, then the second is a non-sequitur, and
advancing the second argument undermines the first.

------
JacobAldridge
Define Value:

Person A wants long term growth of the share price so they can sell down in
many years to fund their retirement.

Person B wants rapid growth in the share price (even if it eventually kills
the company) so they can sell it soon.

Person C isn't much concerned by share price growth, as long as the dividends
keep coming each year.

Person D invested because they want to support environmentally-friendly
companies.

Person E isn't concerned about tree-huggers, but a lot of people in his town
are employed by the company so he wants to support them.

Your challenge, should you choose to accept it: Which of these Shareholders'
Value will you maximize?

~~~
nemanja
Google at some point stated they will always prioritize long term interests of
their users vs. short term interests of their shareholders (paraphrasing). I
think that's the key - when you focus on your users, financial success follows
and stock price will reflect that.

As far as satisfying the shareholders, A and C wouldn't invest in the same
company (growth vs. mature), Bs are speculators which you should almost always
ignore (except when you need to throw them a bone to avoid activist
situation). D/E don't really exist in the world of institutional investors,
which are the investors you would have a dialog with (retail investors are
generally just along for the ride).

~~~
pdonis
_> Google at some point stated they will always prioritize long term interests
of their users vs. short term interests of their shareholders (paraphrasing)_

They say that, but they don't actually do that. If they were prioritizing the
long-term interests of their users, they wouldn't be giving away their core
services for free and funding them with advertising revenues. That may seem
better for users in the short term, but in the long term it means that only
services that promise advertising revenues are available; services that lots
of users like (e.g., Google Reader), but which don't generate enough
advertising revenue, get shut down, no matter what the impact is on users. The
best thing for the long-term interests of users is for Google to charge users
directly for services; yes, figuring out how to do this for something like
Google search is a hard problem, but what is Google for if not to solve hard
problems that no other company is in a position to solve?

More here:

[http://blog.peterdonis.com/opinions/monopoly-
money.html](http://blog.peterdonis.com/opinions/monopoly-money.html)

~~~
judk
Yes, the past 10 years have shown that Google's management has been disastrous
for the company's long term profits and goals.

~~~
sp332
No, it's disastrous for the _users '_ goals.

------
mayukh
While Montier makes a good (and unoriginal) point, I'm not convinced by his
argument.

The first example: IBM and JnJ are in wildly different industries, competing
in different markets against different competitors employing vastly different
strategies. To use an arbitrary time period (who is to say IBM’s returns 10
years from now won’t trounce JnJ’s), and employ a metric (shareholder returns)
that is often out of whack with reality (as Montier himself would acknowledge)
isn’t persuasive enough for me.

The second macro example of comparing returns between two totally different
time periods also isn't exactly apples to apples either. And also completely
ignores the effects of hundreds of other potentially significant factors
(interest rates, gdp levels, global trade etc)

This article seems to be a strong case of confirmation bias on his part.
Ironical given that he's written a popular book on behavioral investing. (And
yes this comment can also be viewed as suffering from a similar bias)

Yes SVM has pitfalls, yes focusing on the customer should be a high priority,
however the agency problems Montier describes (management extracting undue
value) are solved by neither.

Borrowing from churchill(?) — SVM might be the dumbest idea in how we organize
our public markets, except for all the others.

------
ABS
My standard reply to these posts:

I highly recommend to just get the book [1], it's written very well and in
layman terms but here's an extract taken from a review [2] of the same:

"Stout traces the birth of this “fable” to the “oversized effects of a single
outdated and widely misunderstood judicial opinion.” Dodge v. Ford Motor
Company was a 1919 decision of the Michigan Supreme Court. The opinion’s
status as a meaningful legal precedent on the issue of corporate purpose is
tenuous at best. Yet, its facts “are familiar to virtually every student who
has taken a course in corporate law.” As Stout has observed in the past,
“[t]he case is old, it hails from a state court that plays only a marginal
role in the corporate law arena, and it involves a conflict between
controlling and minority shareholders” more than an issue of corporate purpose
generally. The chapter explains quite well that any idea that corporate law,
as a positive matter, affirmatively requires companies to maximize shareholder
wealth turns out to be spurious. In fact, none of the three sources of
corporate law (internal corporate law, state statutes and judicial opinions)
expressly require shareholder primacy as most typically describe it. To the
contrary, through the routine application of the business judgment rule,
courts regularly provide prophylactic protection for the informed and non-
conflicted decisions of corporate boards"

[1] "The Shareholder Value Myth: How Putting Shareholders First Harms
Investors, Corporations, and the Public" by Lynn Stout
[http://www.amazon.co.uk/The-Shareholder-Value-Myth-
Sharehold...](http://www.amazon.co.uk/The-Shareholder-Value-Myth-
Shareholders/dp/1605098132) [2] [http://arizonastatelawjournal.org/book-
review-the-shareholde...](http://arizonastatelawjournal.org/book-review-the-
shareholder-value-myth-how-putting-shareholders-first-harms-investors-
corporations-and-the-public-by-lynn-stout/)

~~~
kemitchell
I also recommend Professor Stout's book, and especially to fellow specialists
and governance wonks. Not because I agree with her main thrust, her
characterization of the orthodox view, or her conclusions about it, but
because resisting the book in good conscience requires summoning foundational
primary sources that practitioners don't have to handle very often. If you
lead right, it's good to fight a southpaw from time to time.

When recommending it to those who aren't corporate attorneys or otherwise
involved in the subject matter, I include a caveat: If this is the only book
you read on corporate governance, be aware that it's a controversial and
contrarian book packaged for non-lawyers. If its subject were political, I
could find and recommend a book arguing the opposite view it in a similar
style. I'm not aware of any legal rebuttal that isn't presented in more
traditionally legal, less approachable form. It's been reviewed in legal
journals, but even most lawyers consider those long-winded and dense.

------
Animats
"Maximizing shareholder value" has indeed gotten out of hand. There are
several reasons for this.

One is tax policy. A corporation can pay for its capital in three ways: 1)
dividends on stock, 2) interest on loans, and 3) stock buybacks to increase
the stock price. The first is taxed more highly than the second two. This has
a huge influence on corporate behavior. Because payments on loans are not
taxed, converting equity to debt increases profits. This funds the entire
"private equity" industry, which is really about leveraged buyouts. This bias
in favor of loans also increases the involvement of the banking industry in
corporate finance.

Loans and investments aren't really that different. They once were; lenders
expected to be paid back. Then came junk bonds, where the interest rate is
cranked up to compensate for the risk, and the securitiziation of debt, which
allowed off-loading the risk onto other investors. (See 2008 financial
crisis.)

There's an occasional call to "end the double taxation of dividends". Taxing
interest paid and stock buybacks at the same rate would be equally effective.
This would be a good time to do that economically, because interest rates are
so low.

Stock buybacks are mostly a tax dodge. But that's not the full reason for
their popularity. For stockholders, they're no better than dividends. But for
stock _option_ holders, which usually include the CEO, they're a windfall.
Option holders get nothing when the company pays a dividend and the stock
price remains the same. But in a buyback, the stock goes up and they win big.
This is one of the major factors driving CEO pay upward. (If you assume CEOs
are rational actors as regards their own compensation, much corporate behavior
becomes clearer.) Japan doesn't allow stock buybacks for most types of
corporations. The US does. It doesn't really benefit anybody but management.

So that's the tax policy argument. It's dull, but important.

As for why companies prioritize shareholders so much, more than they used to,
the reason is simple - less fear by companies. Companies used to be afraid
that overdoing it would lead to government action. Their business might be
nationalized, taken over by the Government. Britain did that to the rail,
coal, steel, airline, power and telephone industries. The US never went quite
that far, but electric power and telephone companies used to be regulated
utilities with rate-of-return regulation, and the airline and trucking
industries were regulated by the Civil Aeronautics Board and the Interstate
Commerce Commission. In the US, this was a political compromise between big
business and small business. Small businesses didn't want big monopolies to
have control over their essential services, like power and transportation.

All this changed starting in the late 1970s. Nationalized and regulated
businesses were stable, but seemed inefficient. They had no incentive to take
risks to improve. The history of the Reagan era is well known, so that doesn't
have to be repeated here, but reviewing the history of deregulation is useful.
What seems to happen in deregulation of regulated monopolies is that a large
number of new companies enter the field, and prices go down. Then most of the
new companies go bust, and the winners consolidate. The result tends to be
deregulated monopolies. Look at the last 30 years of the telephone industry,
from AT&T to lots of little companies and back to AT&T.

There's another source for the decrease in corporate fear - the end of
communism. It's hard to realize this now, but from the 1930s through the
1970s, there was real worry in the US that communism might beat capitalism
economically. By the 1950s and 1960s, the USSR had a successful space program
and was industrializing rapidly. Capitalism had serious ideological
competition. In the 1980s, though, it became clear that the USSR couldn't make
their system work. It worked for some of the big, centralized stuff - coal,
steel, power, and such. But the rest of the economy didn't work very well.
With that threat removed, companies could stop worrying about socialism and
communism gaining popularity.

Related to this was the decline in labor unions. This has a lot of causes, but
the biggest one is simply that unions peaked in the era when industry centered
around huge plants with huge numbers of semi-skilled employees. Those were the
situations in which unions had the most leverage. There were once steel mills
which employed 5,000 people with shovels. If you visit a steel mill today,
there will be some shovels around, but they're just for cleanup. You'll see a
lot of machinery and not many people. Manufacturing employs 7% of the US
workforce. It was around 40% in 1950.

Labor unions once had a big influence on working conditions. When a sizable
portion of the workforce was unionized, non-union businesses tended to have
working conditions not much worse than union shops. Companies didn't want a
labor-organizing campaign. So the 8 hour day and the 40 hour week were
standard, and pay tended to follow union levels in non-union businesses.
That's disappeared.

As a result of these changes, there's no major political opposition left to
"maximizing shareholder value". That's why we're where we are now.

~~~
ElComradio
So if I'm understanding you correctly, a dividend is just as good as a buyback
from the POV of a shareholder but a buyback is preferred because it makes
options holders more money. If this is the case, can you explain why there are
companies that issue dividends at all? Are these companies that are paying
their execs with few options?

How are buybacks a tax dodge? If they have the desired effect of boosting
share price, then there will be increased taxes paid by shareholders when
those positions are exited, no?

~~~
crazycanuck
While both are indeed taxed, dividends are taxed as ordinary income, whereas
gains from sale of stock are considered and taxed as capital gains. In the US
at least, the capital gains rate is somewhere around 1/4 to 1/2 of the
ordinary income rate, so it's much more "tax efficient" to do a buyback than
to pay dividends.

~~~
im3w1l
Uh, what about Qualified Dividends?
[http://en.wikipedia.org/wiki/Qualified_dividend](http://en.wikipedia.org/wiki/Qualified_dividend)

~~~
crazycanuck
Very good point, I was unaware these were still in effect (haven't been a US
tax payer in several years).

------
danbruc
Maximizing shareholder value is not the dumbest idea per se - the flaw is that
maximizing shareholder value does not maximize the value of the business.

Businesses do not exist in empty space but within a society and their primary
responsibility is to provide value to this society by providing jobs, goods,
services, taxes, research, you name it. Investment and growth are not primary
goals, they are just means to the aforementioned responsibilities.

People should invest in a business because of its intrinsic value and not
define the value of business by their investments. Financial gains should only
be an additional incentive and protection against the risks of investments but
not the sole reason for the investment.

If you could argue that maximizing shareholder value naturally aligns with
maximizing intrinsic value all would be fine but I can not see how this could
be true. It may sometimes be true for long-term investments but for short-term
investments the contrary seems to be true. If you only care about the next
quarter cutting wages and quality is the easy way to maximize shareholder
value but is diametrically opposed to maximizing intrinsic value.

------
Lagged2Death
The "dumbest idea in the world" phrasing borrowed by the headline didn't
originate with some wild-eyed lefty or academic, but is attributed to Jack
Welch, celebrated former CEO of GE.

~~~
fsloth
Yeah, and he admitted himself that retrospectively it was not such a good
one."Shareholder value is an outcome—not a strategy." \- Jack Welch
[http://www.businessweek.com/bwdaily/dnflash/content/mar2009/...](http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090316_630496.htm))

~~~
calinet6
That 'strategy' quote is a far more intelligent than the title quote. It
completely and concisely sums up the correct argument in 8 words, and it does
it better than the paper linked.

------
lionhearted
This article isn't very good.

I actually agree with the idea. The quote about shareholder value being a dumb
idea from Jack Welch, yeah, sure.

This article is sloppy though. The author side-by-side compares economists
speaking in abstract aggregates, press releases from PR-generating-feel-good-
organizations (the CEO roundtable thing), publicly stated metrics used by
companies for success (IBM), and distribution/influencer strategies (Johnson
and Johnson).

It just seems like throwing a lot at the wall and seeing what sticks. Pulling
out a 1980's feel-good-PR and contrasting that against Johnson and Johnson
remaining focused on doctors, nurses, families...

That's before getting into cherry-picking, survivor's bias, good and bad
strategy (Rumelt would savage later-day IBM, not for being profit-focused, but
because "doubling earnings per share" is not a strategy)...

...ok, too many problems to list them all. Agree with the general idea; the
article isn't so well-thought though.

------
RockyMcNuts
Some discussion

[http://www.economist.com/blogs/buttonwood/2014/12/investing-...](http://www.economist.com/blogs/buttonwood/2014/12/investing-
ceo-pay-and-economy)

[http://www.businessinsider.com/gmos-montier-maximizing-
share...](http://www.businessinsider.com/gmos-montier-maximizing-shareholder-
value-is-the-worlds-worst-idea-2014-12)

[http://www.bloomberg.com/news/2014-12-03/shareholder-
value-f...](http://www.bloomberg.com/news/2014-12-03/shareholder-value-focus-
seen-as-dumbest-idea-chart-of-the-day.html)

like a lot of things in economics, a lot of things could have been going on
during the switch from 'managerialism' to 'shareholder value' paradigm, so
it's not necessarily true that it caused returns to go down. in context the
effect Montier talks about is quite small. but it does seem clear that it
didn't cause returns to go up meaningfully across the board.

in fact, the effect Montier cites seems to go away if you do a slightly more
sophisticated calculation

[http://3rdmoment.blogspot.com/2014/12/stock-performance-
in-e...](http://3rdmoment.blogspot.com/2014/12/stock-performance-in-era-of-
shareholder.html)

there are a lot of studies that show companies where management has skin in
the game do measurably better than companies where they don't.

that being said, there aren't data that would tell you, companies where the
CEO will earn $1m or $10m depending on how well the company performs don't do
as well as companies where the CEO will earn $20m or $200m.

edit: the question of impact of CEO incentives on stock performance is
probably more complicated than what I said. I've seen a lot of studies that
show that incentives impact management behavior. but probably most of those
behaviors relate to short-term stock outperformance. whether those changes
result in long-term outperformance is another question, and whether the
incentives even reward long-term outperformance is complicated.
[https://hbr.org/1990/05/ceo-incentives-its-not-how-much-
you-...](https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-pay-but-
how)

~~~
crdoconnor
>there are a lot of studies that show companies where management has skin in
the game do measurably better than companies where they don't.

There are studies that show that management 'skin in the game' compensation
policies have cause an epidemic of control fraud:

[http://neweconomicperspectives.org/2014/11/ceo-
compensation-...](http://neweconomicperspectives.org/2014/11/ceo-compensation-
cheaters-prosper.html)

>that being said, there aren't data that would tell you, companies where the
CEO will earn $1m or $10m depending on how well the company performs don't do
as well as companies where the CEO will earn $20m or $200m.

Actually there is data, but it demonstrates the exact opposite:

[http://online.wsj.com/public/resources/documents/CEOperforma...](http://online.wsj.com/public/resources/documents/CEOperformance122509.pdf)

Lower paid CEOs perform better.

~~~
nickff
There is an alternative explanation for the data, which is that desperate
companies that know they're in trouble have to pay more to hire a 'good' CEO
who might be able to get them out (because the CEO does not want to be saddled
with a bad track record). This explanation also jives with the fact that
equity compensation is negatively correlated with stock performance, as the
companies in trouble often give the executives less salary and more stock
options, to incentivize sustainable growth.

~~~
crdoconnor
There are plenty of no-evidence explanations exculpating the poor CEOs. This
is true.

------
jcfrei
For such a bold claim I expected a more in depth analysis rather than this
amalgamation of statistics. For example, nobody would argue against the fact
that executive compensation has gone through the roof. However his argument
for directly relating executive compensation to SVM is lackluster at best:

> _We can see this has been a driving force behind the rise of the 1% thanks
> to a study by Bakija, Cole, and Heim (2012). The rise in incomes of the top
> 1% has been driven largely by executives and those in finance. In fact,
> executives and those in finance accounted for some 58% of the expansion of
> the income for the top 1%, and 67% of the increase in incomes for the top
> 0.1% between 1979 and 2005. Thus, there can be little doubt that SVM has
> played a major role in the increased inequality that we have witnessed_

He makes a solid argument against companies which employ flawed executive
compensation programs - which are without a doubt very common. But so are
companies which try to increase shareholder value. Simple correlation doesn't
imply causation here. If there's any case to be made here, it's that a flawed
compensation scheme leads to a short term optimization of shareholder value
(ie. propagation of SVM) and not the other way around.

His argument for the decline in labour share of GDP is even more spurious:

> _The role of SVM in declining labour share should be obvious, because it is
> the flip-side of the profit share of GDP. If firms are trying to maximize
> profits, they will be squeezing labour at every turn (ultimately creating a
> fallacy of composition where they are undermining demand for their own
> products by destroying income)._

He completely omits the rising productivity in many industries which simply
require a smaller workforce for the same output.

Pointing out well known flaws in an established economic system is hardly
noteworthy. Potential alternatives would be much more interesting to talk
about.

------
patfla
Fwiw, I thought Montier to be a well-respected behavioral economist where
behavioral is in reaction to the failure of previous economic models in 2008
(the Global Financial Crisis).

Behavioral puts human psychology back into the picture.

Montier argues that SVM (shareholder value maximization) is the fig leaf that
covers the change in incentivization of CEOs, and one assumes other corporate
officers, away from salary and bonus to stock options. Which has been key in
bifurcating the 1% away from everyone else.

Or as they say in finance, when a CEO says shareholder maximization, he or she
is talking their own book. They're the shareholder they want to maximize.

SVM reframes the dialog in terms of what many people consider legitimate -
return money to shareholders - and away from, say, value to employees or to
society more generally. Which puts me in mind of another expression, "job
creators."

------
Fando
The concept of maximizing shareholder value being the only true purpose of a
company, taken at its literal sense, is an idea that's rotten to the core.
This type of thinking is a natural consequence of the selfish individuals that
to some degree all of us are. Taking human natural flaws into account, it is
simply irresponsible to adopt such a philosophy. It will be exploited. This
type of company suffers from an inherent vulnerability. At some point, true
motives, such as provision of quality services and goods, could be distorted
and even replaced by fallacious motives. As is seen in the world today.

------
Dwolb
The author isn't arguing against maximizing shareholder value, he's
highlighting the misunderstanding of what maximizing shareholder value is.
Current intro-level schools of thought on how to value projects, raise money
for those projects, and what to do with the money left over, start with a
perfect-world scenario [1]. This scenario's cornerstone centers around the
idea markets are perfectly efficient, there are no taxes, management
incentives align with shareholders, there are no taxes, there are no
bankruptcy costs, and possibly one more.

In this world, there is no difference in value to a company to raise money via
debt or via equity. However, if we start to violate the 5-6 founding
assumptions (i.e. we enter the real world) we find that there significant
differences in value of a firm in a given industry who use debt or equity to
raise money (or any flavor of security between debt and equity), who pay
management via different bonus structures, who keep cash on hand versus pay it
out, have underlying assets which are easily saleable or not, and who have
different risk profiles.

Maximizing shareholder value is a nice tool to use when evaluating key
financial decisions (e.g. how levered a firm should be), but as the other
points out is misused or abused due to misaligned management incentives.
However, tbe idea isn't intrinsically dumb, the misunderstanding of the value
of the idea and how it should be used is what's sometimes wrong and sometimes
harmful.

[1]
[http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_the...](http://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem)

------
phkahler
I always say if maximizing shareholder value is the goal, most companies
should liquidate all their assets and become hedge funds investing in
industries with higher returns. Yeah, it's tongue in cheek, but it make the
point. Companies need to do what they do best, and if investors think that's a
good idea they can invest. Then we can get away from the short term thinking,
which is even better for the shareholders.

------
autokad
"Yet, Johnson & Johnson has delivered considerably more return to shareholders
than IBM has managed over the same time period."

good lord, treating IBM and JNJ the same? not to mention assuming companies in
their various stages should have comparable growth.

you always see these days a new tech company come out 'we are different (like
everyone else), we do not care about our stock price blablabla. it doesnt take
them very long before they realize that their stock price is critical to their
survival.

as almost every tech found out after spitting such garbage, when their stock
plummets their talent leaves. they would also find it hard acquiring talent.
This is especially true when stock options are a significant incentive - as it
almost always is.

this is not to mention the many various social effects of a company whose
stock is always in the gutter. you lose customers, become the butt of jokes,
etc etc (even though these things have no direct tie to stock price).

------
drawkbox
On the flipside, this type of greedy setup actually may be much better or
easier for smart companies focused on innovation and research to operate in,
as long as they have trained their shareholders they can invest and innovate
while others have to cut and slash.

Apple, Amazon and Facebook to name three have really set the precedent that
they use their money to stay in the game. Amazon invests nearly everything
back in. That is actually valuable today more than EPS/P/E Ratios in the best
innovative companies. Innovate and win and the shareholders will follow,
follow your shareholders only and go right off the cliff to mediocrity.

Companies should be run with stakeholders as the focus. Shareholders being
one, but the products/employees/customers/economy they are just as important
to success and real growth.

------
thaddeusmt
Link is down for me - is this the same article?

[http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...](http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-
shareholder-value-the-dumbest-idea-in-the-world/)

~~~
robmccoll
No. Oddly similar title, but different article.

~~~
berberous
They are both quoting Jack Welch, who called it the dumbest idea in the world.

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mattlong
If the link doesn't work, you can read it here: [https://view-
api.box.com/1/sessions/6570005e923b4513914b56fa...](https://view-
api.box.com/1/sessions/6570005e923b4513914b56fa1145c4b8/view)

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pbreit
The headline wouldn't be as provocative if it were correct: "The World's
Dumbest Idea: Maximizing Short Term Shareholder Value".

The author seems to argue that switching from long term to short term
shareholder value maximization hasn't really increased shareholder value (and
might have decreased it). So I gather that he is in fact in favor of
maximizing shareholder value but that it should be performed on a longer
basis.

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sqren
Cached version to those who cannot access the resource:

[https://web.archive.org/web/20141206170332/https://www.gmo.c...](https://web.archive.org/web/20141206170332/https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBoe1yul9uERnfCmQoglFl9k5qwJSfHx8w%2fWCnFLmEb2MC9GoFnZVlslR5NzCRY1ajgn503icBv67VQg%2fNVUMWsYvi3A2%2fL%2bS28A7Pthjp7LmOfLYQfHMJc)

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nihilnegativum
I agree, that the purpose of value maximizing can only be accomplished as a
side effect, but this bad orientation is only part of the problem of current
application of shares, I think that the additional problem lies in their
distribution (both the actual distribution, and the logic behind it). Shares
could solve the tragedy of the commons problem, but their current application
necessarily fails.

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dfragnito
This relates

[http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocra...](http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming)

I agree with the overall statement but not necessarily all of the analysis. I
believe "stakeholder capitalism" is a better corporate structure.

Corporate bylaws would need to be changed to accommodate this.

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lisper

        ➔ host www.gmo.com
        Host www.gmo.com not found: 3(NXDOMAIN)
    

This is using Google's DNS servers.

~~~
sp332
[https://www.whatsmydns.net/#A/www.gmo.com](https://www.whatsmydns.net/#A/www.gmo.com)
shows two different IPs: 216.57.159.45 and 69.147.188.37, and Mountain View
(Google) is giving NXDOMAIN. But if I query 8.8.8.8 from my computer on the
east coast I get 69.147.188.37, so maybe some of Google's servers are giving
conflicting responses?

------
mooneater
Im all for questioning assumptions. But i dont see him put forward a clear
alternative.

And he is comparing change in stock prices based on corporate mantras. He
doesnt even adjust for industry, or compare to the overall market during that
time. That makes no sense, why is this #1.

~~~
mkhalil
I agree with the comparison sort of being apples to oranges, but the key point
is it's bad to have the majority of CEO's pay be Stock+Options because that
will lead to:

\- The CEO will push the company to focus on SVM \- The increase in wage gap
due to high exec pay, like the 1%. \- The company might not be helping it's
longevity

An alternative would be not to pay exec's with Stock+Options, but focus on
Salary+Bonus.

------
jsprogrammer
Shareholders are cost centers, nothing more.

Put that into your quarterly corporate pipe and smoke it.

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joshjkim
A few early-stage-company-related thoughts (in no particular order).

Some prelim. thoughts: Maximizing shareholder value is accomplished by
increasing the value of shares, and presumably share value is the most widely-
agreed-upon way to value a business - whether or not it is accurate or takes
into account everything it should is another matter, but if you assume that
share value is intended to capture the financial value of the business, then
to say I want to max. SH value is basically the same thing as saying I want to
increase the value of the business, which I think for the most part is a good
and acceptable goal.

Here's what I think some of the problems are:

1\. Conflation of SHs/Board/Managers.

To me, the real issue here is more that people in power (who are often SHs
themselves - CEOs, boards, large SHs) use the "SMV" principal to hide behind
self-interested actions - I totally admit this is there prerogative, but it's
pretty annoying to see them try to dress it up in some abstract corporate
governance value system.

This happens a lot for public companies with activist SHs and/or PE firms -
see: Carl Icahn, who buys big stock positions, then publicly pushes management
to take actions like sell or spin-off segments in the name of "shareholder
value" when just the act of this publishing an open letter or pushing for his
own board candidates, etc. will increase the value of his holdings in that
very same company - yes, he is trying to max. SH value because he is a major
SH!

This also happens with public company CEOs whose comp. is tied to and/or made
up of equity, as is pretty much always the case these days. Lots of
interesting literature out there about how careerist CEOs (who don't plan on
staying at one company for more than a few years) will take highly risky
short-term-stock-value-increasing actions that are bad for long-term value,
etc.

Interestingly, this is especially true in early-stage companies, where
Founders/VCs are often the biggest SHs, on the board and in key management
positions (VCs sometimes take operating roles in companies as they hit growth
stages or if there has been founder trouble, etc.)

This conflict comes into relief w/r/t to exits where liquidation preference
get triggered: sometimes happens that VCs who control the board and hold
preferred stock push for a deal where the preferred get $$ back but common
gets nothing, even if the common think that it's a bad deal and want to keep
pushing ahead in hopes that they can improve the business and exit with some
value going to all stakeholders, not just preferred. This was litigated in
Trados (see link below), and the court said that in that case, it was OK that
the VCs made the deal happen.

Trados summary: [http://www.bingham.com/Alerts/2013/10/In-Re-Trados-
Incorpora...](http://www.bingham.com/Alerts/2013/10/In-Re-Trados-Incorporated-
Shareholder-Litigation)

(Not equity related, but a new instance of this is the reverse, and plays out
in acqui-hire deals: founders are given great job opportunities and RSUs from
acquiring company, but VCs get very little if anything and non-technical
employees are out of the job. I think in most cases it's a totally fair
outcome, just interesting to think about how it works in other instances where
the value measurement is different - in acquihires, skill of individuals is
the value, not the business, so stock value of the co. plays a much smaller
role and the power then rests in the individual holding the skills/ability,
not the VCs or the employees running business operations, etc.)

2\. Even if it is not the stated or intended goal (as I sincerely believe most
good entrepreneurs start business for more than pure financial gain - easier
to just work for a hedge fund), almost all tech startups rely on maximizing
shareholder value to properly incentivize founders, early employees and
attract capital to a much higher degree than public companies. The interesting
difference at the early-stage as compared to public companies is that, with no
public market, the constituencies are relatively few in number and far more
concentrated (founders are board members, managers and SHs, VCs are SHs and
board members and advisors, employees are equity holders, very few customers
at first, if at all, etc. - as discussed above, this happens a bit in the
public market but not in such a concentrated way), so the incentives are much
more easily aligned.

VCs are pretty-much-always looking for equity upside, and founders & employees
(to significantly varying degrees haha) are more-often-than-not foregoing
secure/higher salaries in exchange for potential equity upside - put another
way, all founders, VCs and employees pretty much hope for an exit in which
their equity is 10X what they had to pay for it.

Again, no founder/VC is saying the goal is to maximize SH value, but at the
end of the day we as a community more or less measure success through share
value.

That all being said, I love to think about exceptions to this rule: Craiglists
= awesome (I hope they beat eBay in court), Kahn Academy is amazing.

Would love to learn about some more!

~~~
kemitchell
Great stuff. Bonus karma for "w/r/t" and Trados. A few thoughts:

Risk is also a big part of shareholder value. Some stockholders may want
exposure to an operation in the company's industry that isn't highly
correlated to the market en masse, with higher risk and possible reward. (This
is akin to the VC outlook, backed by redemption rights to pull the plug on any
would-be "lifestyle businesses". It also sounds in Trados.) Others, including
insiders, may have no way to diversify portfolios that are very heavy in the
company's stock, and so prefer less or different risk.

You hint at this by your comment on short-termism of careerist managers, and
implicitly by picking stock price (rather than, e.g., book) as value. The
trouble with market value of securities is that potential purchasers are
diverse in their risk appetites and so value diversely. A buyer and a seller
might meet at a price by very different calculations. A price of $x per share
doesn't mean that all prospective buyers would value the security at $x, or
even that all current holders value at $x. Increasing $x by taking risk that's
at odds with shareholder A's portfolio needs doesn't benefit A like it
benefits others who need that exposure, especially if A can't efficiently
trade for a more suitable substitute.

With respect to acqui-hires, I've seen enough variety and change to wonder
whether I've enough firm ground to park a generalization. I've yet to hear of
a structure that's purpose-built for locking in people so VCs can extract
ransom on acqui-hire (perhaps using debt?). In terms of hired employee talent,
there isn't much in the way of leverage against the at-will nature of
employment and acqui-hirers' willingness to buy out options and sweat equity.
Especially in a state like California that doesn't enforce many non-competes,
that raises the question of why the hiring bother with acquiring at all. All
sides involved---VCs, companies, and personnel---may be eyeing other benefits.
As an entrepreneur (or an investor), "acquired" sounds much better than
"abandoned". Talent likes to walk a bridge, rather than take a leap of faith,
and keep good teams together. VCs would rather have a runner, but as dogs go,
it's not so bad to put more of "your people" in a large company with cash to
spend. It may be easier to buy with stock or options than justify an out-sized
compensation plan award to existing employees. All the deals I've seen seem
"personal" in these kinds of ways. Maybe the personal touch is the real story.
Maybe it's just what I've seen and heard.

Concerning alignment in start-ups, I think it's worth pointing out that a lot
of language goes into aligning those involved, resulting in potentially many
series of diverse equity securities, plus notes and other instruments in
between and all around. Everybody wants to get rich, sure, and when people are
getting rich, even board meetings can be fun. Nothing like a new-money down-
round to remember the house is built on fault lines.

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mikaeluman
I am sorry but this seems like complete left wing rethoric bullshit. I can
pick data too.

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tslathrow
GMO is the laughingstock of the HF community... trying to make a name for
themselves with a permabear outlook.

Their index and commodity projections are truly hilarious and they've been
claiming this sort of shit for years, generating bottom-decile returns.

