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The Dumbest Idea In The World: Maximizing Shareholder Value (forbes.com)
376 points by DanielRibeiro on Dec 26, 2011 | hide | past | web | favorite | 135 comments

  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.

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.

I'm really just asserting a tautology: Business owners determine what their businesses should do. Given the current legal status of corporations, the question "What should a company do?" is not ethical in nature (ought); it is a matter of fact (is): companies can, within the constraints imposed by law, do whatever their owners want them to do. There are certainly salient ethical questions here—"Which laws should governments enforce to constrain businesses' behavior?", for example, or "If I want to benefit others, what should I have my business do?"—but they lie outside the scope of my original comment.

The people who have executive power in the leadership structure of companies control what companies do. When ownership is diversified, business owners do not determine what their businesses do; your "tautology" is actually false, obviously so with more than a cursory examination of the world as it is. I myself am a part-owner of ARM, for example, but I have zero effective control over them.

And the question as to what should a company do is very definitely an ethical one. Some people try to argue that ethics only apply to companies in so far as they apply to the people that form the company; but others do not. Because the question isn't "what can a company do within the constraints of law", the question is actually what ought a company do.

Companies help match supply and demand where the supply or demand or both are divided and scattered enough that they can't be efficiently matched through individual contracts. But in this formulation, just like free markets, they have no moral content. The mere fact that there is demand for something does not imply that it is good that the demand is satisfied with supply. Lynch mobs frequently have short bursts of popularity, and they demand someone be lynched; irrelevant of whether they are legal or not, it should be clear that the fact of the demand does not amount to an ethical justification.

So when we ask what ought a company do, it is not enough to look at ownership structures; nor is it enough that we look at the operations of the company in providing supply to market demands. Merely following the law is not enough either; many immoral things are permitted by the law (to the point that later, the law changes), and many moral acts are taxed or prohibited by the law, for various formulations of morality. But more importantly, the law is itself informed by the ethical question over what ought companies do.

For example, it may be the case that child labour is legal in country X, and company A employs children in country X to meet supply for products in country Y, where such child labour is illegal and everybody agrees that it is unethical. By your formulation, there is no way to argue that company A is violating ethical norms. At best, you would suggest that shareholders - e.g. people with pensions, ultimately - should be held ethically responsible. You'll forgive me for thinking that that sounds rather ridiculous.

The people who have executive power in the leadership structure of companies control what companies do.

The leadership structure is determined by the Chief Executive, who is appointed by the Board of Directors, who are elected by the shareholders, i.e., the owners. Q.E.D. (Lest you accuse me again of naïveté, I'm aware that there remains a principal-agent problem (http://en.wikipedia.org/wiki/Principal-agent_problem); when an angel becomes available to serve as CEO, I suggest doing your level best to get him the job.)

By your formulation, there is no way to argue that company A is violating ethical norms.

The whole point of my formulation is that it is silent on ethical questions. If you find it unethical that Company A uses child labor, you can buy from their competitors, or organize a boycott, or lobby to make their practice illegal—and I might well join you. Supposing that Company A is a standard joint-stock company, your actions would serve to align their interests (maximize value) with yours (be ethical according to your criteria). There is no conflict between your actions of protest and the statement "The company owners determine its actions"; as categories, is and ought are orthogonal.

should be held ethically responsible

Note the passive voice in this statement: "be held responsible". By whom? When people say that corporations should "be held responsible", what they means is, "We want to hold corporations responsible [is] according to our system of ethics [ought]." In other words, stripped of all camouflage, it is a naked grab for power. It's a generally well-intentioned power grab, of course, and depending on your system of ethics you might consider their achieving power to be a good thing. But Robespierre had good intentions, too, and the road to hell, etc.

You acknowledge the principle/agent problem, yet you pretend it doesn't exist in your QED; your demonstrandum was not convincingly demonstrated.

What if company A has a monopoly owing to being cheaper than any possible competition that does not use child labour? Would your argument for introducing a law against it not be an ethical argument governing the permissible actions of companies?

We want to hold corporations responsible [is] according to our system of ethics [ought]." In other words, stripped of all camouflage, it is a naked grab for power

Well yes, I do rather prefer government to anarchy. I'm sorry to say that if you see this as a "naked grab for power", I have little more to add, and am unwilling to continue a conversation with you. This is because, unless I'm mistaken, you are denying the very basis of democratic government ("we", the majority) in defense of something much more dangerous (the oligopoly of wealth and executive power). Someone who would do that is not someone I would trust; it is someone I'd rather shun.

the very basis of democratic government ("we", the majority)

Come now—you don't even believe this. The majority used to support legal chattel slavery. Did that make slavery right? Killing Native Americans and taking their land was pretty popular, too. And what about the overwhelming popular support for the Anschluss Österreichs that brought Austria under Nazi rule? Und so weiter.

You can believe in ethical government, or you can believe in the ethical principle of "majority rule", but you can't believe in both. Think about that the next time you slam someone for questioning "democracy".

If you shun me, it's not because I'm dangerous or untrustworthy, but rather because you are a Jedi and I am a Sith. (Suffice to say you've been exposed to a lot of anti-Sith propaganda.) Don't worry—I, too, was once a Jedi, and I don't take it personally. Luckily, it's never too late to come over to the Dark Side.

Perhaps the grandparent isn't making that great of an argument. But at the same time, I don't see you doing anything but arguing. And yet, I have no idea what you're arguing for. I assume that you're making the case that companies need to be more focused on collective action, but I don't really see any alternative vision compared to the grandparent.

That said, I don't think collectivism and individuality are mutually exclusive. If a company can be individualistic in a way that benefits society, what's the problem? Clearly there need to be some limits to what company owners can get away with. That's why society has laws. But it's especially naive to think that companies can be structures that act solely for the good of society with no benefit to the people that have invested in and work for them. Clearly, there needs to be some level of individualism granted to the people who make a company work. Otherwise, you'll have companies that spend so much time focusing on the good of everyone that they end up delivering for no one.

In a single term: stakeholder theory. I do think there needs to be some balance; not necessarily along collectivist lines, but rather with some thought applied to the kind of society we want to live in, and the kind of fairness and justice we want to see in our lives and the lives of our children. So I am hostile to absolutist approaches to ownership and the firm, particularly since we are all only here temporarily, and everything we think we own, we are just renting.

In my view, capitalism is justified in so far as it motivates value creation and production that leaves everyone better off, in a just way, rather than as something which follows from underlying principles around ownership and control of capital. That is, capitalism is a means to an end, not an end in itself; and when this means turns out to be unjust, it should be changed and regulated, rather than treated as sacred.

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.

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.

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.

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

The original argument was against facile generations like "businesses ought to maximise shareholder value" and "businesses ought to aim to create more customers, which the author quite reasonably pointed out didn't apply to his own business ventures. If anything, it's a criticism of "sociopathic" maxims like Milton Friedman's infamous "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits": the implication is that other objectives like paying himself a higher salary, working less, giving his books away for free on the internet to help everyone learn Rails or aiming for abstract "socially responsible" goals need not be subordinate to supposedly universal business imperatives of growing profits or customer bases.

The ethical implications of limited liability laws (one ought not to take credit one has no expectation of repaying; one ought not to mislead investors) are a tangential issue; a list of things an owner ought not to do with their business (see also: sell crack to kids, sexually harass staff, murder competitors) can happily exist in the absence of some overriding objective business owners ought to follow.

This is a strawman. Clearly mhartl is doing something good for society. If his goal in helping society is so that he can build a pool of money he can dive into like Scrooge McDuck, why do you care? Is helping society only good if the person who does a good deed only cares for helping starving orphans and lost puppies?

The only time having self interest is wrong is if that self interest hurts society. What's wrong with furthering your own interest if society benefits in the process?

Society, being an abstract entity, cannot articulate what it actually wants. What we know is at lawmakers have granted a certain condition of limited-liability to encourage enterprise. Everyone is aware of this limited liability and is free to trade with those who claim it as they see fit. There is no further debt to society and it's not a 'privilege.'

"society does not grant [...] protection for free. Nor does it expect to get the short end of the deal. It [...] expects [its] stake to be rewarded [...] mhartl's implication [...] represents [...] arrogance [...] It is supremely egocentric [...]"

There is a certain amusement in seeing a lecture about what "society" surely thinks and expects from all of us followed up with accusations of arrogance and egocentricity.

Limited liability was initially intended to protect minority shareholders from being responsible for the misconduct of the general partners. Now it has been extended to general partners as well which is just stupid.

Who is this "society" you speak of? Am I society? Can I tell businesses what I want them to do?

"""What you state is extremely individualistic, but it is unrealistic and naive for the same reason."""

Actually not at all. It just takes a certain type of society that wants to have and enforces such norms.

If it's really your business, and you're the one deciding what it does, and you choose what you want most from that business, then you are maximizing shareholder value, because you are the shareholder and you're maximizing the business's value in your life.

Of course you're right in a sense, but when people say "businesses should maximize shareholder value", they use "value" specifically to mean financial value.

"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."

This is specious, not all shareholders are equal and most have no practical consequence from their shareholding because they hold too few.

Large shareholders are rarely, if ever, interested in being owners, they want short term tradeable instruments. Maximising shareholder value is pandering to the whims of these people whose goals are never in the interests of the underlying business.

The owners can do what they want to do without a business. So why create a business? If the owners just want to have a place to park their money, they can have a trust. If they want to do good in the world they can make a non-profit, or an NGO.

The only valid definition of a business purpose - creating customers.

If they don't want customers (one, few or many), they shouldn't start a business.


> If they don't want customers (one, few or many), they shouldn't start a business.

Legally, there is no such a thing as a "business". A corporation or LLP exists to limit liability. That's it. "Business" is not well defined in the real world.

Is an HFT proprietary trading firm, trading its own money on an anonymous exchange, with no customers or clients, not a business?

> Legally, there is no such a thing as a "business".

The US Internal Revenue Service would probably disagree with you there. If I didn't file Schedule C ("Profit or Loss From Business") every year, I'd be in prison.

> Is an HFT proprietary trading firm, trading its own money on an anonymous exchange, with no customers or clients, not a business?

An HFT with no "customers" is simply an agent of its owners. The only sense in which you could call it a business is that it happens to have the form of an incorporated entity, which many businesses also happen to have the form of. A is part of B, C is part of B, does that mean all As are Cs?

You've latched on to one of the bizarre artifacts of the modern American legal system, not a fundamental principle of business.

> If I didn't file Schedule C ("Profit or Loss From Business") every year, I'd be in prison.

I wasn't aware of that; In that case, there is at least one legal definition of business with a lot of merit behind it (gun wielding people will put you in prison if you fall under it but do not file schedule C). And whatever the IRS regulations for Schedule C define as a business, is a business.

> An HFT with no "customers" is simply an agent of its owners.

Aren't all businesses? Isn't the defining property of business is doing transactions? (of whatever kind). Can you summarize what the requirement for Schedule C filing is?

> You've latched on to one of the bizarre artifacts of the modern American legal system, not a fundamental principle of business.

Where are the fundamental principles detailed? I agree the vast majority of businesses have customers, but I don't think it's a defining property -- there are a lot of people with customers who do not consider themselves having a "business" (Although the IRS might think otherwise)

So you say that the real world is mostly made from legal definitions?

I would wonder what that would mean for string theory.

> So you say that the real world is mostly made from legal definitions?

No. I'm saying that arguing about what a "business" is or isn't is futile, because something which is a business to one is not a business to the other. Had there been a legal definition, there would have been merit to such a discussion.

> I would wonder what that would mean for string theory.

I wonder too. So far, string theory has not been predictive, and as such is a very interesting intellectual experiment, but not a lot more. When it can actually predict something testable that disagrees with another theory, we'll be able to call it "science".

Where on earth did you get the ridiculous idea that your business can do what you want it to?


Saying your business can do whatever it damn well pleases because you own it is like saying I can drive my car any way I want. Not so. Your actions affect others. You are using public infrastructure and there are rules.

Move to an island where you can be all by your lonesome and run a business any way you want there.

I'm pretty sure that mhartl means that there (is|should be) no universally mandated goal of a business (e.g. maximize stock price, maximize market share, grow quarterly). Not that businesses should be allowed to break laws.

The goals of the business should be the goals of the owner not the goals of some economist or capitalist pundit.

First I see that you are new here, so welcome.

That isn't much of an argument you are presenting though -- you could argue against a person being allowed to do anything based on that. The reason I can't drive a car the way I want is that it represents a clear and present danger to the health of third-parties. On the other hand running my business the way I want doesn't present a clear harm to others, so I can't.

The BP oil spill is a clear example of dangers to others, as is the credit crash. There are numerous other examples, one given in the article itself, where the actions of business can do great damage to individuals. Is my toothpaste safe? What about my tomatoes?

This seems like a bizarre leap from what mhartl was talking about when he said "A business should do what the owners want it to do", which is what tomjen3 was defending. Given the choice between a reasonable interpretation of someone's comment and an unreasonable one, it seems unkind to choose the unreasonable one without even asking for clarification.

When you hear someone say something like "People should be free to choose their own destiny," do you come in guns-a-blazin' about how they shouldn't be free to choose a destiny where they kill people or beat children? Because that's usually not what people mean when they say that. I think mhartl and tomjen3 were just suggesting that this same principle applies even when the person is a business owner — that people don't suddenly have any one particular goal forced on them just because they happen to be running a business.

In economics this is called an "externality", specifically a negative one in this case.


The credit crash was due as much to people taking on obligations they ought not to have taken on, as it was about lenders making loans they ought not to have made.

"On the other hand running my business the way I want doesn't present a clear harm to others, so I can't."

I beg to differ. How corporations are run harms so many others that it amazes me that you would even say that. What about all the "down-sized" workers whose pensions were gutted and benefits taken away - or the workers who lose their lives because companies care more about the bottom line than they do about safety?

tomjen3 said "the way I want", not "any way I want". There's an important distinction. Just because some companies act like that doesn't mean all business owners - and particularly tomjen3 - do.

See chc's post: http://news.ycombinator.com/item?id=3393472

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.

> 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.

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.

First, I'd question what you think "honor" means. There are people who think stoning their daughter over dating someone outside their social group is the honorable thing to do. So concepts of "honor" are wishy-washy at best.

Your second sentence sounds like it's suggesting that Rockefeller and Carnegie knew what honor meant & that this is somehow a good thing. They probably had a concept of their image & perhaps even moral crisis later in life which made them turn philanthropic. Just because one has a concept of honor doesn't really do society any good because it doesn't mean they're actually honorable people. Keeping up the image of honor isn't the same thing as being honorable. It seems almost as though you're excusing them because they had to work hard to keep the image of being honorable going.

One would also think that if everyone acted "honorably" we wouldn't need a legal system in the first place, because no one would ever be dishonest or do dishonorable things. There are legal systems in the world which are far from honorable & are basically an invisible hand of the politicians or theocracy which rules the land.

Not all war-profiteers have been hung for treason. Heck the US even cooperated with Nazis after World War II[1] or how about the persecution of Alan Turing? Good ol' days indeed.

I am not sure if I would say that lynching someone over fraud is the honorable thing to do.

I get your anger, but the annals of history are filled with "dishonorable actions", this isn't apologizing for those who have done misdeeds, it's just stating facts. Painting a rosy picture of the "good ol' days" does no one any favors.


"There is no question what the roll of honor in America is. The roll of honor consists of the names of men who have squared their conduct by ideals of duty."

- Woodrow T. Wilson

Aristocrats had to preserve their honor or face reprisals: They could be ostracized, humiliated, publicly shamed, lynched, challenged to a duel, convicted of crimes they did not commit, have their property taken by force and then have the police look the other way, etc.

Whether you like codes of honor is a separate question from whether it existed.

Codes of honor are all about vigilante justice and public humiliation.


There are people who think stoning their daughter over dating someone outside their social group is the honorable thing to do. So concepts of "honor" are wishy-washy at best.

Well, given that we're allowing the statement, "society was never based on honor," to stand, we can assume that we're restricting ourselves to Western or simply American values, since the Japanese provide an obvious counter-example. There aren't many Americans who have ever been into honor killings of family members.

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.

Citation needed.

Or more to the point - when exactly do you think think period was?

For example, in 1804 the sitting vice president (Burr) was accused (probably correctly) of corrupt dealings. He challenged his accuser to an (illegal) pistol duel and killed him[1]. Burr was charged with murder, but the charges were dropped and Burr continued his political career "out west". This was hardly an isolated incident - US history is full of similar examples - not exactly the honourable behaviour you seem to believe was the norm.

[1] http://en.wikipedia.org/wiki/Burr-Hamilton_duel

Two hundred years later, the sitting vice president (Cheney) was accused[1] (probably correctly) of corrupt dealings. He just ignored his accusers and nothing came of it.

Now, I realize you were responding to the statement about lynching, but it's worth noting that challenging someone to a duel is what you do when your honor has been questioned. In fact, the Wikipedia page on "Honour" includes an illustration of the Burr-Hamilton duel, with the caption, "Alexander Hamilton defends his honour by accepting Aaron Burr's challenge." It also describes honour as deriving from "perceived virtuous conduct and personal integrity."

It would seem that honour really was a more important thing two hundred years ago than it is today.

[1] http://www.google.ca/search?q=Cheney+corrupt+dealings&hl...

I don't think that murdering your rightful accuser and getting away with it is really what most people mean when they say "honor" these days.

Maybe honor did used to be more important, but it's not the same concept, only the same word.

I'm not saying Burr was honourable. I'm saying he cared about being perceived as honourable. As did Hamilton, or he wouldn't have accepted the challenge. Cheney, in contrast, doesn't give a damn what people think, as long as Halliburton keeps getting government contracts.

The point is not that people were more virtuous in the past. It's that virtue, or at least the perception of virtue, was considered important in the past, much more so than today.

And I'm saying that the perception of "honorable" was obviously very different than what we would consider "honorable" to be today if murdering his accuser and getting away with it improved that perception.

Sigh. Yes, attitudes toward violence have changed. We don't have duels any more, and if we did, the winner would go to jail. Fine.

What's interesting about the duel isn't that Burr killed Hamilton, it's that he took the risk of getting killed himself. The duel could easily have turned out the other way. Who would risk his life to protect his reputation today? Certainly not Dick Cheney.

I agree, that's interesting. I simply dispute that this is evidence that honor truly was important in the past. The word may have been, but the meaning was not what we mean by it today.

It is worth noting that Burr was known as a violent man and a good pistol shot (unlike Hamilton). If he had been an honorable man he would have deliberately missed (which was common in duels).

It's more accountability than what Dick Cheney faced.

The point is that even under primitive social codes like the honour system, public officials faced more accountability than they do now.

There is no accountability left whatsoever in ANY social leaders: not business leaders, not industry leaders, not political leaders, not military leaders, not scientific leaders, not legal leaders.

ZERO personal accountability. They can be as corrupt as they want, they can fuck it up as bad as they like, but there are absolutely no consequences to them.

This is what has changed. At least in the 1800s you could be challenged to a duel when you engaged in corruption. At least in the 1800s robber barons had to protect themselves from vigilante justice.

Person A ignores his accuser.

Person B murders his accuser and goes on with life.

How exactly is B more accountability? As far as I know, Dick Cheney hasn't murdered any of his accusers.

It's not murder it's a duel. Big difference. Both duellists put their lives on the line.

How many people in America right now would be willing to have a duel with Cheney? Hundreds if not thousands. That says something meaningful about his role.

I don't really see why a duel isn't a murder. Plenty of murderers put their lives at risk to kill. Just because the other guy agreed to it doesn't make it not a murder. I guarantee you that if I challenged somebody to a duel today and ended up killing him that I would go to jail for murder, and rightly so.

Sources? beagle3 offers concrete examples, you don't. I'd love to be proven wrong here, but I've found nothing that suggests honor was ever valued in the united states and certainly not the way you say it was. Japan, certainly...

"There is no question what the roll of honor in America is. The roll of honor consists of the names of men who have squared their conduct by ideals of duty."

- Woodrow T. Wilson

Unfortunately the internet is an intellectual ghetto and so there are no good links that describe honour. But cmon you ignorant computer scientists, read a fucking history book. Honor was the most important code of conduct for American aristocrats and lasted until the mid-20th century. If they were publicly dishonoured they could lose everything they cared about.

This is why people fought duels to defend their honour. People were willing to die to maintain their honour.


You mean like when head rolled over watergate but not Valerie Plame? Or because since we all watch torture on 24 it makes gitmo ok? Or Rush redefines the word hypocrite and the people still flock to him like Jesus? or Obama reneges on his promises. He is effectively are more weller spoke Bush.

I don't think we lost honor, I don't think we had it, but I do think we have lost nearly all sense of caring.

> 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.

I think he is actually really bummed because his worldview is incongruent with how Darwinian and shitty the world actually is. Optimists take it the hardest.

"the optimists don't make it out of vietnam" http://en.wikipedia.org/wiki/James_Stockdale

The reason I support punishing the guilty instead of letting them get away with it is because I'm a realist.

It's pacisfists who are the optimists. Pacifists who say we should just let Cheney and Blankfein off the hook. I say we should tar and feather them, precisely because I understand that if we don't, things will get worse. This is not an optimistic viewpoint.

(a note to the HNer who systematically went and downvoted all of my responses in this thread instead of joining the dialog: Thank you. You missed a few. Also, you might want to go downvote me in unrelated threads as well, I'm sure it'll make you feel better)

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.


"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

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.

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

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.

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.

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...! 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.

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.

> 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.

This is extremely true! Probably the best example of this is Cecil John Roads (http://en.wikipedia.org/wiki/Cecil_Rhodes) who was a ruthless businessman who owned countries, started wars and engaged in unsavory business practices.

Yet he is fondly remembered for the Rhodes Scholarship and his donations to the University of Oxford.

This revisionist view of Rhodes is overly negative. He was an empire builder but his prime motivation was to modernize the world. Rhodesian policy led to the end of the empire, in fact. This is just overly simplistic character assassination. Rhodes was way more complicated than you make him out to be.

I remember reading one of his lectures where he was telling the class that now their duty, as wealthy and cultured modernists, was to serve the uncivilized and poor of the world and to bring the luxury and comfort that aristocrats knew to everyone. Rhodes taught altruism and service to the unfortunate and his legacy is many powerful people who worked to better the world, inspired by Rhodes.

> He was an empire builder

Rhodes was not an Empire Builder. He was a company builder. His company was the British South African Company (http://en.wikipedia.org/wiki/British_South_Africa_Company).

> but his prime motivation was to modernize the world. Rhodesian policy led to the end of the empire, in fact.

His motivation was to make money. You know that he tried to start a war? http://en.wikipedia.org/wiki/Jameson_Raid

Which led to two other wars http://en.wikipedia.org/wiki/Second_Matabele_War http://en.wikipedia.org/wiki/Second_Boer_War

The "British South African Company" that fought in these wars was a paramilitary unit that belonged to his company.

> Rhodes taught altruism and service to the unfortunate and his legacy is many powerful people who worked to better the world, inspired by Rhodes.

Maybe he tried some veneer after he became rich - but he was still a bastard.

(Even his Rhodes scholarship is designed to Anglicise. It is impossible for a person to obtain the Rhodes scholarship unless he studied in English).

Wtf? Rhodes was known as "The Empire Builder"

Who is teaching you this bullshit history?

Demonizing historical figures instead of studying them in the context of their time is really pathetic.

> Rhodes was known as "The Empire Builder"

Maybe you misunderstood me. You say that he was a selfless Empire Builder - i.e. he had some zeal to build the English Empire for the good of the queen and England. Yet his true aim was making money (through the British South African Company).

> Who is teaching you this bullshit history?

> Demonizing historical figures instead of studying them in the context of their time is really pathetic.

Trying to whitewash history and historical figures is quite sad. Admittedly I learnt history from a different perspective than you (i.e. from the side of the oppressed and not the opressee).

Yet even in western countries, colonialism is now seen as a bad thing by the majority of people (a few nationalists and apologists notwithstanding).

By "our society", American society is meant, and what was said is true. It would be ignorant of history to say that this country's laws and founding documents did not draw much inspiration from the Bible.

The Bible ("Old Testament") ... in which King David does the most dishonorable thing possible, sends a man to die in war so he can have that man's wife -- and gets endless praise regardless?

No wonder. Regardless of the inspiration, reality with its liberal bias favors the successful rather than the honorable. These concepts are not inherently incompatible, but way more often than not are, and always were.

Regardless of whether man praises something or not, the Bible condemns what is unrighteous and praises what is righteous. However, it also shows that God hates the sin but loves the sinner (see John 3:16).

Yes, the king himself committed adultery and murder. After this, David was rebuked by the prophet Nathan with the word of Jehovah (2 Samuel 12:1-14). You see, God immediately condemned what David did. Then He spoke a judgment on David and on his house (Israel): "Now therefore the sword will not depart from your house forever because you have despised Me and have taken the wife of Uriah the Hittite to be your wife." (v. 10) The sword, that is, war, has not left the nation of Israel. They are constantly fighting for their survival. David was even personally disciplined by his son dying and his wives being treated as he had treated Uriah's wife (vv. 11-14).

After being rebuked, David mourned. At this time, he wrote Psalm 51. In it he repents and confesses his sins to God, saying, "blot out my transgressions", "wash me thoroughly from my iniquity", "from my sin cleanse me", and "purge my sin". Eventually, David's repentance and confession joined God's forgiveness and the result was Solomon, through whom the temple was built and Christ was produced.

You are wrong but I doubt you see it. At any point in our history that you look you have just cherry picked the outliers that uphold your opinion. Your original argument is largely blanketed statements, without diligence.

I can't help but smile.

Cherry picked or not, every concrete example brought up in this thread (Burr/Hamilton, Cheney, and those I gave) is supporting my point of view. The opposing point of view (which I infer you support from your post) has not brought up a single supporting example, even though it starts at the inferior position (if you claim things were different, the onus is on you to demonstrate the direction, character and rate of change!).

Yet you dismiss those examples as being "outliers" and cherry picks given without diligence. Oh well. I am wrong in trying to arguing with people who care not about the facts. But I have a little time to kill, so it's ok.

I feel sorry for approximately half of the human race, and I sometimes have trouble determining which half that is.

Thank you for standing for what is upright. We need to speak the truth concerning what is right and what is not right.

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.

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.

>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.)

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.

Yes. The article frustratingly kept identifying "maximizing shareholder value" as the problem and the naive "delight customers" as the solution. Maximizing shareholder value would be much more closely aligned with society's interests if shareholders had the information needed to distinguish real value being built from a company being strip mined.

You need a second constraint. The shareholders have to care about long-term value. Many institutional shareholders don't care and have no incentives to care about long term value. To them, firms are not long term investments - they are merely symbols moving up and down on a price chart. If your symbol moves down too often, they'll pull money out of your firm, even when those gyrations are being caused by forces completely outside your control (natural disasters, or sector-wide trends).

With shared information and rational actors (unrealistic, I know) stock prices should reflect long term expectation, even in the short term.

shareholder investment window is up to the shareholders. if shareholders push for short term profits at the expense of long term stability that is FINE. In a healthy market they get eaten. We have an unhealthy market where some get to maximize short term profit and then go crying to mommy when the consequences roll in.

"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.

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.

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).

Yes, I found this silly in all the same ways.

In the one talk I've seen Jack Welch give he said himself the only form of job security is customers. The article's author is attacking a straw man. He slams Welch's management of the GE as short sighted, but the only facts in support are the deterioration under Immelt's management.

Ultimately, in the long term customers and shareholders have aligned interests in most all cases.

At least is spawned a discussion here, but the lead is so full of flawed reasoning by analogy that it made me sick as a rainbow.

"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.

Jobs certainly wound up maximizing shareholder value.

Maybe the shareholders aren't so easily fooled.

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

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.

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.

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?)

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.

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.

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.

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

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

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"...

There are also dividends.

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.

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.

  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.

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.

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.

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.

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.

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.

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?

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...

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.

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...

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?

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.

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

Has it ever occurred to you that whoever has the most money can manipulate stock prices so any investor is in not one of the insiders is a mark? It boggles my mind that so few investors realize the game is certainly rigged and they ARE going to consistently lose. Why not just go to a casino? There - at least theoretically - you know what the takeout is and can decide whether you get enough "fun" from your losses to make you think it worthwhile. Gambling is gambling and the house always wins.

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.

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?

Good point. The sentences were written before his death. I've fixed them now.

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


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.

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.

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."

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

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.

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

I wish I could understand this.

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.

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