The Dumbest Idea In The World: Maximizing Shareholder Value

  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.

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.

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.

Jobs certainly wound up maximizing shareholder value.

Maybe the shareholders aren't so easily fooled.

  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.