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The Dumbest Idea In The World: Maximizing Shareholder Value

forbes.com

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Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#21

Post by barrkel »

mhartl wrote: post #11

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 ni…

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.

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#22

Post by 1gor »

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

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

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

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

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

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

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

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

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#23

Post by blrgeek »

mhartl wrote: post #11

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 ni…

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.

http://dictionary.reference.com/browse/business

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#24

Post by forensic »

beagle3 wrote: post #20
forensic wrote: post #15

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 s…

> 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,…

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.

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#26

Post by xianshou »

xianshou wrote: post #25

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?

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

http://www.forbes.com/sites/stevedenning/2011/11/16/why-are-...

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.

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#27

Post by Untitled »

beagle3 wrote: post #20
forensic wrote: post #15

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 s…

> 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,…

> 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.

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#28

Post by HalibetLector »

forensic wrote: post #24
beagle3 wrote: post #20

Earlier quoted context omitted.

> 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,…

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 ent…

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...

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#29

Post by philwelch »

mhartl wrote: post #11

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 ni…

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.

Re: The Dumbest Idea In The World: Maximizing Shareholder Value

#30

Post by yuhong »

WalterBright wrote: post #17
mixmax wrote: post #3

"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 h…

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.
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