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The Dumbest Idea In The World: Maximizing Shareholder Value

forbes.com

31–40 of 139 posts

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

#31

"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 ca…

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 f…

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).

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

#32
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…

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.

[1]http://www.nytimes.com/2010/11/14/us/14nazis.html

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

#33
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…

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

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

#34
post #21
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 pro…

"""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.

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

#35
post #21
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 pro…

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.

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

#36
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…

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.

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

#37
post #22

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. explor…

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.

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

#39
post #30

Earlier quoted context omitted.

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.

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

#40
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.

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