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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

#51

Post by pge »

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...

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

#52

Post by quanticle »

shasta wrote: post #37
1gor wrote: 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.

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).

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

#53

Post by yummyfajitas »

pge wrote: post #51

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 o…

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?

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

#54

Post by Andrew_Quentin »

tomjen3 wrote: post #44
xinjiang wrote: post #36

Earlier quoted context omitted.

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.

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?

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

#55

Post by yummyfajitas »

1gor wrote: 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…

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.

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

#56

Post by Andrew_Quentin »

yummyfajitas wrote: post #53
pge wrote: post #51

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 o…

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.

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

#57

Post by stevedenning »

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?

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

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

#58

Post by stevedenning »

xianshou wrote: post #26
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.

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.

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

#59

Post by yummyfajitas »

Andrew_Quentin wrote: post #56
yummyfajitas wrote: post #53

Earlier quoted context omitted.

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?

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

#60

Post by sitkack »

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…

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.

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