The Dumbest Idea In The World: Maximizing Shareholder Value

Anthony Heman

I'm not even done reading the article but this seemed like something people here might like to discuss.

http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

“Imagine an NFL coach,” writes Roger Martin, Dean of the Rotman School of Management at the University of Toronto, in his important new book, Fixing the Game, “holding a press conference on Wednesday to announce that he predicts a win by 9 points on Sunday, and that bettors should recognize that the current spread of 6 points is too low. Or picture the team’s quarterback standing up in the postgame press conference and apologizing for having only won by 3 points when the final betting spread was 9 points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.”

Imagine also, to extrapolate Martin’s analogy, that the coach and his top assistants were hugely compensated, not on whether they won games, but rather by whether they covered the point spread. If they beat the point spread, they would receive massive bonuses. But if they missed covering the point spread a couple of times, the salary cap of the team could be cut and key players would have to be released, regardless of whether the team won or lost its games. Suppose also that in order to manage the expectations implicit in the point spread, the coach had to spend most of his time talking with analysts and sports writers about the prospects of the coming games and “managing” the point spread, instead of actually coaching the team.

Nuri

I think it should be noted that although corporations have a legal duty to their shareholders, that duty does NOT include maximizing shareholder value. They have an obligation to provide a reasonable return, but whenever shareholders have sued because the company took a (reasonable) action that was less profitable for shareholders than an alternative, courts have generally held in favor of the company. Companies get to make choices and do not always have to do the thing that makes the maximum profit for shareholders. That's a corporate choice, not a legal duty.

George Patches

Simple solution, don't go public.

Dragonmaster Lou

Simple solution, don't go public.

Easier said than done. Part of the reason for a company to go public is that going public allows it to have greater access to cash to finance expansion and so on. Granted, you can probably eventually get the same amount of cash by remaining private, but that could take much longer to do so.

YoshoKatana

This is a really good article, ostensibly about the background of Mitt Romney, but also about the shift in American corporations towards making shareholder value their prime directive.