Shareholder Value

As someone who went to business school in the height of the “shareholder value” craze, I do find some validity to this article. Especially after years of dealing with CEOs. I had one CEO I had an argument with about this very topic. My side (the correct one) was that you end up “choosing” your investors by the messages you send. If you tell them you are focused on a 5 year horizon with a set goal, and then you tell them that you won’t be focusing on the 90-day cycle – you will get to your destination but not in 90-day sprints – then you will get long-term investors. And this will result in less stock price volatility if you hit some intermediate goals.

But he was stuck in the 90-day cycle. And that hurts a lot of companies. You can’t invest for the future in that environment.

Anyway, here is the article that was excerpted in The Week, where I read it:

BEST COLUMNS

It’s foolish to focus on stock prices

The relentless pursuit of higher share prices has done investors no favors.

POSTED ON SEPTEMBER 6, 2012, AT 2:25 PM

Lynn Stout
Los Angeles Times

The relentless pursuit of higher share prices has done investors no favors, said Lynn Stout. Maximizing “shareholder value” has been corporate America’s religion for over three decades now. To crank up share prices, companies sell key assets, outsource jobs, shower CEOs with stock options, and drain cash reserves by paying out dividends. These tactics often produce short-term market bumps, but they also hurt a company’s “long-term ability to grow and prosper.” Investors have borne the brunt of this trade-off, suffering “more than a decade of the worst investor returns since the Great Depression.” So why does the charade continue? Because investors continue to believe that companies are legally required to maximize returns in the short term, even though that’s a “pure myth.” In reality, corporate directors have no such obligation. Only with the rise of the “Chicago School” of free-market economics in the 1980s did share price become the default gauge of corporate performance. It’s time to step back from misguided short-term thinking so that companies can finally “do a better job for shareholders—and the rest of us too.”

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