Saturday, May 10, 2014

On the shareholder value myth

I came across a small booklet entitled "The Shareholder value myth" by Lynn Stout.   I now have the privilege to look at the corporate world now from the outside so I can write more freely from my academic seat now.   The book starts with the assertion that during the last 20 years there is a common practice to see the "shareholder value" as the only consideration in corporates' strategy.  Actually when I studied in an MBA program in the early eighties,  we learned that there are multiple stakeholders: shareholders, employees, customers, suppliers, regulators and the social environment, and the management needs to balance the interests.    Since that time the equation has changed to have shareholder as the primary stakeholder. The main thesis of this book is that this is actually a wrong thing to do, since it biases towards short term (the speculative shareholder vs. the long-term shareholder).  Since the author is a professor of law, she starts by legal claims that disputes the common thinking that the shareholders own the corporate, and discusses the relations between these two entities.  She claims that the current economy takes it to extreme by saying that the goal of maximizing the value for shareholders is a goal the justifies all means to achieve it. Stout claims that this kind of thinking is typical for psychopaths, and that most people, thus most shareholders are not psychopaths.

The consequences according to Stout are damaging to corporates, employees, customers and society.  The drive for short-term results, fueled by linking senior executives compensation to short term goals, and cutback of R&D, employee benefits, and quality and affordability for customers.    It also triggers unethical behavior.  The good news according to Stout is that we see first signs that this paradigm starts to decline, however the "Wall Street" culture is still quite pervasive. 

I'll write more opinion about socio-economical issues in time -- still learning it! 

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