Shareholder Value: A Myth, A Cult, and a Struggling Economy

Money BagsWondering why we’re still slogging along toward economic recovery? Musing about the reasons for the rise of the Financialists?  Start here: “How the cult of shareholder value wrecked American business,” by Steven Pearlstein in his Washington Post economics column.   Pearlstein nails it — on the self perpetuating elements of corporate mismanagement:

“This infrastructure includes business schools that indoctrinate students with the shareholder-first ideology and equip them with tools to manipulate quarterly earnings and short-term share prices.

It includes corporate lawyers who reflexively advise against any action that might lower the share price and invite shareholder lawsuits, however frivolous.

It includes a Wall Street establishment that is thoroughly fixated on quarterly earnings, quarterly investment returns and short-term trading.

And most of all, it is reinforced by gluttonous pay packages for top executives that are tied to the short-term performance of the company stock.” [Washington Post]

Bingo!  Pearlstein isn’t the only voice lamenting the Cult of Shareholder Value, nor is his the first.   Joe Nocera offered this bit of history on August 10, 2012:

“As the expression goes, be careful what you wish for. Shareholder value has long since become the mantra of the business culture. Corporate boards shower executives with stock options to “align” them with shareholders. “Underperforming” companies find themselves under siege from activist investors. Increasing shareholder involvement is viewed as the way to fix whatever ails corporate governance. Over time, “maximizing shareholder value” became viewed as the primary task of the corporation.”

And the result? We place undue focus on short term gains instead of developing a company’s long term economic value.  Management becoming obsessive about raising stock prices rather than raising the value of its brand.

Professor Lynn Stout, whose book launched the discussion, contends:

“When managers are focusing on share price, it’s very hard for companies to actually be innovative,” Stout argues. “The second problem that short-termism imposes on consumers is that, obviously, when they’re trying to cut costs…they’re not going to invest in their employees; they’re not going to invest in customer support, they’re not going to invest in improving their products the way they should.”

But, oh the hedge funds will be so happy.   And therein lies the core of the financialist issue:  “Shareholder value (aka stock price) mythology includes the key to the destruction of the corporations the management of which the cult purports to support.

The shareholder value cult is essentially parasitic.   If providing a better benefit package would increase labor costs, thereby diminishing profits by a smidge, then the cult of shareholder value asserts it must not be offered.  That such a move would mitigate against employee turnover and cut retraining costs is off the cult screen.  If expending more on research and development would impinge on profits, then innovation is to be sacrificed on the altar of short term share holder “value.”

The cult of share holder value also puts the company at risk by placing it at the mercy of factors beyond its control.  Are sales of camping equipment curtailed by the incidence of major wildland fires in the western United States? — then the share holder value cult demands that customer service be reduced, wages and hours cut, and the development of new products must be placed on hold, even if the company is still essentially profitable.

The emphasis of the management in the cult of shareholder value remains on meeting “analysts’ expectations.”  A firm may be punished by the financial markets for missing a “target,” while its place in the commercial or retail market is still secure.

It is high time this extrapolation of Milton Friedman’s imagination is laid to rest in the cemetery of unproductive ideas.

Comments Off on Shareholder Value: A Myth, A Cult, and a Struggling Economy

Filed under Economy

Comments are closed.