Shareholder Value: “the dumbest idea in the world”
That’s a quote form General Electric’s former CEO, Jack Welch. It’s not actually in this article, but that’s what this article does is explain why this idea is so dumb. It ends with some solid recommendations, mostly aimed at pulling corporations out of their short-term focus.
Here are some worthwhile excerpts:
The most likely explanations for this transformation are two broad structural changes — globalization and deregulation — which together conspired to rob many major American corporations of the outsize profits they had earned during the “golden” decades after World War II. Those profits were so generous that there was enough to satisfy nearly all the corporate stakeholders. But in the 1970s, when increased competition started to squeeze out profits, it was easier for executives to disappoint shareholders than their workers or communities. The result was a lost decade for investors.
No surprise, then, that by the mid-1980s, companies with lagging stock prices found themselves targets for hostile takeovers by rivals or corporate raiders using newfangled “junk” bonds to finance their purchases. Disgruntled shareholders were only too willing to sell. And so it developed that the mere threat of a possible takeover imbued corporate executives and directors with a new focus on profits and share prices, tossing aside old inhibitions against laying off workers, cutting wages, closing plants, spinning off divisions and outsourcing production overseas. Today’s “activist investor” hedge funds, which have amassed war chests of tens of billions of dollars to take on the likes of Microsoft, Procter & Gamble, PepsiCo and Apple, are the direct descendants of these 1980s corporate raiders.
And the cost of ensuring top executive alignment with shareholder interests (through extra-generous stock-based compensation):
Obviously, a lot of other things happened during those two periods that could have affected returns to shareholders. One thing we know is that less and less of the wealth generated by the corporate sector was going to frontline workers. Another is that more and more of it was going to top executives. According to Martin, the ratio of chief executive compensation to corporate profits increased eight-fold between 1980 and 2000. Almost all of that increase came from stock-based compensation.
HT Gerald Huff over on Twitter