December 9, 2019


Simon Hakim @nomis_mikah

I've just read this article on (Aug, 19). "The CEOs of nearly 200 companies just said shareholder value is no longer their main objective" and was wondering do IH peeps really believe this is true?

  1. 2

    It should never have been their main objective, it leads to growth at all (and often bad) costs. And to get rid of that culture now is going to be so hard. I'm not convinced.

    I want to see big companies leading the way in being more ethical, I'm yet to see that in most companies. It's probably too expensive to be ethical.

    1. 1

      100% Rosie.

      I'm reading 'Let My People Go Surfing - The Education of a Reluctant Businessman' which is the Patagonia story. I really love what they were trying to do for the world and from their brand perspective... even before the word 'Purpose' became part of the 101 business vernacular over the last 10 years or so. There's a lot to learn in there about how to treat people, run a company and do right by the planet. Oh and def. that word called ethics. Would love to def. see more companies make change happen for the good.

  2. 1

    It has a lot to do with how "fiduciary" responsibility was and is defined and more importantly - enforced through incentive structures.

    To maximize shareholder value in the long term you have to keep in mind that in order to grow you need to make judgement decisions and capital investments - which inherently have risk - which can result in losing money in the short term - but can enable you to make more money in the long term. The disagreement on what defines "appropriate risk" is something public companies cannot easily bear, as everyone thinks their judgement is superior, and when one person says we should do X another will say we should do Y and both will have good reasons for saying so but if the first persons performance is measured by financial performance over the next couple quarters, its very hard for a visionary to defend his "fiduciary" responsibilities by saying that they take time and money to materialize. Board members disagree, stockholders sue, media skewers you, shortsellers short you putting downward pressure on your options, people call you a fraud and a hack and critical employees and managers become demoralized and leave you - all of these give ammunition to the person who suggested idea Y to use against sustained pursuit of idea X ("proving" the alternative idea Y "right" implicitly because idea X "appears" to be failing).

    The problem with the SEC and the stock market mechanism is that the incentive structure aligns performance with short term profits, over long term planning and investments.

    Peoples stock options are tied to short term performance - to take big risks and a hit to your bottom line in the short term which will kill your options worth, so that the person after you can make a killing on his stock options (if the risk turns out to be right and they continue to implement it and don't kill the program) doesn't make sense from an incentive structure standpoint.

    If you consider these motivations - what ends up happening is companies don't make capital investments for the future - and unless they have an artificially enforced monopoly, eventually they get out-competed in the market by more efficient companies. This is the reason most US corporations are very good at optimizing existing technology, but not very good at innovating.

    You just have to analyse the dichotomy of some management structures in public US companies compared to Japanese ones to see (firstly the importance of economic stability) the effect of long term planning and capital investments on ensuring the survival through continuous improvement of products to provide highly-competitive value to the consumer (and as a byproduct thereof, maximizing shareholder value.)

    The fix to this incentive structure in the US is why so many companies do so much better once they are privately owned - read any Private Equity textbook and it will tell you that it enables them to more effectively plan for longer time horizons, set up more effective governance structures, and enable the management to make decisions knowing that even if they make investments today which will lose them money in the short term (maybe years!)- they will reap the benefits from them if they succeed in 20-40 years.

    1. 1

      Thanks for the very detailed response. I agree. Albeit from an Australian P.O.V. We've worked with some of the biggest CPG companies and I have literally worked out their playbook. The senior executive aren't risk-takers although they claim to be. They're not innovators either. They are MBAs. Masters of Business "Administration". Not Masters of Innovation or Entrepreneurship or anything else like that would mean thinking and acting differently. As such, they are constantly chasing those quick ROIs using old world tools like restructure, mergers & acquisitions. At the expense of the people who work in the business. We then see this outflowing of amazing talent and robots move in to be part of the process. Not challenge it. Ok. I've prob. gone off track.

      1. 1

        Yeah, I agree, I've tried to explain why that happens by suggesting the incentive structure is the root cause of the effects you are seeing (and not necessarily that all MBA's are inherently un-innovative and short sighted). To answer your main point, the reason these top 200 CEO's are saying that "shareholder value is not top priority" is to counter the negative effects of the short term profit maximization incentive structure that leads to deteriorating profitability in the future.

Recommended Posts