Why maximizing shareholder value is no way to run a company
This article (link via Daring Fireball) makes a sound argument against the concept of “maximizing shareholder value,” a concept which has struck me as pretty stupid from the first moment that I heard it. It’s one of those things that makes sense as an abstraction, but no sense as a way to run a business on a day to day basis. Given that shareholders are the owners of a company, it theoretically makes sense to focus on making sure their investments pay off, but in practice, the approaches managers take to doing so are just disastrous.
As the article points out, what it comes down to is management focused on the expectations market rather than the real market. The article reviews Roger L. Martin’s book Fixing the Game, and quotes Martin thusly:
What would lead [a CEO] to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.
I see the stock market as a game that exists almost entirely separately from the businesses upon which it is theoretically based. This article goes a long way toward validating those thoughts.
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