Strong opinions, weakly held

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.


  1. I do appreciate the government placing limits on executive pay that led to stock options (and thus focusing on stock value) becoming popular. I to think it’s a horrid way to run a business.

  2. I had this in my queue to post as well. There are so many important implications of the expectations market (which is a brilliant term!) which go a long way to explaining things like the difference between consumer confidence and the stock market, to pick one example. This piece is one of the most important I have read this year.

  3. I’ve worked for a couple of public companies that forced employees to take banked vacation days in order to tweak the quarterly earnings report. In fact, the company I work for now required employees to take one day of vacation just this past September.

    When this happened in struggling companies, I could view it as desperate acts from desperate corporate officers. This past October, however, there was absolutely no reasonable justification for this action as the company that I work for now has enjoyed long-term profitability and success.

    It was quite clear to me this past September that the company was close to meeting Q3 projections, but was trying to tweak the numbers to make up the difference (they still missed by $.01). Forcing employees to take banked vacation made absolutely no difference to the actual viability of the company. If anything, we lost some productivity that we would otherwise have had that quarter. It was done purely to play the quarterly numbers game.

  4. Very late on this, but I read the same article and I thought it was great. The #1 example of this is stock buybacks versus dividends. Stock buybacks do nothing whatsoever for the company’s long-term prospects, and any bump in the stock price will be nothing but temporary given the tendency of prices to revert to fundamentals. You should essentially fire any CEO who engages in one. Of course, this never happens.

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