“One thing clearly stands head and shoulders above the rest when you talk to many people in corporate America. It’s an idea that completely removes responsibility from many corporations in our society. It’s an idea that threatens not only our constitutional democracy, but also every value Christians hold dear and every value we hold dear from modernity and post-modernity.
It’s an idea so bad that Jack Welch, former CEO of General Electric, called it ‘the dumbest idea in the world.’
The idea, called shareholder value theory, is that the sole purpose of publicly-held corporations is to return profit to shareholders.
Customers be damned. Society be damned. Families be damned. Results be damned. America be damned.
Where did this idea come from?”
In a long, detailed article, a look at why the focus on the Libertarian idea of “shareholder value” is dumb. It leads to a short-term approach, a focus on the value of a company through its market capitalization (Google is now bigger than Apple, FWIW), and turns the stock market into a spectator sport, something it isn’t and should not be.
This point in the article is interesting:
Privately held companies, which are free from the pressures of shareholder value theory, invest more and create more value than publicly-held companies. Privately held companies invest 6.8 percent of total assets, compared with 3.7 percent for publicly-owned companies. Rather than invest, publicly-held companies are more likely to spend money on stock buybacks.
Why? Because once again, their mission is driven solely by short-term profit to shareholders rather than long-term value.
I really don’t see the point in Apple buying back so many of their shares. Sure, they pay less dividends, but the buybacks haven’t kept the shares from dropping. (One can argue that Apple’s share price highlights how illogical the stock market is…)
I would say the second dumbest idea in America is the lack of single-payer health care. Not just because of the cost involved with having a for-profit health care system, but because for many people health care is tied to their jobs. This gives people less incentive to change jobs, or to try their hands at setting up their own businesses. If you run a business, you don’t want people staying in your company simply because they’re afraid to lose their health care. (I know there are systems in place that allow you to hold on to your health care for 18 months if you leave your job in the US, but that’s not enough for some people.)
Source: How to really make America great again: Get rid of ‘the dumbest idea in the world’
A better article is this Jan 23 article, which I believe is the inspiratino for the kos.
http://www.forbes.com/sites/stevedenning/2016/01/23/why-the-system-is-rigged/#1e6827178223
A better article is this Jan 23 article, which I believe is the inspiratino for the kos.
http://www.forbes.com/sites/stevedenning/2016/01/23/why-the-system-is-rigged/#1e6827178223
It could be argued that for some employers in the US, having employees fear losing their healthcare if they lose their jobs is a *feature,* not a *bug.*
It could be argued that for some employers in the US, having employees fear losing their healthcare if they lose their jobs is a *feature,* not a *bug.*
Damn straight, Kirk, It’s a good article *especially* because it makes clear that it didn’t used to be like this, something a majority of folks seem completely unaware of.
Back in the era where US median incomes went up in line with GDP growth, it wasn’t like this.
Damn straight, Kirk, It’s a good article *especially* because it makes clear that it didn’t used to be like this, something a majority of folks seem completely unaware of.
Back in the era where US median incomes went up in line with GDP growth, it wasn’t like this.
This is a thoughtful article that has a lot of good points in it.
It seems to me that the problem isn’t the emphasis on creating shareholder value as such, but incentives that lead to a focus on *short term* metrics that compromise long-term shareholder value.
I have worked as a securities enforcement attorney, and it is undeniable that regulatory requirements for quarterly and annual reports are key drivers of this short-termism. Much of the violative activity that I see is driven by the perceived need to “beat the street” on a regular basis.
I have also worked as an employee in a large, well-known private company. The controlling shareholders were keenly focused on increasing shareholder value, but they recognized that the keys to this included long-term investments that may not yield results for many years. That includes capital investment as well as investments in efficient processes and happy, productive, talented personnel–all at the service of customers.
When done correctly, all of these goals basically reinforce each other, though obviously not without occasional tensions.
The principal owner of this business has said that he intends never to become a public company, precisely because doing so would shift the incentives from the long-term to the short-term, to the detriment of the long-term shareholder value.
It is clear to me that public companies should have an obligation to keep their investors informed, but it is equally clear to me that a long-term approach to shareholder value is far superior to the prevailing short-termism.
I wish I had the solution to this dilemma–but I don’t. But I hope, at least, that this is a helpful way to frame the issue.
This is a thoughtful article that has a lot of good points in it.
It seems to me that the problem isn’t the emphasis on creating shareholder value as such, but incentives that lead to a focus on *short term* metrics that compromise long-term shareholder value.
I have worked as a securities enforcement attorney, and it is undeniable that regulatory requirements for quarterly and annual reports are key drivers of this short-termism. Much of the violative activity that I see is driven by the perceived need to “beat the street” on a regular basis.
I have also worked as an employee in a large, well-known private company. The controlling shareholders were keenly focused on increasing shareholder value, but they recognized that the keys to this included long-term investments that may not yield results for many years. That includes capital investment as well as investments in efficient processes and happy, productive, talented personnel–all at the service of customers.
When done correctly, all of these goals basically reinforce each other, though obviously not without occasional tensions.
The principal owner of this business has said that he intends never to become a public company, precisely because doing so would shift the incentives from the long-term to the short-term, to the detriment of the long-term shareholder value.
It is clear to me that public companies should have an obligation to keep their investors informed, but it is equally clear to me that a long-term approach to shareholder value is far superior to the prevailing short-termism.
I wish I had the solution to this dilemma–but I don’t. But I hope, at least, that this is a helpful way to frame the issue.
Also, I disagree that universal single-payer healthcare is the way to go–at least for the US–but I wholeheartedly agree that tying healthcare to employment was a miserable mistake. As you are probably aware (but perhaps some interested readers do not), it is something of a historical accident rather than a deliberate policy. Companies sought to avoid WWI wage and price controls by offering benefits, including health insurance. At some point these benefits became tax exempt, and now we are virtually locked into a system that has the disadvantages you note with few countervailing advantages.
Also, I disagree that universal single-payer healthcare is the way to go–at least for the US–but I wholeheartedly agree that tying healthcare to employment was a miserable mistake. As you are probably aware (but perhaps some interested readers do not), it is something of a historical accident rather than a deliberate policy. Companies sought to avoid WWI wage and price controls by offering benefits, including health insurance. At some point these benefits became tax exempt, and now we are virtually locked into a system that has the disadvantages you note with few countervailing advantages.
The primacy of “shareholder value” was promoted by two novelists (one of whom is usually called an “economist”). Ironically, it went from philosophical postulate to being regarded as a fundamental economic truth, a legal doctrine, and finally a natural law, all without testing, observation, or specific establishment in legislation.
Isn’t that the way much of economics works, though? It’s very hard to test macroeconomic theories.
Sigh…not surprised to see “Libertarian” injected into this, though the Kos article itself doesn’t use the nomenclature (only the comments). Or Ayn Rand’s name come up. I’ve read Rand, extensively; the Kos article misrepresents her position. I’m not even going to endeavor to do a take down in Rand’s defense…she wrote extensively and those who wish to mischaracterize her positions usually have formed opinions not through research and reading but by 3rd party allusion and prejudice; folks are going to believe what they want to believe and ascribe the boogey men they choose to invent, regardless of reality. Ironically, that obliquity to reality, the very behavior, is discussed as a foundational problem outside Objectivism, her extensively published philosophy.
It also, fundamentally, misrepresents Friedman’s position. The worst part for the author of the article (although not the casual reader, alas) is that Friedman repudiated that misrepresentation OVER AND OVER AND OVER, quite publicly, during his lifetime. Use YouTube, Kos readers. Even more ironically, Friedman’s quote the Kos article uses even SHOWS they misrepresent his position, as he states “which generally will be to make as much money as possible”…”GENERALLY”. Because, you see, the premise of paid labor within a capitalistic system is to produce and be awarded (“add value”) for your labor. Wow. Surprising concept?
Both Friedman and Rand discussed at length the downsides of corporate greed. Rand very expressly detailed the difference between her concept of “selfishness” (which is NOT the Biblical-defined “selfishness” most conflate it to be) and “greed”. She had zero love for looters and cheaters, and those who gamed the system to the fraud of others. Friedman likewise warned of the economic detriment of workers who did not strive to profit as efficiently as employers; he was also a very vocal advocate of workers being shareholders (and therefore owning and profiting from the business). That both vigorously promoted a philosophy of SELF RESPONSIBILITY should not alone undermine their message; workers should not be held less accountable than owners for maximizing opportunity. (Note, nothing in what I said there says or should be construed to say that “maximizing opportunity” is tantamount to fraud, greed, short-term profit-taking, etc…any effort towards reading that into the statement is an assumed philosophical bias.)
I just take umbrage with the beating of dead horses, literally, in excuse for the behaviors we see today. It is bad enough they can’t defend themselves, it is worse however that they DID but are actively ignored because that doesn’t fit a narrative. Libertarians (small “l” or big “L”) didn’t cause the mess we’re in—libertarian ideas are held by a very very small percentage of the population (and even smaller among the 1%)—otherwise this country would look far different politically (see the “trucker” movies of the 1970s); authoritarians and thieves created this mess, almost all with a D or R behind their names, and very likely nearly equal in number on both sides. It is always so convenient to seek out and blame a marginal “other” group with differing ideas, though, when things aren’t going so well, isn’t it?\
(Sorry, Mr. McElhearn, to get all politically charged…but I’ve spent way too much time reading Rand and Friedman, and others with glaringly different philosophical and economic viewpoints like Marx, Locke, Smith, de Tocqueville, Krugman, et al, to allow such a base falsehood pass unchallenged.)
Quite all right, Scott, I’m delighted to hear an informed opinion, even if I disagree with it.
The primacy of “shareholder value” was promoted by two novelists (one of whom is usually called an “economist”). Ironically, it went from philosophical postulate to being regarded as a fundamental economic truth, a legal doctrine, and finally a natural law, all without testing, observation, or specific establishment in legislation.
Isn’t that the way much of economics works, though? It’s very hard to test macroeconomic theories.
Sigh…not surprised to see “Libertarian” injected into this, though the Kos article itself doesn’t use the nomenclature (only the comments). Or Ayn Rand’s name come up. I’ve read Rand, extensively; the Kos article misrepresents her position. I’m not even going to endeavor to do a take down in Rand’s defense…she wrote extensively and those who wish to mischaracterize her positions usually have formed opinions not through research and reading but by 3rd party allusion and prejudice; folks are going to believe what they want to believe and ascribe the boogey men they choose to invent, regardless of reality. Ironically, that obliquity to reality, the very behavior, is discussed as a foundational problem outside Objectivism, her extensively published philosophy.
It also, fundamentally, misrepresents Friedman’s position. The worst part for the author of the article (although not the casual reader, alas) is that Friedman repudiated that misrepresentation OVER AND OVER AND OVER, quite publicly, during his lifetime. Use YouTube, Kos readers. Even more ironically, Friedman’s quote the Kos article uses even SHOWS they misrepresent his position, as he states “which generally will be to make as much money as possible”…”GENERALLY”. Because, you see, the premise of paid labor within a capitalistic system is to produce and be awarded (“add value”) for your labor. Wow. Surprising concept?
Both Friedman and Rand discussed at length the downsides of corporate greed. Rand very expressly detailed the difference between her concept of “selfishness” (which is NOT the Biblical-defined “selfishness” most conflate it to be) and “greed”. She had zero love for looters and cheaters, and those who gamed the system to the fraud of others. Friedman likewise warned of the economic detriment of workers who did not strive to profit as efficiently as employers; he was also a very vocal advocate of workers being shareholders (and therefore owning and profiting from the business). That both vigorously promoted a philosophy of SELF RESPONSIBILITY should not alone undermine their message; workers should not be held less accountable than owners for maximizing opportunity. (Note, nothing in what I said there says or should be construed to say that “maximizing opportunity” is tantamount to fraud, greed, short-term profit-taking, etc…any effort towards reading that into the statement is an assumed philosophical bias.)
I just take umbrage with the beating of dead horses, literally, in excuse for the behaviors we see today. It is bad enough they can’t defend themselves, it is worse however that they DID but are actively ignored because that doesn’t fit a narrative. Libertarians (small “l” or big “L”) didn’t cause the mess we’re in—libertarian ideas are held by a very very small percentage of the population (and even smaller among the 1%)—otherwise this country would look far different politically (see the “trucker” movies of the 1970s); authoritarians and thieves created this mess, almost all with a D or R behind their names, and very likely nearly equal in number on both sides. It is always so convenient to seek out and blame a marginal “other” group with differing ideas, though, when things aren’t going so well, isn’t it?\
(Sorry, Mr. McElhearn, to get all politically charged…but I’ve spent way too much time reading Rand and Friedman, and others with glaringly different philosophical and economic viewpoints like Marx, Locke, Smith, de Tocqueville, Krugman, et al, to allow such a base falsehood pass unchallenged.)
Quite all right, Scott, I’m delighted to hear an informed opinion, even if I disagree with it.
Another extremely dumb idea in the US is treating corporations as a person. Even this is not done equitably but favors corporations – a human felon is barred from voting, often for life, but corporations that commit felonies continue to get government contracts and can participate in the political process.
Another extremely dumb idea in the US is treating corporations as a person. Even this is not done equitably but favors corporations – a human felon is barred from voting, often for life, but corporations that commit felonies continue to get government contracts and can participate in the political process.