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The Dumbest Idea In The World: Maximizing Shareholder Value
Forbes ^ | 11/28/2011 | Steve Denning

Posted on 11/19/2012 12:38:59 PM PST by ksen

“Imagine an NFL coach,” writes Roger Martin, Dean of the Rotman School of Management at the University of Toronto, in his important new book, Fixing the Game, “holding a press conference on Wednesday to announce that he predicts a win by 9 points on Sunday, and that bettors should recognize that the current spread of 6 points is too low. Or picture the team’s quarterback standing up in the postgame press conference and apologizing for having only won by 3 points when the final betting spread was 9 points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.”

Imagine also, to extrapolate Martin’s analogy, that the coach and his top assistants were hugely compensated, not on whether they won games, but rather by whether they covered the point spread. If they beat the point spread, they would receive massive bonuses. But if they missed covering the point spread a couple of times, the salary cap of the team could be cut and key players would have to be released, regardless of whether the team won or lost its games.

(Excerpt) Read more at ...

TOPICS: Business/Economy; Miscellaneous; Society
This is a pretty long article and I'm still reading it but what do you guys think . . . is maximizing shareholder value a dumb idea? Why or why not?
1 posted on 11/19/2012 12:39:03 PM PST by ksen
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To: ksen

Comparing “football” with commerical business transactions will not work - although the objective is still to “win,” the definition of “win” for each activity is very different.

2 posted on 11/19/2012 12:45:55 PM PST by Ken522
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To: ksen
This would require me to write a very long book. However, the writer confuses a few concepts. maximizing share-holder value is a fiduciary duty of any corporation. it's not an option. HOW we maximize value is optional. Some do so by focusing on short-term stock gains and profits, over long-term company products. Some do so by focusing on quality, building loyal customers and trusted brands. Some focus solely on pricing opportunities and cost. Some do so through social efforts — going green, etc. All of these corporate strategies are aimed at Maximizing shareholder value — just in different ways and over different periods of time. In so doing, they give prospective shareholders a menu of investment opportunities, so that prospective shareholders could invest in different companies with different strategies to diversify their holdings.
3 posted on 11/19/2012 12:50:50 PM PST by Iron Eagle
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To: ksen
All I know is that if a sentence contains the phrase "maximizing shareholder value" in it it is probably a lie.

Companies should be making profits, managing their trademarks, producing desirable products and services at prices the market will bear.

If all or most of that is happening then shareholder value will necessarily follow in the short run and over the long haul.

However, if business owners focus solely or primarily on shareholder value then they are more likely to engage in strategies that may bump up short term value at the expense of long term success.

4 posted on 11/19/2012 12:51:47 PM PST by who_would_fardels_bear
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To: Iron Eagle
However, the writer confuses a few concepts. maximizing share-holder value is a fiduciary duty of any corporation. it's not an option. HOW we maximize value is optional. Some do so by focusing on short-term stock gains and profits, over long-term company products.

This is the crux of the matter. Maximizing shareholder value shouldn't be seen as the same as maximizing the short-term increase in stock price. Maximizing shareholder value means maximizing the present value of future expected cash flows. Let the stock market do what it wants to do. Stock markets are by nature short-sighted and inefficient (no one can convince me of the EMH).

However, today most folks don't get the difference, so the focus is on short-term tricks, gains, etc. to boost share price, and these actions often sacrifice long-term value. CEO's of today's publicly traded companies are obsessed with what stock analysts have to say about the value of their stock, not with actually maximizing present value.

5 posted on 11/19/2012 12:57:25 PM PST by Thane_Banquo ( Walker 2016)
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To: ksen
Though I didn't read the article, I reject the premise that a CEO of a legitimate business who happens to discuss earnings expectations is analogous to a coach discussing expectations of their team.

For starters, CEOs of public companies have a fiduciary responsibility to their shareholders. Shareholders invest in good faith, and CEOs are supposed to reveal their expectations for achieving success in future market conditions. Shareholders can take the CEO at their words, and stay invested, or they can take their money elsewhere.

Sports coaches are under no such responsibility. They can tell you how they expect their team to perform, but they have no obligation to fans or bettors. Coaches have an obligation only to their general managers or team presidents.

I would also say that where CEOs have an obligation to earn at least as much as their reasonable competitor, in terms of return on investment, coaches are measured by wins and losses. (I'll let others decide which is more difficult.)

SO to the original question, as a shareholder, I'm hopeful that a CEO maximizes their profits, keeps costs reasonably low, and does whatever they can to maximize my value. Otherwise, what's the point of investing?

6 posted on 11/19/2012 1:03:05 PM PST by Lou L (Health "insurance" is NOT the same as health "care")
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To: Iron Eagle

I was thinking along the same lines as you. US companies have placed way too much emphasis on short-term profitablity to the detriment of long term financial health and stability. That did not start yesterday. Unfortunately, that is encouraged by the ability to attract capital in the markets - Wall Street. Wall Street thrives on the volatility caused by short-term thinking. . . short-term thinking also has contributed to the societal rot that we are experiencing as well. Conservatism is genarally a far superior way of thinking and behaving whether you are talking about politics or finance, IMHO

8 posted on 11/19/2012 1:15:28 PM PST by RatRipper (Self-centeredness, greed, envy, deceit and lawless corruption has killed this once great nation.)
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To: Tzar

I tend to agree. This article is paving the way for their move to redefine what a “corporation” is and to stick them with new charters which impose new missions upon them which supersede shareholder value.

What are those new missions? Improving Social Justice? Creating jobs for Obama’s peeps? Who knows. Sure as heck won’t be shareholder value though.

9 posted on 11/19/2012 1:19:57 PM PST by Buckeye McFrog
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To: All

We sure need some here.
FReepathon Day 50!

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To: ksen

The writer simply doesn’t understand the word “value”, and so wastes his and his readers’ time.

11 posted on 11/19/2012 1:32:00 PM PST by Taliesan
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To: Taliesan

My reading is that the guy doesn’t understand football, coaching, point-spread, betting in general, corporate value, market capitalization, share price, profit, investing, or forecasting.

Makes anything he writes on these subjects a bit of a waste of time.

12 posted on 11/19/2012 2:18:34 PM PST by John Valentine (Deep in the Heart of Texas)
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To: Iron Eagle
I agree, and I see a couple issues to cover from this article.

1) Something crooked this way came into the corporate world that saw CEOs walk away with 100 million in options just for doing their damn job.

2) I cringe when corporations get into social causes. There job is simply create profits for the owners. End of story.

13 posted on 11/19/2012 3:02:46 PM PST by Sam Gamgee (May God have mercy upon my enemies, because I won't. - Patton)
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Comment #14 Removed by Moderator

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