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11-30-2012, 11:52am | #181 | |||||||
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11-30-2012, 12:52pm | #182 | |||||||
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Although the concept seems entrenched in business practise, it actually originated in a 1976 article by two business school professors at the University of Rochester who postulated that corporate executives act as agents on behalf of the shareholders, who are in turn the corporation's principals. This raised the spectre of 'agency costs', which might be incurred if executives acted in their own interests rather than in the interests of their principals. The only safeguard against executives profiting at the expense of shareholders was to align both of their interests through a commitment to maximising shareholder value, and best incentivised by stock options for senior executives. This idea is so deeply ingrained that many people assume corporations are legally required to maximise shareholder value. But this erroneous assumption is thoroughly dispelled by Lynn Stout of Cornell Law School in a recent book, The Shareholder Value Myth and in a recent article in the Stanford Social Innovation Review by Antony Page and Robert Katz. These legal scholars persuasively debunk any such legal or fiduciary duty. Another excellent book, Fixing the Game, by Roger Martin, dean of the Rotman School of Management at the University of Toronto, goes further by pointing out that maximising shareholder value is actually a bad way to run a business. Martin explains the danger of managers who aim to optimise the price of the stock rather than the performance of the company with an analogy of football players betting on their own games. If the players focus on winning the game, all of their incentives align with excellent performance. However, if they are rewarded based on the betting pool, they begin to worry about managing the odds. Betting odds are like stocks Betting odds, like stocks, are based on expectations of future performance. The better a team does, the higher expectations run. Players who want to make money by betting must manage the bookies' expectations, either by strategically losing some games to lower expectations, or by taking greater and greater risks to achieve unprecedented levels of success. Either way, when players start playing to meet 'expectations' rather than to win the game itself, their team's performance suffers. The same insidious incentives arise when executives start managing to meet analysts' expectations rather than managing the business itself. Martin and Stout both compile evidence to suggest that the primacy of shareholder value has not actually benefitted shareholders but has instead turned into a bonanza for senior executives: in 1970, only 1% of a Fortune 500 chief executive's compensation was in stock options and the average salary of was $700,000 (£438,000). Today stock and stock options account for 80% of the vastly inflated average compensation, which has increased more than 1,800% to $12.9m (£8m). The ultimate irony The ultimate irony may be that the allegiance to shareholder value has caused the very problem it was intended to cure: enriching senior executives at the shareholders' expense. Given long enough time on the horizon, the interests of the company, the investors, and the executives would ultimately align. But with an average chief executive tenure of four and a half years, and an average stock holding period of only four months, short-term pressures exacerbate the focus on manipulating the stock rather than building the business. The increase in high speed trading and the proliferation of hedge funds and private equity firms has further increased the short-term pressure for financial engineering rather than long-term value creation. The biggest cost of all, however, is neither to the company nor its shareholders, but to our society and our planet. The ubiquitous mandate to maximise short-term shareholder value has driven a deep wedge between business and society. The long term success of any company depends on the health and wellbeing of its employees, customers, and the communities in which it operates. Unfortunately, these factors do not affect the quarterly earnings that drive analysts' expectations. CEOs who manage the stock, rather than the company, have little reason to think about the social and environmental consequences of their actions. And the result – whether in oil spills or credit derivatives – brings devastation far beyond the company's own shareholders. But a small, yet growing cadre of sophisticated business leaders are beginning to expand their focus beyond merely maximising shareholder value to creating shared value. They are building strong companies and healthier societies at the same time; making money by reducing their environmental footprint, meeting the needs of low-income populations, and finding innovative, profitable solutions to social problems. One might expect that such an "altruistic" approach would diminish shareholder returns: instead, it keeps corporate leaders focused on the most powerful emerging trends and the long term fundamentals of their businesses. As investors like Generation Investment Management are increasingly discovering, maximising shared value is the best way to maximise shareholder value. |
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11-30-2012, 1:16pm | #183 | |||||||
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11-30-2012, 2:01pm | #184 | |||||||
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11-30-2012, 2:06pm | #185 | |||||||
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The whole goal of a business is to make money, and by making money a company increases it's value. You do that by making long reaching goals, and placing yourself into a position to realize those goals. You do not get there by giving the house to the employees. Sure certain measures must be taken to ensure a stable workforce, but a workforce is merely a piece of a profit center. Sure some short sighted managers are there only to maximize their stock options, however if properly managed the stock options are based on long term goals to help minimize this effect. |
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11-30-2012, 2:09pm | #186 | ||||||
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More specifically, give the place to the union. The shareholders are the greedy bastards. We all know the unions, as well as the government, can never be greedy.
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11-30-2012, 4:42pm | #187 | |||||||
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I don't understand why this isn't obvious to everyone? The only problem is industry pales in comparison to government. How can anyone look at Susan Rice's resume and figure out how she became a millionare several times over? |
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11-30-2012, 4:58pm | #188 | |||||||
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11-30-2012, 5:14pm | #189 | ||||||
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Screw that. the best part is how everyone not in "senior management" is held to a different set of rules. They'll get their bonus no matter what.
When on a conf call the other day, changes to year end bonuses were announced. I asked if this was just us or if sr management would get options and bonus as usual like Hostess? people on the call started laughing. |
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11-30-2012, 5:24pm | #190 | ||||||
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This is interesting since it's way out of my orbit.
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11-30-2012, 5:38pm | #191 | ||||||
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The best part is how some jerk off is going to tell me if I don't like it to move on. Well we are. And the biotechs thrive and big pharma dies.
And after I move on, who exactly do you replace me with? And since I have no turnover in two years, who do you think these employees are loyal too? I've already been sued once for telling some old **** to pound salt and taking the best 25 with me. Never stuck. I once had a senior VP tell me,"there's the door" I told him if I left today I'd have a job next friday only because I want to take the week off. ACS certs with tier 1 MBAS and MSF are hard to find. The attitude on this board is why a lot of traditional powerhouses are dying horrible deaths now. |
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12-01-2012, 9:26am | #192 | |||||||
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Even if this tripe had any merit, the principle the people (CEO's) are responsible to the people who hire them (Shareholders via the board of directors) is fundamental. This pseudointellectual crap that people who made a deal to do a job for a salary are somehow annoited with rights superior to the owners of the business is horseshit and if allowed to be incorporated would mean the destruction of the concept of business. Last edited by Loco Vette; 12-01-2012 at 3:32pm. |
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12-01-2012, 9:34am | #193 | ||||||
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12-02-2012, 10:51am | #194 | |||||||
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And apparently you need to read it again because it in no way states or even implies that the workers are anointed with special rights. |
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12-02-2012, 11:46am | #195 | |||||||
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12-02-2012, 4:13pm | #196 | |||||||
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Regardless of where it came from the quote at issue does note refute the idea that CEO's first duty is to the shareholders, it just condemns those who pursue the short term results too zealously (as do I). And as for reading, when I was about 6 I ate some potato salad at a picnic that had been in the sun too long and wound up in the hospital. That taught me not to trust mayonnaise that had been out of the fridge too long. By the same token, I have read enough of what you post here that I know most of it is of no value and tends to produce abdominal cramps and diarrhea. Last edited by Loco Vette; 12-05-2012 at 5:04pm. |
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