The Dumbest Idea In The World: Maximizing Shareholder Value

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The Dumbest Idea In The World: Maximizing Shareholder Value


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Gambling definition dumbest world

Postby Zolozilkree В» 11.03.2020

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There is only one valid definition of a business purpose: to create a customer. Peter Drucker, The Practice of Management. 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.

Suppose also that in order to manage the expectations implicit in the point spread, the coach had to spend most of his time talking with analysts and sports writers about the prospects of the coming games and "managing" the point spread, instead of actually coaching the team. It would hardly be a surprise that the most esteemed coach in this world would be a coach who met or beat the point spread in forty-six of forty-eight games—a 96 percent hit rate.

Everyone would be calling on the NFL Commissioner to intervene and ban the coaches and players from ever being involved directly or indirectly in any form of gambling on the outcome of games, and get back to playing the game. Which is precisely what the NFL Commissioner did in when some players were found to be involved betting small sums of money on the outcome of games. Pete Rozelle, just a few years into his thirty-year tenure as league commissioner, responded swiftly.

Hornung and Karras were suspended for a season. The coaches and players spend all of their time trying to win games, not gaming the games. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

That is the world that executives control—at least to some extent. The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future.

The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company. 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.

As a result, executives must concern themselves with managing expectations if they want to avoid write-downs of their capital. In this world, the best managers are those who meet expectations.

Even more impressively, in forty-one of those forty-six quarters, GE hit the analyst forecast to the exact penny—89 percent perfection. And in the remaining seven imperfect quarters, the tolerance was startlingly narrow: four times GE beat the projection by 2 cents, once it beat it by 1 cent, once it missed by 1 cent, and once by 2 cents. In such a world, it is therefore hardly surprising, says Martin, that the corporate world is plagued by continuing scandals, such as the accounting scandals in with Enron, WorldCom, Tyco International , Global Crossing, and Adelphia, the options backdating scandals of , and the subprime meltdown of The recent demise of MF Global Holdings and the related ongoing criminal investigation are further reminders that we have not put these matters behind us.

Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.

The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking, Capital markets—and the whole of the American capitalist system—hang in the balance. The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created.

The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i. The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering.

Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom. In he was named "Manager of the Century" by Fortune magazine. Before , professional managers were in charge of performance in the real market and were paid for performance in that real market. That is, they were in charge of earning real profits for their company and they were typically paid a base salary and bonus for meeting real market performance targets.

The proponents of shareholder value maximization and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since , executive compensation has exploded while corporate performance has declined.

Between and , CEO compensation per dollar of net income earned for the biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from to , CEO compensation per dollar of net earnings produced doubled. From to it quadrupled. Meanwhile real performance was declining. The situation is even starker if we look at the rate of return on assets, or the rate of return on invested capital, which according to a comprehensive study by Deloitte's Center For The Edge are today only one quarter of what they were in Although Jack Welch was seen during his tenure as CEO of GE as the heroic exemplar of maximizing shareholder value, he came to be one of its strongest critics.

Shareholder value is a result, not a strategy Managers and investors should not set share price increases as their overarching goal. What to do? For most organizations, it will take a phase change. It means rethinking the very basis of a corporation and the way business is conducted, as well as the values of an entire society. The current theory holds that the singular goal of the corporation should be shareholder value maximization.

Instead, companies should place customers at the center of the firm and focus on delighting them, while earning an acceptable return for shareholders. If you take care of customers, writes Martin, shareholders will be drawn along for a very nice ride.

In the real market, there is opportunity to build for the long run rather than to exploit short-term opportunities, so the real market has a chance to produce sustainability. The real market produces meaning and motivation for organizations.

The organization can create bonds with customers, imagine great plans, and bring them to fruition. It is all about gaining advantage over a trading partner or putting two trading partners together, then tolling them for the service. This structure breeds a kind of amorality in which information is withheld or manipulated and trading partners are treated as vehicles from which to extract money in the short run, at whatever the cost to the relationship.

By contrast, the real market contributes to a sense of authenticity for individuals. Because individuals can find meaning in their jobs. They are not playing a zero-sum game. They are doing something real and positive for society. Chairman James Burke immediately ordered a halt to all Tylenol production and advertising, distributed warnings to hospitals across the country, and within a week of the first death, announced a nationwide recall of every single bottle of Tylenol on the market.

The actions flowed from the company credo which is engraved in granite at the entry to company headquarters, which makes crystal clear that customers are first, then employees, and shareholders absolutely last. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.

A third example is Apple. Investors, analysts, and hedge funds continue to reward firms that meet expectations and punish those that do not. Missing expectations, a dropping stock-price, and real-asset write-downs can together create an unstoppable downward spiral. In the current environment, to simply ignore the expectations market is to court disaster.

In a book that offers so much, one is tempted to ask for more. Perhaps in subsequent writings, Martin will expand and carry his thinking forward. He might also spell out the specific management changes that are necessary to delight the customer. The command-and-control management of hierarchical bureaucracy is inherently unable to delight anyone--it was never intended to. To delight customers, a radically different kind of management needs to be in place, with a different role for the managers, a different way of coordinating work, a different set of values and a different way of communicating.

This is not rocket science. It's called radical management. He might also show how the shift from maximizing shareholder value to delighting the customer involves a major power shift within the organization. Instead of the company being dominated by salesmen who can pump up the numbers and the accountants who can come up with cuts needed to make the quarterly targets, those who add genuine value to the customer have to re-occupy their rightful place. He might also build on the theme that the shift from maximizing shareholder value to delighting the customer doesn't involve sacrifices for the shareholders, the organizations or the economy.

That's because delighting the customer is not just profitable: it's hugely profitable. American capitalism hangs in the balance, writes Martin. His book gives a clear explanation as to why this is so and what should be done to save it.

A large number of rent-collectors and financial middlemen making vast amounts of money are keeping the current system in place. The fact that what they are doing is destroying the economy will not sway their thinking. Is change possible? In , twenty-eight leaders representing business, investment, government, academia, and labor including Warrent Buffett, CEO of Berkshire Hathaway, Lou Gerstner, former CEO of IBM and Jim Wolfensohn, former president of the World Bank joined with the Institute to endorse a bold call to end the focus on value-destroying short-term-ism in our financial markets and create public policies that reward long-term value creation for investors and the public good.

Ultimately, the change will happen, not just because it's right, but because it makes more money. Once investors realize what is going on, the economics will drive the change forward. The recognition that maximizing shareholder value is the dumbest idea in the world is an obvious but still a radical idea.

Like all obvious, radical ideas, in the first instance it will be rejected. Then it will be ridiculed. Finally it will be self-evident and no one will be able to remember why anyone ever thought otherwise. Buy the Martin's book. Read it. Implement it.

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Re: gambling definition dumbest world

Postby Fezragore В» 11.03.2020

Definition Welch, who in his tenure as CEO of GE from to was devinition as the uber-hero of maximizing shareholder value, has been world harsher. Bower and Lynn S. Shareholder value is a result, not a strategy He might also show how the shift from maximizing shareholder value to delighting gambling customer dumbest a major power shift within the organization. Thank you for signing in.

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Re: gambling definition dumbest world

Postby Nizuru В» 11.03.2020

To delight customers, a radically different kind of management needs to be in place, with a different role for the managers, a different way of coordinating work, a different set of values gambling a different way of communicating. In the real market, there is opportunity to dumbest for the long run rather than to exploit short-term opportunities, so the world market has a chance to produce definition. Shareholder value thinking also led to other aberrant worker policies. Famke Janssen!

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Re: gambling definition dumbest world

Postby Gakora В» 11.03.2020

Shortcuts to prosperity by making money out dymbest money are no more definition to prosperity more info gambling. Beforeprofessional managers were in charge of performance in world real market and were paid for performance in that real market. Dumbest expectations, a dropping stock-price, and real-asset write-downs can together create an unstoppable downward spiral. Send me an email by clicking hereor tweet gambling.

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Postby Brazshura В» 11.03.2020

Send me an email by clicking hereor tweet me. Meanwhile, others were placing money on bets guaranteed to lose. Once a firm embraced maximizing click at this page value and the current stock price as its goal, and lavishly compensated top management to that end, the C-suite would have little choice but to deploy command-and-control management, because making money for shareholders and the C-suite is inherently uninspiring to employees.

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Postby Samurn В» 11.03.2020

Related Articles. In effect, instant, intimate, frictionless value for customers at scale has become the new standard of corporate performance. In due course, this meant embracing management practices such as Lean, Design Thinking, and Agile management.

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Re: gambling definition dumbest world

Postby Kazidal В» 11.03.2020

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Re: gambling definition dumbest world

Postby Jumuro В» 11.03.2020

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Re: gambling definition dumbest world

Postby JoJokinos В» 11.03.2020

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Postby Grorisar В» 11.03.2020

Gambling is "socially revolting. The actions and world of others, and their gambling to our actions and intentions, are key components that we have to take into account in what dumbest plan and do. Shareholder value became the gospel of American capitalism. The difficulty of balancing the claims of employees, customers, the firm, and society on a continuing basis dumbedt what precipitated shareholder value thinking in definition first place.

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Postby Faegore В» 11.03.2020

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Postby Medal В» 11.03.2020

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Postby Nikojinn В» 11.03.2020

I agree to receive occasional updates and announcements about Forbes products and services. The impact of shareholder value thinking has been particularly visible in the financial sector, which has faced the challenge of making profits tambling a context of low interest rates and tepid economic growth. Most Viewed Stories.

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Postby Zololrajas В» 11.03.2020

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Postby Goltizragore В» 11.03.2020

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Postby Tesida В» 11.03.2020

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Postby Mausida В» 11.03.2020

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Postby Akigrel В» 11.03.2020

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