Jack Welch recently slammed the idea of "shareholder value" as a corporate goal and I responded by calling him a big fat idiot.Now BusinessWeek takes a look at the impact that shareholder value-oriented management has had on Corporate America. The anecdotal evidence is not good: The past ten years have witnessed the apotheosis of shareholder value and there are very, very few companies that don't make references to it in their press releases and conference calls. Over that time however, the stock market has been flat: Stock options and performance-based pay have increased as a percentage of overall compensation but that doesn't seem to have led to higher stock prices. Meanwhile, studies suggest that most executives are actually sacrificing long-term business objectives in the pursuit of meeting quarterly earnings expectations to boost their stock prices.
Given all that, it might seem like the whole "shareholder value" movement has been a failure, and it's certainly hard to argue that it's been a resounding success. Clearly it hasn't. But as an unabashed proponent of shareholder-oriented corporate management, here's my defense: What we've gotten hasn't really been an increased focus on shareholder value. What we've gotten is shareholder-oriented rhetoric while lazy directors and bureaucratic executives have looted the most powerful driver of wealth creation in history. The corporation. Incentive-based compensation has increased but so has overall compensation. Paying the same person $500,000,000 to do a job instead of $500,000 is not likely to produce great results.
The argument for shareholder value is pretty obvious: What better way to make shareholders rich than to pay executives for making them rich? The fact that that hasn't happened over the past ten years is a testament to the fact that compensation committees got the incentives wrong and large institutional shareholders lacked the cajones to take on derelict directors. But companies that have truly focused on generating strong returns for shareholders have prospered.
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Reader Comments (Page 1 of 1)
3-19-2009 @ 9:16PM
Tim said...
tell that to all the tech behemoths that do not pay a dividend