shareholder value

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pages: 237 words: 50,758

Obliquity: Why Our Goals Are Best Achieved Indirectly by John Kay

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Andrew Wiles, Asian financial crisis, Berlin Wall, bonus culture, British Empire, business process, Cass Sunstein, computer age, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, discovery of penicillin, diversification, Donald Trump, Fall of the Berlin Wall, financial innovation, Gordon Gekko, greed is good, invention of the telephone, invisible hand, Jane Jacobs, Long Term Capital Management, Louis Pasteur, market fundamentalism, Nash equilibrium, pattern recognition, purchasing power parity, RAND corporation, regulatory arbitrage, shareholder value, Simon Singh, Steve Jobs, The Death and Life of Great American Cities, The Predators' Ball, The Wealth of Nations by Adam Smith, ultimatum game, urban planning, value at risk

And whether we experienced a good education, whether business decisions were successful or whether the poem approached perfection of form is something that will be known only after, and often long after, the event. Even then we will never know whether the life that was lived or the education that was received, the business that was created or the poem that was written was the best possible. No one will be buried with the epitaph “He maximized shareholder value,” not just because the objective is an unworthy intermediate goal rather than a high-level objective but because, even with hindsight, no one can tell whether the goal of maximum shareholder value was achieved. If shareholder value was indeed maximized at ICI or Boeing, it was maximized obliquely. The epitaph on men such as Henry Ford, or Bill Allen, or Walt Disney, or Steve Jobs reads instead: “He built a great business, which made money for shareholders, gave rewarding employment and stimulated the development of suppliers and distributors by meeting customers’ needs that they had not known they had before these men developed products to satisfy them.”

Boeing’s strategy of getting close to the Pentagon proved counterproductive: The company got rather too close and faced allegations of corruption.7 And what was the market’s verdict on the company’s performance in terms of unit cost, return on investment and shareholder return? Boeing stock, thirty-two dollars when Condit took over, rose to fifty-nine dollars as he affirmed the commitment to shareholder value; by the time of his forced resignation in December 2003 it had fallen to thirty-four dollars. Condit’s successors once again emphasized civil aviation. The 777 is a success, and the Dreamliner appears a better vehicle for the future than the huge Airbus 380. By 2008 Boeing had regained its leading position in commercial aviation and the share price its earlier value. At Boeing, as at ICI, shareholder value was most effectively created when sought obliquely. That profit-seeking paradox, like the conundrum of happiness, illustrates the power of obliquity. Comparisons of the same companies over time are echoed in contrasts between different companies in the same industries.

ICI and Boeing were more successful as profit-making companies when they “served customers internationally through the responsible application of chemistry” or “ate, breathed and slept the world of aeronautics” than when they tried to “maximise value for our shareholders” or “go into a value based environment.” But the last word in this chapter should go to Jack Welch, CEO of General Electric from 1981 to 2001. Welch was not just America’s most admired businessman but a darling of Wall Street. The rise in the market capitalization of GE during Welch’s tenure represented the greatest creation of shareholder value ever. Ten years into retirement, he told the Financial Times: “Shareholder value is the dumbest idea in the world.”20 Elaborating his thought to Business Week a few days later, he explained:The job of a leader and his or her team is to deliver to commitments in the short term while investing in the long term health of the business. . . . Employees will benefit from job security and better rewards. Customers will benefit from better products or services.

 

pages: 335 words: 104,850

Conscious Capitalism, With a New Preface by the Authors: Liberating the Heroic Spirit of Business by John Mackey, Rajendra Sisodia, Bill George

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It starts with the company’s purpose and values, which serve to attract and inspire the right team members. This leads to innovation and superior customer service, which then leads to improved market share and higher revenues, profits, and eventually shareholder value. As he puts it, “This is a reinforcing, virtuous circle. If you turn it around and start with shareholder value, you can’t ‘get there from here.’ The clock only runs one way. If you start with the proposition that we have to satisfy the security analysts and hot-money shareholders, you will eventually destroy the enterprise. You will harm innovation and superior customer service, harm employee motivation, and ultimately destroy whatever shareholder value you have built up. That’s what happened at General Motors, The Home Depot, Sears, Kodak, Motorola, and a host of other formerly great companies.”1 Beyond Analytical Thinking One of the most challenging but important ideas about management and leadership involves understanding the relationships between stakeholders.

These problems pale in comparison with the 2008 failure of major financial firms like Fannie Mae, Bear Stearns, Lehman Brothers, Countrywide, Citigroup, and scores of others, as overleveraged financial institutions collapsed while trying to maximize their shareholder value. In effect, Wall Street’s pressure on corporations to increase short-term stock prices boomeranged, knocking out many of those same financial firms. John Mackey, who calls Friedman “one of his heroes,” challenged the economist’s ideas in their 2005 debate, shortly before Friedman’s death. To his credit, Friedman tried to incorporate many of Mackey’s ideas into his theory of shareholder value creation, but Mackey pushed back: “While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods’ core business mission.

As environmental scientist Amory Lovins has said, “If something exists, it must be possible.”10 This misconception is based on the pervasive belief that big corporations are all dedicated to the sole purpose of maximizing profits and shareholder value and that the legal deck is stacked against anyone trying to change this. The consequences of this narrow view that many large publicly traded companies have of their responsibilities are reflected in the disturbing observation that only about 19 percent of Americans have confidence in big companies, while about 64 percent trust small businesses.11 Some people believe the only way to change this is to change the laws of incorporation so that public companies can escape from the legal fiduciary requirement to maximize profits and shareholder value.12 But this view reflects a mind-set that trade-offs between stakeholders are inevitable. It fails to recognize the holistic nature of the business enterprise: that all stakeholders are interdependent and that the best way to optimize long-term profits and long-term shareholder value is to simultaneously create value for the other stakeholders too.

 

pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, high net worth, income inequality, investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, means of production, moral hazard, mortgage debt, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Plutocrats, plutocrats, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, Winter of Discontent, working poor, Yom Kippur War

The difference is that some of the protectors are on the inside, top managers whose remuneration packages are heavily weighted with shares and share options – that is, options to buy shares at a future date at a predetermined price – and so they have similar interests to the external protectors. ‘The dumbest idea in the world’ Pressure on BP management to cut costs in order to deliver shareholder value is alleged to have led BP to skimp on vital safety measures at the well that blew up in the Gulf of Mexico Deepwater Horizon oil spill. Saving $1 million a day on safety and research and development ended up costing the company’s shareholders $100 billion for the clean-up.32 Jack Welch, the former General Electric chief, who is thought to have coined the term ‘shareholder value’ in 1981, finally acknowledged the error of his ways in 2009, saying: ‘On the face of it, shareholder value is the dumbest idea in the world . . . Your main constituencies are your employees, your customers and your products.’33 Extraordinarily, in this new regime, it made sense for firms to avoid building up accessible cash reserves.

CEO pay has not only rocketed but changed in composition, with stock options and retirement benefits accounting for an increasing proportion of pay, the former rising in US top companies from 8% of pay in 1990 to two-thirds in 2001.97 The official rationale for this was that it aligns CEOs’ interests with those of shareholders. In practice this encouraged them to engage in short-term manipulation of accounts to push up share prices, to allow executives to cash out (sell) at inflated prices.98 Comparing the US unfavourably to Germany, where shareholder value has had limited effect, William Tabb writes: ‘The use of stock options to encourage executives to maximize shareholder value weakened American capitalism to an incalculably dramatic extent.’99 CEOs need to be well networked in order to know what the best deals are and to convince ‘investors’ that their companies will be successful. But they also need their contacts and friends – usually executives from other companies – to serve on the remuneration committees that decide on their pay.

He also included in his recommendation ‘the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital’. 95 Keynes, J.M. (1933) ‘National self-sufficiency’, The Yale Review, 22(4), pp 755–69. 96 Henwood, D. (1997) Wall Street, London: Verso, p 5. 97 Tawney, R.H. (2004) [1920] The acquisitive society, Mineola, NY: Harcourt Brace and Howe. 98 Adam Smith thought it was justifiable only in special cases. 99 Andrew Haldane at the Bank of England argues that in view of this, banks inevitably increased risks to maximise shareholder value: ‘For shareholders, the sky is the limit but the floor is always just beneath their feet. To maximise shareholder value, therefore, banks need simply to seek bigger and riskier bets.’ Haldane, A. (2012) ‘The doom loop’, London Review of Books, 34(4), 23 February, pp 21–2. 100 On this see Randy Martin’s excellent (2007) The financialisation of everyday life, Houndmills, Baskingstoke: Palgrave. 101 Personal share ownership in the UK has fallen proportionately in the last 50 years, from 54% of shares on the London Stock Exchange in 1963 to 10% in 2010 (BBC News, 27 January 2010, http://news.bbc.co.uk/1/hi/business/8482601.stm). 102 Department for Work and Pensions, Family Resources Survey, 2009–10, Table 6.7; and Froud, J., Johal, S., Haslam, C. and Williams, K. (2001) ‘Accumulation under conditions of inequality’, Review of International Political Economy, 8(1), pp 66–95. 103 Langley, P. (2007) ‘The uncertain subjects of Anglo-American financialization’, Cultural Critique 65, pp 66–91. 104 Engelen, E., Ertürk, I., Froud, J., Johal, S., Leaver, A., Moran, M., Nilsson, A. and Williams, K. (2011) After the great complacence: Financial crisis and the politics of reform, Oxford: Oxford University Press. 105 Froud et al (2001).

 

pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

The central driving force of this model was the chase for what came to be known as ‘shareholder value’—that companies should be run primarily or solely for the interests of their owners, subordinating all other goals. The pursuit of shareholder value meant maximising the short term rise in the share price, while linking executive rewards to shareholder interests. The concept was pioneered in the United States in the 1980s by companies like the giant General Electric, run by one of the most ruthless company bosses of the decade, Jack Welch. In Britain, the first company to embrace the new model was Lloyds Bank. At a board meeting in 1985, the Bank set itself a single, overriding new goal, ‘… of doubling our shareholder value every three years.’174 One by one, even companies long wedded to the ‘stakeholder model’ such as Cadbury Schweppes, with its strong Quaker and paternalist traditions, fell under its spell.

While this was deeply unpopular with staff and customers, its potential to cut costs and improve profit margins ‘went down a storm’ in the City.183 The other retail banks soon joined in the aggressive pursuit of shareholder value, shedding staff in an ongoing cost-cutting drive. The number of bank branches halved in the 20 years to 2009. The UK now has 197 bank and building society branches per million inhabitants compared with 500 in Germany and over 1000 in Spain.184 Rapid growth in the banking sector coincided with a shrinking of staff. In the five years to 2008, Abbey, Lloyds and RBS cut their staff levels by 39,000.185 Although shareholder value was initially shunned in those nations most wedded to a ‘social market’, notably Germany and Japan, a weaker version of the new supercapitalism spread, if gingerly, elsewhere. Parts of Asia—from Hong Kong to Singapore—embraced the new capitalism in full.

Businesses could never be ‘a positive force for good’, creating wealth and jobs, he declared, while short-term shareholder value is the main boardroom aim. A week later, Paul Polman, boss of Unilever, said that the company had already stopped offering guidance to the stock market on potential profits. ‘It is very easy for me to get tremendous results very short term, get that translated into compensation and be off sailing in the Bahamas’ he declared. ‘But the goal for this company—and it’s very difficult to do—the goal is to follow a four- or five-year process. We need to change the strategy and the structure as well as the culture.’ The research evidence is that the chase for shareholder value has left a trail of failures. In the US, the collapse of Enron can be traced to a corporate culture based on a single performance goal.

 

pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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Seven years later, though, the group had finally caved, rewriting the statement to say that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”43 Today, whether they believe it or not, it’s rare to find a CEO of a public company who doesn’t publicly buy into the idea of shareholder value. Indeed, the only leaders who can openly question this notion and get away with it tend to be high-profile founder-owners who have a certain cult of personality (Alibaba’s Jack Ma and Starbucks’s Howard Schultz are two who regularly accomplish that feat). Yet, sadly, if you sit in a Finance 101 class at any top business school today—Harvard, Wharton, Stanford, and the like—you’ll learn pretty much what you would have learned three or four decades ago: that shareholder value comes before anything else. You’ll also hear some of the core teachings in such classes, which are mandatory for MBA students: that people are guided by rational self-interest to make the best economic decisions; that the purpose of business is to make money and provide value to investors; and that a firm’s share price, rather than its underlying technologies, innovative capacity, human resources, or social benefit, is the measure of its success.

The current business model “emerged out of the shareholder-value revolution and the leveraged buyout (LBO) movement of the 1970s and 1980s,” say Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research (CEPR) in Washington, and Cornell University professor Rosemary Batt in their influential book, Private Equity at Work.21 This mirrors what we’ve already learned in chapters 3 to 5; as Appelbaum and Batt put it, the rise of private equity represents “a fundamental shift in the concept of the American corporation—from a view of it as a productive enterprise and stable institution serving the needs of a broad spectrum of stakeholders to a view of it as a bundle of assets to be bought and sold with an exclusive goal of maximizing shareholder value.” If the markets are an ocean, private equity firms like Blackstone are the great white sharks that have perfected the use of debt, leverage, asset stripping, tax avoidance, and legal machinations to maximize profits for themselves at the expense of almost everyone else—their investors, their limited partners, their portfolio companies and the workers in them, and certainly society at large.22 During the 2012 presidential race, Mitt Romney’s candidacy spurred a vigorous debate over whether private equity firms create or destroy jobs on a net basis.

The very type of short-term, risky thinking that nearly toppled the global economy in 2008 is today widening the gap between rich and poor, hampering economic progress, and threatening the future of the American Dream itself. The financialization of America includes everything from the growth in size and scope of finance and financial activity in our economy to the rise of debt-fueled speculation over productive lending, to the ascendancy of shareholder value as a model for corporate governance, to the proliferation of risky, selfish thinking in both our private and public sectors, to the increasing political power of financiers and the CEOs they enrich, to the way in which a “markets know best” ideology remains the status quo, even after it caused the worst financial crisis in seventy-five years. It’s a shift that has even affected our language, our civic life, and our way of relating to one another.

 

pages: 287 words: 44,739

Guide to business modelling by John Tennent, Graham Friend, Economist Group

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correlation coefficient, discounted cash flows, double entry bookkeeping, iterative process, purchasing power parity, RAND corporation, shareholder value, the market place, time value of money

In many companies an overall success factor is applied to all projects, whether they are for business reorganisation, asset purchase, budgeting or strategic planning – the enhancement of shareholder value. A model can then be used to quantify the change in shareholder value that is created by alternative scenarios. SHAREHOLDER VALUE The objective for most organisations is to deliver a growing return to shareholders (the owners in the case of an unincorporated business or partnership). This is achieved by generating growing profits and realising them in cash. The cash can then be used for reinvestment in the business, repayment of funding or distribution to shareholders. 194 16. ANALYTICAL RATIOS AND REVIEWING THE FINANCIAL STATEMENT Chart 16.1 Shareholder value framework Shares Loans INVESTORS Sales CASH Dividend Interest THE BUSINESS Assets Costs TAX One common method of quantifying shareholder value is to calculate the net present value (npv) of the future cash flows generated by a project (see Chapter 15 for the principles of discounted cash flow).

The solution is to assume that the business will tend towards an optimal financing structure. This structure can be predicted by looking at the capital structure of other similar businesses in the industry. 182 15. PROJECT APPRAISAL AND COMPANY VALUATION Discounted cash flow decision rule The decision rule based on dcf analysis is straightforward. If the net cash flow or npv is positive, the project will increase shareholder value and should be undertaken. If the net cash flow or npv is negative, the project will decrease shareholder value and should only be undertaken if there are other compelling strategic benefits for doing so, otherwise it should be rejected. DISCOUNTING CASH FLOWS IN PRACTICE If $100 is deposited in an account that pays interest annually at 10% gross, the balance on that account would grow as follows: Now $100 1 year → $110 2 years $121 → 3 years $133.1 → This is the principle of compound interest.

ANALYTICAL RATIOS AND REVIEWING THE FINANCIAL STATEMENT Chart 16.1 Shareholder value framework Shares Loans INVESTORS Sales CASH Dividend Interest THE BUSINESS Assets Costs TAX One common method of quantifying shareholder value is to calculate the net present value (npv) of the future cash flows generated by a project (see Chapter 15 for the principles of discounted cash flow). The result gives a single number that represents the current value of the future cash flows. This shareholder value number may be helpful in overall terms, but it can be difficult to use when analysing the detailed elements of a project. What is needed is a set of indicators that, while being congruent with the principle of shareholder value, provides information about a range of project attributes. These indicators are known as ratios. Ratio analysis Ratios provide indicators that through comparison enable the identification of the strengths and weaknesses of the project. The benefit of ratios is that in comparison they remove the effects of scale, inflation and foreign currency.

 

pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

O’Sullivan, ‘Maximizing Shareholder Value: A New Ideology for Corporate Governance’, Economy and Society, vol. 29, no. 10, 2000, pp. 13–35. 15 Ibid. 16 W. Lazonick, ‘Profits without Prosperity’, Harvard Business Review, vol. 92, no. 9, 2014, pp. 46–55. 17 M. Mazzucato, ‘Financing innovation: creative destruction vs. destructive creation’, in special issue of Industrial and Corporate Change, M. Mazzucato, ed., vol. 22, no. 4, 851–67, See repurchases/R&D in Figure 1, p. 857. 18 J. Kay, ‘The Kay review of UK Equity Markets and Long-term Decision Making’, Final Report (July 2012). 19 P. A. Hall and D. Soskice, Varieties of Capitalism and Institutional Complementarities (pp. 43–76), New York, Springer US, 2001. 20 Lazonick and O’Sullivan, ‘Maximizing Shareholder Value’. 21 The share of basic research funded by the private sector has fallen, causing the public sector to focus more on basic research, and in the process cut its applied research budget (Arora et al., ‘Killing the Golden Goose?’).

As evolutionary economics has emphasised, this heterogeneity is not a short-run transition towards a world of similar actors, but a long-run feature of the system.41 Different norms and routines combine to generate different behaviours and outcomes. In fact, the evidence shows the particular importance of ownership and governance structures. Over the past thirty years the orthodox view that the maximisation of shareholder value would lead to the strongest economic performance has come to dominate business theory and practice, in the US and UK in particular.42 But for most of capitalism’s history, and in many other countries, firms have not been organised primarily as vehicles for the short-term profit maximisation of footloose shareholders and the remuneration of their senior executives. Companies in Germany, Scandinavia and Japan, for example, are structured both in company law and corporate culture as institutions accountable to a wider set of stakeholders, including their employees, with long-term production and profitability their primary mission.

Companies in Germany, Scandinavia and Japan, for example, are structured both in company law and corporate culture as institutions accountable to a wider set of stakeholders, including their employees, with long-term production and profitability their primary mission. They are equally capitalist, but their behaviour is different. Firms with this kind of model typically invest more in innovation than their counterparts focused on short-term shareholder value maximisation; their executives are paid smaller multiples of their average employees’ salaries; they tend to retain for investment a greater share of earnings relative to the payment of dividends; and their shares are held on average for longer by their owners. And the evidence suggests that while their short-term profitability may (in some cases) be lower, over the long term they tend to generate stronger growth.43 For public policy, this makes attention to corporate ownership, governance and managerial incentive structures a crucial field for the improvement of economic performance.

 

pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

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air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, cloud computing, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, index fund, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

An annual Gallup poll in the United States showed that the percentage of respondents with little or no confidence in big business increased from 27 percent in the 1983–1986 period to 38 percent in the 2011–2014 period. For more, see Gallup, “Confidence in Institutions,” www.gallup.com. 2 3 4 WHY VALUE VALUE? profits. Companies that confuse the two often put both shareholder value and stakeholder interests at risk. Indeed, a system focused on creating shareholder value isn’t the problem; short-termism is. Banks that confused the two at the end of the last decade precipitated a financial crisis that ultimately destroyed billions of dollars of shareholder value, as did Enron and WorldCom at the turn of this century. Companies whose short-term focus leads to environmental disasters also destroy shareholder value, not just directly through cleanup costs and fines, but via lingering reputational damage. The best managers don’t skimp on safety, don’t make value-destroying decisions just because their peers are doing so, and don’t use accounting or financial gimmicks to boost shortterm profits, because ultimately such moves undermine intrinsic value that is important to shareholders and stakeholders alike.

The best managers don’t skimp on safety, don’t make value-destroying decisions just because their peers are doing so, and don’t use accounting or financial gimmicks to boost shortterm profits, because ultimately such moves undermine intrinsic value that is important to shareholders and stakeholders alike. WHAT DOES IT MEAN TO CREATE SHAREHOLDER VALUE? At this time of reflection on the virtues and vices of capitalism, we believe that it’s critical that managers and boards of directors have a new, precise definition of shareholder value creation to guide them, rather than having their focus blurred by a vague stakeholder agenda. For today’s value-minded executives, creating shareholder value cannot be limited to simply maximizing today’s share price for today’s shareholders. Rather, the evidence points to a better objective: maximizing a company’s collective value to current and future shareholders, not just today’s.

Academics and even some business leaders have called for companies to change their focus from increasing shareholder value to a broader focus on all stakeholders, including customers, employees, suppliers, and local communities. At the extremes, some have gone so far as to argue that companies should bear the responsibility of promoting healthier eating and other social issues. Many of these impulses are naive. There is no question that the complexity of managing the coalescing and colliding interests of myriad owners and stakeholders in a modern corporation demands that any reform discussion begin with a large dose of humility and tolerance for ambiguity in defining the purpose of business. But we believe the current debate has muddied a fundamental truth: creating shareholder value is not the same as maximizing short-term 1 Alfred Marshall, Principles of Economics (New York: Macmillan, 1890), 1:142.

 

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

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Affordable Care Act / Obamacare, barriers to entry, business process, Claude Shannon: information theory, Clayton Christensen, conceptual framework, corporate governance, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, inventory management, Joseph Schumpeter, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Robert Shiller, shareholder value, Steve Jobs, The Great Moderation, value at risk

Thus, for example, the frequency of releasing proforma (non-GAAP) earnings doubled from 2003 to 2013, standing now at over 40 percent.12 Researchers, too, sense a serious problem: A recent study by leading accounting researchers examined the impact on investors of all the accounting and reporting rules and standards issued by the Financial Accounting Standards Board (FASB) from its inception (1973) through 2009—a staggering number of 147 standards—and found that 75 percent of these complex and costly rules didn’t have any effect on the shareholders of the impacted companies (improved information generally enhances shareholder value), and, hard to believe, 13 percent of the standards actually detracted from shareholder value. Only 12 percent of the standards benefited investors. Thus, 35 years of accounting regulation came to naught.13 The SEC is concerned, too: Consider, for example, the current initiative of the US Securities and Exchange Commission (SEC)—Disclosure Effectiveness—aimed at “ . . . considering ways to improve the disclosure regime for the benefit of both companies and investors.”14 The SEC invited input and comments to this initiative, and indeed, a Google search reveals scores of mostly extensive comments and submissions by business institutions, accounting firms, and individuals.

Chinese companies currently file twice the number of patents filed by American companies. But doubts regarding the quality of Chinese patents linger, see “Patent Fiction,” The Economist (December 13, 2014). 6. Financial Accounting Standards Board, ASC 730 (1974). This standard, mandating the immediate expensing of R&D, ranks high among the FASB standards that decreased shareholder value. See Urooj Khan, Bin Li, Shivaram Rajgopal, and Mohan Venkatachalam, Do the FASB’s Standards Add Shareholder Value? working paper (Columbia Business School, 2014). 7. The accounting distinction between assets (capital) and expenses is clear: Assets, like plant or securities, provide future benefits, whereas expenses, like salaries or rent, are payments for past services without future benefits. Thus, the accounting treatment of intangible investments as expenses absurdly implies that they don’t provide reliable future benefits.

working paper (Stanford University, 2010), 3. 12. See Jeremiah Bentley, Theodore Christensen, Kurt Gee, and Benjamine Whipple, Who Makes the non-GAAP Kool-Aid? How Do Managers and Analysts Influence non-GAAP Reporting Policy? working paper (Salt Lake City: Marriott School of Management, Brigham Young University, 2014). 13. Urooj Khan, Bin Li, Shivaram Rajgopal, and Mohan Venkatachalam, Do the FASB Standards Add (Shareholder) Value? working paper (New York: Columbia University Business School, 2015). 14. US Securities and Exchange Commission, Disclosure Effectiveness, 2015. 15. Here and there, we found exceptions. For example, the accounting firm Ernst & Young proposes a report on critical estimates underlying financial information and their realizations. We also advance this important suggestion in Chapter 17. 16. We don’t mean to denigrate agenda proposals.

 

pages: 237 words: 72,716

The Inequality Puzzle: European and US Leaders Discuss Rising Income Inequality by Roland Berger, David Grusky, Tobias Raffel, Geoffrey Samuels, Chris Wimer

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Branko Milanovic, Celtic Tiger, collective bargaining, corporate governance, corporate social responsibility, double entry bookkeeping, equal pay for equal work, fear of failure, financial innovation, full employment, Gini coefficient, hiring and firing, illegal immigration, income inequality, invisible hand, labour market flexibility, labour mobility, Long Term Capital Management, microcredit, offshore financial centre, principal–agent problem, profit maximization, rent-seeking, shareholder value, Silicon Valley, Silicon Valley startup, time value of money, very high income

There are different elements to consider. It has long been the case in Germany that you didn’t just get your bonuses linked to shareholder value, you get it from market share, which was something real and could be measured – the social market concept that you have to show organic growth, not just financial 76 J. Monks chicanery. I wouldn’t say that Germany is a model of corporate governance, it isn’t, but I do think that is the direction I would like to see people going, trying to structure business rewards so they are not just linked to short-term shareholder value, mergers and acquisition deals, many of which go wrong. The majority of which go wrong and you have no shareholder value at all. I think that’s probably where the heart of it is, but I wouldn’t say we’re totally confident we would stop it by those things.

I was slightly worried, so I asked to see the book before accepting to write the foreword. I was very surprised. We were in the middle of the excitement about shareholder value, financial motivations, etc., and they were writing things like that people were working not for money only, that things were not as simple, that people are not unidimensional. All the good old things that we’ve known for a long time, but that were getting forgotten. So I was happy to write the foreword to that book. There was such a discrepancy between what they were saying about the way a company works, and the image of a company devoted purely to building shareholder value, and making sure everybody was in line through appropriate monetary, financial incentives. It was striking. But to answer your question more appropriately, some theoretical economists were not happy about that complexity of management motives.

But to answer your question more appropriately, some theoretical economists were not happy about that complexity of management motives. They wanted management to be concerned only about shareholder value, and they advocated the systems of financial incentives, which developed so well that they created the current situation. Gabriele Galateri di Genola Chairman, Telecom Italia “The world has survived ages of tragedies and disasters and of confidence and development, because every action produces a reaction that tends to stabilize or recreate equilibrium. So even in this field I think that what has happened will create a better equilibrium in terms of speculation and remunerations, and more generally in terms of diminishing inequalities.” Since December 2007, Gabriele Galateri di Genola has been Chairman of Telecom Italia, Italy’s largest telecommunications company whose operations span Europe, Brazil and several other South American countries.

 

pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, corporate governance, corporate social responsibility, crony capitalism, David Brooks, delayed gratification, double helix, factory automation, financial deregulation, financial innovation, full employment, game design, greed is good, If something cannot go on forever, it will stop, impulse control, income inequality, inflation targeting, invisible hand, job automation, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

In that era, corporations had been seen as obligated not just to shareholders, but to all “stakeholders,” not least workers and their communities. But the stakeholder idea, conservative theorists now argued, was simply wrong. A corporation is not some social entity with dependent constituencies. It is merely a legal contrivance, a “nexus of a set of contracting relationships,”2 as economist Michael Jensen put it, whose sole purpose is maximizing “shareholder value.” This nexus is no more obligated to anyone else (employees, say) than you or I am obligated to shop at a particular grocery store.† For advocates of “shareholder value” theory, it was this very idea of social obligations (that business somehow owed workers, or any other part of society, anything beyond efficient operations) that led so many firms to fail in their real social obligation: maximizing the wealth upon which all social progress depends. As economist Milton Friedman argued in a much-quoted article in The New York Times, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.”

For Reagan, Thatcher, and other conservatives had been successful not only in removing many business regulations (such as those impeding corporate takeovers), but also in discrediting the idea that government had any positive role to play in the economy. As Reagan famously quipped, “The most terrifying words in the English language are: I’m from the government and I’m here to help.” This new faith in free markets trickled down into every social sector. At many law schools and business schools, shareholder value became the new orthodoxy for future business leaders—despite some glaring inconsistencies. Damon Silvers, a labor lobbyist in Washington, DC, who graduated from both Harvard Business and Law Schools shortly after the shareholder revolution, recalls how shareholder value theory clashed with some of the more traditional management ideas. “You would hear a professor saying, ‘A firm is a nexus of contracts; what matters is incentives’; and then literally ten minutes later, they would talk about the importance of teamwork. And you’d say, ‘Well, hold on, you can’t believe these two things at the same time.

As economist Milton Friedman argued in a much-quoted article in The New York Times, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” Here was the corporate variation on Adam Smith’s “invisible hand.” Companies turned loose to maximize their own wealth would improve society’s fortunes far more efficiently than would any government-induced strategy based on an ideal of social responsibility. By the 1980s the logic of efficient markets and shareholder value had expanded into a political philosophy. The market was not only the most efficient arbiter of corporate strategy, but also the most efficient means to organize a free society. The shift away from the managed economy of the postwar and the embrace of an unfettered, “efficient” marketplace was paralleled by a rightward swing in American political culture. For Reagan, Thatcher, and other conservatives had been successful not only in removing many business regulations (such as those impeding corporate takeovers), but also in discrediting the idea that government had any positive role to play in the economy.

 

pages: 313 words: 94,490

Made to Stick: Why Some Ideas Survive and Others Die by Chip Heath, Dan Heath

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affirmative action, availability heuristic, Barry Marshall: ulcers, correlation does not imply causation, desegregation, Menlo Park, Ronald Reagan, Rosa Parks, shareholder value, Silicon Valley, Stephen Hawking, telemarketer

When a CEO discusses “unlocking shareholder value,” there is a tune playing in her head that the employees can’t hear. It’s a hard problem to avoid—a CEO might have thirty years of daily immersion in the logic and conventions of business. Reversing the process is as impossible as un-ringing a bell. You can’t unlearn what you already know. There are, in fact, only two ways to beat the Curse of Knowledge reliably. The first is not to learn anything. The second is to take your ideas and transform them. This book will teach you how to transform your ideas to beat the Curse of Knowledge. The six principles presented earlier are your best weapons. They can be used as a kind of checklist. Let’s take the CEO who announces to her staff that they must strive to “maximize shareholder value.” Is this idea simple?

But in many circumstances this is a false choice for one compelling reason: If a message can’t be used to make predictions or decisions, it is without value, no matter how accurate or comprehensive it is. Herb Kelleher could tell a flight attendant that her goal is to “maximize shareholder value.” In some sense, this statement is more accurate and complete than that the goal is to be “THE low-fare airline.” After all, the proverb “THE low-fare airline” is clearly incomplete—Southwest could offer lower fares by eliminating aircraft maintenance, or by asking passengers to share napkins. Clearly, there are additional values (customer comfort, safety ratings) that refine Southwest’s core value of economy. The problem with “maximize shareholder value,” despite its accuracy, is that it doesn’t help the flight attendant decide whether to serve chicken salad. An accurate but useless idea is still useless. We discussed the Curse of Knowledge in the introduction—the difficulty of remembering what it was like not to know something.

It tempts them to use language that is sweeping, high-level, and abstract: The most efficient manufacturer of semiconductors! The lowest-cost provider of stereo equipment! World-class customer service! Often, leaders aren’t even aware that they’re speaking abstractly. When a CEO urges her team to “unlock shareholder value,” that challenge means something vivid to her. As in the Tappers and Listeners game, there’s a song playing in her head that the employees can’t hear. What does “unlocking shareholder value” mean for how I treat this particular customer? What does being the “highest-quality producer” mean for my negotiation with this difficult vendor? Now, leaders can’t unlearn what they know. But they can thwart the Curse of Knowledge by “translating” their strategies into concrete language. For instance, Trader Joe’s is a specialty food market that carries inexpensive but exotic food.

 

pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

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banking crisis, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, late capitalism, means of production, moral hazard, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

Part of this was an erosion of rights to job security, the division of labour markets into core and periphery areas with different degrees of protection, the authorization and encouragement of low-pay employment, the acceptance of high structural unemployment, the privatization of public services and a cutback of public employment, and if possible the elimination of trade unions from the wage formation process.51 At the end, over and above national differences and specificities, stood a ‘lean’ and ‘modernized’ welfare state increasingly geared to ‘recommodification’, whose ‘employment-friendliness’ and lower costs had been bought by lowering the minimum subsistence level guaranteed as a social right.52 Not only labour markets were deregulated from the late 1970s on; the same was increasingly true of the markets for goods, services and capital. While governments hoped that this would bring faster growth and in any case relieve them of political responsibilities, employers invoked the expansion of markets and sharper competition to justify the degrading of wages and work conditions or the widening of wage differentials.53 At the same time, capital markets were transformed into markets for corporate control, which made of ‘shareholder value’ the supreme maxim of good management.54 In many places, even in Scandinavia, citizens were referred to private education and insurance markets as a supplement or even alternative to public providers, with the option of taking up credit to pay the bills. Economic inequality grew everywhere by leaps and bounds (Fig. 1.3).55 In this way and others, responding in more or less the same way to the pressure coming from the owners and managers of their ‘economy’, the developed capitalist countries shed the responsibility they had taken on in mid-century for growth, full employment, social security and social cohesion, handing the welfare of their citizens more than ever over to the market.

., The Age of Dualization: The Changing Face of Inequality in Deindustrializing Countries, Oxford: Oxford University Press, 2012; J. Goldthorpe (ed.), Order and Conflict in Contemporary Capitalism, Oxford: Clarendon Press, 1984; B. Palier and K. Thelen, ‘Institutionalizing Dualism: Complementarities and Change in France and Germany’, Politics and Society, vol. 38/1, 2010, pp. 119–48. 54 See Martin Höpner, Wer beherrscht die Unternehmen? Shareholder Value, Managerherrschaft und Mitbestimmung in Deutschland, Frankfurt/Main: Campus, 2003. 55 Fig. 1.3 shows the evolution of the Gini coefficient, the most commonly used measure of income inequality, in the seven countries used as examples (see fn. 15 in this chapter). The Gini coefficient measures the deviation of the actual distribution from equal distribution. Another measure of inequality is the share of wages – as opposed to profits – in national income.

In the debt state, therefore, a second category of stakeholders appears alongside the citizens who, in the democratic tax state and established political theory, constituted the only reference group of the modern state. The rise of creditors to become the second ‘constituency’62 of the modern state is strikingly reminiscent of the emergence of activist shareholders in the corporate world under the ‘shareholder value’ doctrine of the 1980s and 1990s.63 Like the boards of publicly listed companies in relation to the new ‘markets for corporate control’, the governments of today’s debt states in their relationship with the ‘financial markets’ are forced to serve a further set of interests whose claims have suddenly increased because of their greater capacity to assert themselves in more liquid financial markets.

 

pages: 479 words: 133,092

The Coke Machine by Michael Blanding

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carbon footprint, clean water, collective bargaining, corporate social responsibility, Exxon Valdez, Gordon Gekko, Internet Archive, laissez-faire capitalism, market design, Naomi Klein, New Journalism, Ponzi scheme, profit motive, Ralph Nader, rolodex, Ronald Reagan, shareholder value, The Wealth of Nations by Adam Smith, Thorstein Veblen, union organizing, Upton Sinclair

He set the tone for other companies, who rushed to please Wall Street by any means necessary—including accounting tricks, stock buybacks, and rampant acquisitions of other companies. Flush with stock options, CEOs profited handsomely, even as they sometimes hurt the long-term success of their companies through an emphasis on short-term growth. Outside of Jack Welch, no CEO was associated with the “shareholder value movement” more than Roberto Goizueta, who became a darling of Wall Street in the 1980s. “I wrestle over how to build shareholder value from the time I get up in the morning to the time I go to bed,” he once said. “I even think about it when I am shaving.” In the days before the Internet, he had a computer screen installed in a conference room on the twenty-fifth floor of Coca-Cola headquarters with a live feed from the New York Stock Exchange that continually monitored Coca-Cola’s stock price; he put another screen at the main entrance to Coke headquarters, so it would be the first thing employees would see as they walked in the door and the last thing they’d see as they left.

BIGGERING AND BIGGERING Page 63 hundredth-anniversary celebration: Ron Taylor, “Coke Bills Party as Biggest Ever in Atlanta,” Atlanta Journal-Constitution, May 10, 1986; Howard Pousher, “Epic Feast for 14,000,” Atlanta Journal-Constitution, May 10, 1986. Page 64 focusing everything on their quarterly earnings: John D. Martin and J. William Petty, Value Based Management: The Corporate Response to the Shareholder Movement (Boston: Harvard Business School Press), 13-28. Page 64 “shareholder value movement”: Betsy Morris, “The New Rules,” Fortune, August 2, 2006. Page 64 cutting waste and inefficiency: Allan A. Kennedy, The End of Shareholder Value (Cambridge, MA: Perseus, 2002), 49-61. Page 64 rushed to please Wall Street: Betsy Morris, “Tearing Up Jack Welch’s Playbook,” Fortune, July 11, 2006; Kennedy, 164-166. Page 64 hurt the long-term success of their companies: Kennedy, xi, 63-66; “Buy Now, While Stocks Last,” The Economist, July 17, 1999; John Cassidy, “The Greed Cycle: How the Financial System Encouraged Corporations to Go Crazy,” The New Yorker, September 23, 2002.

Planet India: How the Fastest-Growing Democracy Is Transforming America and the World. New York: Scribner, 2007. Kaufman, Francine R. Diabesity: The Obesity-Diabetes Epidemic That Threatens America—and What We Must Do to Stop It. New York: Bantam, 2005. Kay, Ira T. CEO Pay and Shareholder Value: Helping the U.S. Win the Global Economic War. Boca Raton, FL: St. Lucie Press, 1998. Kelly, Marjorie. The Divine Right of Capitalism: Dethroning the Corporate Aristocracy. San Francisco: Barrett-Koehler, 2003 (orig. pub. 2001). Kennedy, Allan A. The End of Shareholder Value. Cambridge, MA: Perseus, 2002. Kirk, Robin. More Terrible Than Death: Massacres, Drugs, and America’s War in Colombia. New York: Public Affairs, 2003. Klein, Naomi. Fences and Windows: Dispatches from the Front Lines of the Globalization Debate. New York: Picador, 2002.

 

pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Not, in general, because they needed to raise capital for their businesses, but because the times dictated fresh priorities. Companies were encouraged to pursue ‘shareholder value’.31 Many chief executives came to see themselves as meta-fund managers, buying and selling a portfolio of companies rather as asset traders might buy and sell portfolios of securities. Jack Welch became CEO of America’s largest industrial company, General Electric, in 1981. In a speech he gave that year at New York’s Pierre Hotel he announced that the corporation would sell or close any business in which it was not number one or number two. This occasion is widely described as the beginning of the application of shareholder value principles in American business: and as he implemented this strategy over the following two decades, Welch became America’s most admired business leader.32 In 1965 an American economist, Henry Manne, had coined the phrase ‘the market for corporate control’.33 The right to manage a corporation was an asset that could be bought and sold.

‘The model I have is of a global consumer company that really helps the middle class with something they haven’t been served well by historically. That’s my vision. That’s my dream,’ said Reed. ‘My goal is increasing shareholder value,’ Sandy [Weill] interjected, glancing frequently at a nearby computer monitor displaying Citigroup’s changing stock price.37 Weill ousted Reed, but within eight years Citigroup’s share price would have lost almost all its value and the business would be rescued by the US government. In an illuminating comment on the financialisation of business, Jack Welch – now long retired from General Electric – would in 2009 proclaim shareholder value ‘the dumbest idea in the world’.38 We are the 1 per cent Ill fares the land, to hastening ills a prey Where wealth accumulates, and men decay. Oliver Goldsmith, The Deserted Village, 1770 John Reed had spent his entire business career at Citigroup, where he had pioneered the roll-out of ATMs, before becoming CEO in 1984.

Financial innovation was critical to the creation of an industrial society; it does not follow that every modern financial innovation contributes to economic growth. Many good ideas become bad ideas when pursued to excess. And so it is with finance. The finance sector today plays a major role in politics: it is the most powerful industrial lobby and a major provider of campaign finance. News bulletins report daily on what is happening in ‘the markets’ – by which they mean securities markets. Business policy is dominated by finance: the promotion of ‘shareholder value’ has been a mantra for two decades. Economic policy is conducted with a view to what ‘the markets’ think, and households are increasingly forced to rely on ‘the markets’ for their retirement security. Finance is the career of choice for a high proportion of the top graduates of the top schools and universities. I will describe the process by which the finance sector has gained such a dominant economic role over the last thirty to forty years as ‘financialisation’.

 

pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

In a 1981 Harvard Business Review article, Rappaport gave the approach a name that stuck: The most basic question for any strategic planner in business, he wrote, was “Will the corporate plan create value for shareholders?”27 To figure out how to create this “shareholder value,” Rappaport continued, one had to measure the expected return from any corporate investment against the cost of capital. To compute the cost of capital, Rappaport recommended using the Ibbotson-Sinquefield equity risk premium and Barr Rosenberg’s measures of beta. That was all fine and good, but corporate executives weren’t going to focus on creating shareholder value just because they’d read about it in the Harvard Business Review. They needed incentives. Linking pay to stock prices was one way to do it, but that approach had fallen mostly out of favor in the 1970s. Options to buy corporate stock had been used widely in the 1950s and 1960s to reward executives and align their interests with those of shareholders.

Jack Bogle Takes on the Performance Cult (and Wins) The lesson that maybe it’s not even worth trying to beat the market makes its circuitous way into the investment business. 8. Fischer Black Chooses to Focus on the Probable Finance scholars figure out some ways to measure and control risk. More important, they figure out how to get paid for doing so. 9. Michael Jensen Gets Corporations to Obey the Market The efficient market meets corporate America. Hostile takeovers and lots of talk about shareholder value ensue. The Challenge 10. Dick Thaler Gives Economic Man a Personality Human nature begins to find its way back into economics in the 1970s, and economists begin to study how markets sometimes fail. 11. Bob Shiller Points Out the Most Remarkable Error Some troublemaking young economists demonstrate that convincing evidence for financial market rationality is sadly lacking. 12.

As it traveled from college campuses in Cambridge, Massachusetts, and Chicago in the 1960s to Wall Street, Washington, and the boardrooms of the nation’s corporations, the rational market hypothesis strengthened and lost nuance. It was a powerful idea, helping to inspire the first index funds, the investment approach called modern portfolio theory, the risk-adjusted performance measures that shape the money management business, the corporate creed of shareholder value, the rise of derivatives, and the hands-off approach to financial regulation that prevailed in the United States from the 1970s on. In some aspects the story of the rational market hypothesis parallels and is intertwined with the widely chronicled rebirth of pro-free-market ideology after World War II. But rational market finance was not at heart a political movement. It was a scientific one, an imposing of the midcentury fervor for rational, mathematical, statistical decision making upon financial markets.

 

pages: 385 words: 133,839

The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink by Michael Blanding

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carbon footprint, clean water, collective bargaining, corporate social responsibility, Exxon Valdez, Gordon Gekko, Internet Archive, laissez-faire capitalism, market design, Naomi Klein, New Journalism, Ponzi scheme, profit motive, Ralph Nader, rolodex, Ronald Reagan, shareholder value, The Wealth of Nations by Adam Smith, Thorstein Veblen, union organizing, Upton Sinclair

He set the tone for other companies, who rushed to please Wall Street by any means necessary—including accounting tricks, stock buybacks, and rampant ac­ quisitions of other companies. Flush with stock options, CEOs profited handsomely, even as they sometimes hurt the long-term success of their companies through an emphasis on short-term growth. Outside of Jack Welch, no CEO was associated with the “shareholder value movement” more than Roberto Goizueta, who became a darling of Wall Street in the 1980s. “I wrestle over how to build shareholder value from the time I get up in the morning to the time I go to bed,” he once said. “I even think about it when I am shaving.” In the days before the In­ ternet, he had a computer screen installed in a conference room on the twenty-fifth floor of Coca-Cola headquarters with a live feed from the New York Stock Exchange that continually monitored Coca-Cola’s stock price; he put another screen at the main entrance to Coke headquarters, so it would be the first thing employees would see as they walked in the door and the last thing they’d see as they left.

BIGGERING AND BIGGERING Page 63 hundredth-anniversary celebration: Ron Taylor, “Coke Bills Party as Biggest Ever in Atlanta,” Atlanta Journal-Constitution, May 10, 1986; Howard Pousher, “Epic Feast for 14,000,” Atlanta Journal-Constitution, May 10, 1986. Page 64 focusing everything on their quarterly earnings: John D. Martin and J. William Petty, Value Based Management: The Corporate Response to the Shareholder Movement (Bos­ ton: Harvard Business School Press), 13–28. Page 64 “shareholder value movement”: Betsy Morris, “The New Rules,” Fortune, August 2, 2006. Page 64 cutting waste and inefficiency: Allan A. Kennedy, The End of Shareholder Value (Cambridge, MA: Perseus, 2002), 49–61. NOTES 3 08 Page 64 rushed to please Wall Street: Betsy Morris, “Tearing Up Jack Welch’s Playbook,” Fortune, July 11, 2006; Kennedy, 164–166. Page 64 hurt the long-term success of their companies: Kennedy, xi, 63–66; “Buy Now, While Stocks Last,” The Economist, July 17, 1999; John Cassidy, “The Greed Cycle: How the Financial System Encouraged Corporations to Go Crazy,” The New Yorker, September 23, 2002.

Planet India: How the Fastest-Growing Democracy Is Transforming America and the World. New York: Scribner, 2007. Kaufman, Francine R. Diabesity: The Obesity-Diabetes Epidemic That Threatens America—and What We Must Do to Stop It. New York: Bantam, 2005. Kay, Ira T. CEO Pay and Shareholder Value: Helping the U.S. Win the Global Economic War. Boca Raton, FL: St. Lucie Press, 1998. Kelly, Marjorie. The Divine Right of Capitalism: Dethroning the Corporate Aristocracy. San Fran­ cisco: Barrett-Koehler, 2003 (orig. pub. 2001). Kennedy, Allan A. The End of Shareholder Value. Cambridge, MA: Perseus, 2002. BIBLIOGRAPHY 363 Kirk, Robin. More Terrible Than Death: Massacres, Drugs, and America’s War in Colombia. New York: Public Affairs, 2003. Klein, Naomi. Fences and Windows: Dispatches from the Front Lines of the Globalization Debate.

 

pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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asset allocation, collateralized debt obligation, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, mortgage debt, new economy, Occupy movement, passive investing, Ponzi scheme, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam

The essential problem is that the corporate and investment communities have failed to adapt their business practices, and in particular their compensation practices, to an economy in which professional managers who are responsible for other people’s money dominate. “The ubiquitous maxim, ‘We manage to maximize shareholder value,’ is at odds with the way public companies actually operate. Managing for shareholder value means focusing on cash flow, not earnings; it means managing for the long term, not the short term; and, importantly, it means that managers must take risk into account. Instead, many managers seem obsessed with Wall Street’s quarterly earnings expectations game and the short-term share price, thereby compromising long-term shareholder value. “Quarterly performance measurement of fund managers encourages them to prefer the safety of performing acceptably close to their benchmark index over maximizing long-run shareholder returns.

As Fortune magazine puts it: “The true cost of equity is what your shareholders could be getting in price appreciation and dividends if they invested instead in a portfolio about as risky as yours.” While we know that in the short run stock prices are affected by both the company’s reported quarterly earnings and the market’s evanescent expectations, we also know that the return on the firm’s capital—the dividends that the company distributes, and the earnings growth that it achieves—ultimately determines 100 percent of shareholder value in the long term. Time Horizons and the Sources of Investment Return So how do we define “shareholder value” for the business corporation? How do we measure that value, and over what period? In particular, should it be the short-term, even momentary, price of the stock? Or should it be the long-term accretion of the firm’s intrinsic value? Truth told, in the long run it makes little if any difference. For the long-term return on a corporation’s shares in the stock market is almost entirely determined by its investment fundamentals.

Company management proposals affirming compensation-related proxy proposals made by company management, such as equity compensation plans, bonus plan performance criteria, management advisory vote on executive compensation, or “Say on Pay” proposals and option issuance. 3. Shareholder proposals relating largely to limiting executive compensation. The report ranked the voting practices of these 26 fund families from the most supportive of efforts to tie executive pay to company performance (and in turn, to shareholder value) to the least supportive of those efforts (see Exhibit 3.1). AFSCME chose categories of shareholder proposals on executive pay that the union believed to be most likely to enhance shareholder value. They dubbed the fund families that most consistently supported measures to rein-in pay the “Pay Constrainers” and those that voted least often for such measures the “Pay Enablers,” with the lowest scores going to them. The data for 2011 were roughly consistent with the data for the prior year.

 

pages: 244 words: 76,192

Execution: The Discipline of Getting Things Done by Larry Bossidy

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Albert Einstein, business process, complexity theory, Iridium satellite, Long Term Capital Management, NetJets, shareholder value, six sigma, social software, Socratic dialogue, supply-chain management

Linked together as these behaviors are, rewarding the doers must be based on the correct metrics. For too long companies—and this often involved boards of directors— set “shareholder value” as one of the goals to be measured and rewarded in compensation plans. But the directors and CEOs who set shareholder value as a goal missed an essential point. Increasing shareholder value is an outcome, not a goal. If you set the right strategy with the right goals and execute well to implement the strategy and achieve the goals—growth in earnings per share, good cash flow, improved market share, for example—then shareholder value is the result. Get everything else right and shareholder value will take care of itself. EXPAND PEOPLES’ CAPABILITIES. The fundamentals of this essential behavior don’t change. Even in tough times you can find ways to provide education and training as an investment in the company’s future.

RAM: I was observing a meeting at a newly formed division of a company in the Fortune 20. The division, with some 20,000 employees, was the product of a merger in 2001 of two companies in the same industry. It had a new leadership team, and this was only its second meeting. The central issue for the leadership team was how to create a new culture to improve unacceptable performance. Return on capital was less than 6 percent, and shareholder value was being destroyed. The new CEO of the division and the leadership team knew that cost savings through synergies would not be enough to make the division an outstanding performer. The general practice in both merged businesses was not to hold people accountable for commitments they had made individually. Under the rubric of so-called teamwork, each management team performed poorly. For example, each had lost market share and suffered from lower return on investment because its people did not reduce costs in logistics ahead of competitors.

THE IMPORTANCE OF ROBUST DIALOGUE You cannot have an execution culture without robust dialogue—one that brings reality to the surface through openness, candor, and informality. Robust dialogue makes an organization effective in gathering information, understanding the information, and reshaping it to produce decisions. It fosters creativity—most innovations and inventions are incubated through robust dialogue. Ultimately, it creates more competitive advantage and shareholder value. Robust dialogue starts when people go in with open minds. They’re not trapped by preconceptions or armed with a private agenda. They want to hear new information and choose the best alternatives, so they listen to all sides of the debate and make their own contributions. When people speak candidly, they express their real opinions, not those that will please the power players or maintain harmony.

 

pages: 337 words: 103,273

The Great Disruption: Why the Climate Crisis Will Bring on the End of Shopping and the Birth of a New World by Paul Gilding

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airport security, Albert Einstein, BRICs, carbon footprint, clean water, cleantech, Climategate, corporate social responsibility, decarbonisation, energy security, Exxon Valdez, failed state, fear of failure, income inequality, Joseph Schumpeter, market fundamentalism, Naomi Klein, new economy, nuclear winter, oil shock, peak oil, Ponzi scheme, purchasing power parity, Ronald Reagan, shareholder value, The Spirit Level, The Wealth of Nations by Adam Smith, union organizing, University of East Anglia

This to me is a shallow and wholly ineffective way to organize people, which is what companies do—organize people to deliver an outcome. Even though this runs counter to the dominant thinking in most companies, it is not actually a radical idea and is well discussed in the business literature. Even the so-called father of shareholder value, former GE CEO Jack Welch, came out after his CEO tenure and said, “On the face of it, shareholder value is the dumbest idea in the world.… Shareholder value is a result, not a strategy.…” It is also the case that markets and business work well only when adequately guided and controlled by society as a whole, through regulation and goal setting by government and by active consumers and community groups holding companies to account. As free market advocate Tom Friedman said, “I don’t want to kill the animal spirits that necessarily drive capitalism—but I don’t want to be eaten by them either.”1 One of the realizations I had when we were running campaigns at Greenpeace against corporations was that we were part of the market, that campaigns attacking company brands based on their performance on environmental or social issues could be seen as market forces.

In 2002, Don Reed and Murray Hogarth, two of our most experienced advisers, and I released a major report with the title Single Bottom Line Sustainability. It caused quite a stir in the corporate sustainability community around the world because we argued that companies should take only those actions in sustainability that delivered definable financial benefit to the company. It wasn’t that we believed in shareholder value as an end in its own right. Ecos followed its own advice and was clearly purpose focused. We were transparent about being in business to drive change toward sustainability, not to do whatever our clients wanted to pay us for. However, we recognized that unless we gave advice to clients that delivered value, they wouldn’t keep following it. If we wanted to drive sustained action on sustainability, that action had to deliver measurable financial reward for the companies involved.

The CEO during most of my time with DuPont was Chad Holliday, who still stands out as one of the most committed and thoughtful CEOs I have worked with anywhere in the world. Chad was responsible for leading DuPont’s transformation toward sustainability from 1998 to 2008. My favorite story involving Chad is a fine example of my earlier point about the importance of organizing a company around social purpose, with shareholder value being a measure of success rather than an organizing principle. I was giving a talk with Chad to DuPont’s global safety and sustainability leaders. I raised the issue of DuPont as an institution and who really cared about it. DuPont is a proud company with a two-hundred-year history that lives and breathes its culture; you can’t spend time there without getting a sense of it. I provocatively said to Chad and the other leaders: “So why does it matter if DuPont exists?

 

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

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asset allocation, backtesting, Black-Scholes formula, Bretton Woods, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, new economy, oil shock, passive investing, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

If a firm buys assets, the income from these assets is available to pay future dividends 5 There might be some psychic value to holding a controlling interest in a firm. In that case, the owner values the stock more than minority shareholders value it. CHAPTER 7 Stocks: Sources and Measures of Market Value 99 or otherwise increase value. If a firm repurchases its shares, it reduces the number of shares outstanding and thus increases future per share earnings. Finally, retained earnings can be used to expand the capital of the firm in order generate higher future revenues and/or reduce costs. Some people believe that shareholders value cash dividends the most, and that assertion is probably true in a tax-free world. But from a tax standpoint, share repurchases are superior to dividends. As discussed in Chapter 5, share repurchases generate capital gains whose tax can be deferred until the shares are sold.

Nevertheless, the commitment to pay a cash dividend often focuses management on delivering profits to shareholders and reduces the probability that earnings will be spent in a less productive way. Others might argue that debt repayment lowers shareholder value because the interest saved on the debt retired is generally less than the rate of return earned on equity capital. They might also claim that by retiring debt, they lose the ability to deduct the interest paid as an expense (the interest tax shield).6 But debt entails a fixed commitment that must be met in good or bad times, and, as such, the use of debt increases the volatility of earnings. Reducing debt therefore lowers the volatility of future earnings and may not diminish shareholder value.7 Some investors claim the investment of earnings is an important source of value. But this is not always the case. If retained earnings are reinvested profitably, value will surely be created.

Great investors, such as Benjamin Graham, made some of their most profitable trades by purchasing shares in such companies and then convincing management (sometimes tactfully, sometimes with a threat of takeover) to disgorge its liquid assets.8 One might question why management would not employ assets in a way to maximize shareholder value since managers often hold a large equity stake in the firm. The reason is that a conflict often exists between the goal of the shareholders, which is solely to increase the return on their shares, and the goals of management, which may include prestige, control of markets, and other objectives. Economists recognize the conflicts between the goals of managers and shareholders as agency costs, and these costs are inherent in every corporate structure where ownership is separated from management. Payment of cash dividends or committed share repurchases often lowers management’s temptation to pursue goals that do not maximize shareholder value. Finally, capital expenditures are certainly necessary in a growing firm, yet many studies show that firms often overexpand and spend too much on capital, which reduces profits and forces retrenchment by management.9 Often young, fast-growing companies may create more value by spending on capital expenditures, while companies in older, more mature industries, in which agency costs are most severe, pay dividends or repurchase shares, which is better for shareholders.

 

pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, banking crisis, capital controls, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail

An investment bank may not have a “fiduciary” duty of care to a customer (under this definition of a customer), but, nonetheless, from an ethical perspective it has similar duties to other commercial enterprises (in the same way as a retailer) to describe products accurately, and not to mislead. Fiduciary duties would not be expected to conflict with ethical duties in most circumstances. As has been seen in a number of instances during the financial crisis, failing to take ethical issues into account can cause a major loss in shareholder value. Ethical behaviour may in fact protect shareholder value. The approach taken to defend Goldman’s position regarding ABACUS can also be explained in part by moral relativism, applying ethical standards in the context of what was common practice at the time in the market for mortgage-backed securities. This approach, although used in a number of contexts, has clear limitations and is not necessarily supported by other ethical approaches, and is one that does not stand scrutiny from an ethical perspective.

Given the speed of innovation in the capital markets and investment banking, this can mean that a prescriptive Introduction: Learning from Failure 7 approach to ethics – following compliance rules – does not protect against unethical decisions or actions, which can then have damaging effects. An understanding of ethical principles may therefore have a specific value in protecting reputational and shareholder value. Although investment banks claim to require ethical behaviour, empirical and anecdotal evidence very much contradicts this. Existing investment banking Codes of Ethics are, in practical terms, ineffective, and serve in the main to protect shareholders from abuse by employees, rather than protecting clients. Ethics and ethical behaviour should be inculcated throughout an investment bank, and not left to the realms of Compliance or Corporate Social Responsibility (CSR) departments, or as the prerogative of senior executives, often at a significant distance from front-line bankers.

Shareholder support – or the lack of it – for companies has clearly affected the behaviour of some banks and investment banks, but such pressure is not always farsighted. In 2007, there was extensive external pressure on HSBC to reform its activities, including pressure from activist shareholders. It became clear from late 2007 onwards, as the financial crisis developed, that while HSBC had eschewed some short-term opportunities for profits, despite highprofile exposure to sub-prime loans in the US, its shareholder value had been more effectively stewarded than that of many other UK and global banks. Institutional shareholders have demanded high returns from commercial banking, potentially higher than could be sustained in the long term from a quasi-utility activity. Pressure from shareholders can effectively change a company’s strategy. The pressure to lift commercial banking returns from utility-type levels (c. 10–12%) to investment banking levels (c. 20%) was applied both internally and externally within integrated banks and was one of the drivers of increased risk in the banking sector.

 

pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Financialization of business reached its zenith with shareholder value. In 1981, in a speech at New York’s Hotel Pierre, Jack Welch, chief executive officer (CEO) of General Electric (GE), stated the company’s objective as returning maximum value to stockholders.5 Companies should only make investments and take on businesses providing returns above the firm’s cost of capital. Incorporation increases the separation between owners and managers of the business. In their 1932 book, The Modern Corporation and Private Property, Adolf Berle and Gardiner Means argued that companies were akin to feudal kingdoms run by “princes of industry” in their own, not the shareholder’s, interests. Investors seeking to control the activities of managers embraced shareholder value. This fitted the great expectation machine6—the needs of the pension funds, insurance companies, and professional investment managers who pooled and managed the savings and pension contributions of individuals.

This fitted the great expectation machine6—the needs of the pension funds, insurance companies, and professional investment managers who pooled and managed the savings and pension contributions of individuals. Investors want a simple mechanism to evaluate the companies they invest in. Disliking uncertainty, they prefer the financial world to be a predictable and highly ordered place. Shareholder value quickly became the preferred narrative and language of communication between companies, their managers, and investors. As remuneration became linked to performance via bonuses and grants of shares or stock options, managers embraced shareholder value. With little control over the business, shareholders invested initially only for dividends paid by the company. Speculative shares were companies with uncertain ability to pay dividends, such as the Lucky Chance Oil Company of West Virginia. Investors eventually became preoccupied with appreciation in stock prices.

Investors eventually became preoccupied with appreciation in stock prices. Companies became fixated on enhancing shareholder wealth by boosting the stock price. In investor presentations, Bernie Ebbers, CEO and later convicted criminal, would put up a chart of WorldCom’s rising share price and ask his audience: “Any questions?” In March 2009, Welch would change his mind, calling shareholder value “the dumbest idea in the world.”7 Dirty Tricks Higher shareholder value requires increasing earnings, reducing the amount of capital used by the business, or decreasing the cost of that capital. You can improve the real business. Business improvements are risky and very slow, akin to watching grass grow. Financial changes are easier, more predictable and, most important, quicker. Financial engineering replaced real engineering.

 

pages: 48 words: 12,437

Smarter Than Us: The Rise of Machine Intelligence by Stuart Armstrong

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artificial general intelligence, brain emulation, effective altruism, Flash crash, friendly AI, shareholder value, Turing test

But these overseers, who haven’t been following the intricacies of the algorithm’s decision process and who don’t have hands-on experience of the situation, are often at a complete loss as to what to do—and the plane or the stock market crashes.1 Finally, without a precise description of what counts as the AI’s “controller,” the AI will quickly come to see its own controller as just another obstacle it must manipulate in order to achieve its goals. (This is particularly the case for socially skilled AIs.) Consider an AI that is tasked with enhancing shareholder value for a company, but whose every decision must be ratified by the (human) CEO. The AI naturally believes that its own plans are the most effective way of increasing the value of the company. (If it didn’t believe that, it would search for other plans.) Therefore, from its perspective, shareholder value is enhanced by the CEO agreeing to whatever the AI wants to do. Thus it will be compelled, by its own programming, to present its plans in such a way as to ensure maximum likelihood of CEO agreement. It will do all it can do to seduce, trick, or influence the CEO into agreement.

 

pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

A trading rule according to which an investor shorts the company stock if the CEO buys a very large or costly estate and buys the company stock if the CEO buys a more normally sized estates (for CEOs, at least) yielded a return of 40.8 percent after three years (shorting a stock means selling it, without owning it, in order to profit from price declines). What Is Performance, Anyway? Shareholder Value as the Benchmark of Everything On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… Your main constituencies are your employees, your customers and your products. —Jack Welch, 2009 128 ECONOMISTS AND THE POWERFUL An economist who believes in the rationality and farsightedness of financial markets will make no distinction between short-term rises in stock prices and long-run increases in company value.

Analysts who had given favorable assessments of the company were allowed to ask their questions earlier than those who had given unfavorable ones. THE POWER OF THE CORPORATE ELITE 131 Paying Well for Lies, Gambles and Creative Accounting Top executives will routinely and inevitably possess information not available to investors. In these situations, changes in short run share prices will not imply a similar change in long run shareholder value. —Michael Jensen and Kevin Murphy, 2004 The large amounts of stocks and stock options that top managers get, ostensibly to align their interests with those of shareholders, create a massive insider trading problem. Top management has a huge information advantage over outside shareholders. At the same time, they have a large amount of stock and stock options to unload and trade. If they use their insider knowledge for timing their trades, they are putting individual investors in particular at a disadvantage.

Correia, Maria M. 2009. “Political Connections, SEC Enforcement and Accounting Quality.” Working paper. Coughlin, Peter. 1992. Probabilistic Voting Theory. Cambridge, MA: Cambridge University Press. Cramer, James J. 2002. Confessions of a Street Addict. New York: Simon and Schuster. Cuñat, Vincente, Mireia Gine and Maria Guadalupe. 2010. “The Vote is Cast: The Effect of Corporate Governance on Shareholder Value.” NBER Working Paper 16574. Curasi, Carolyn F. 1995. “Male Senior Citizens and their Shopping Preferences.” Journal of Consumer Marketing 12: 123–133. Das, Jishnu and Qui-Toan Do. 2009. “U.S. and Them: The Geography of Academic Research.” World Bank Policy Research Paper 5152. Datta, A. 2003. “Divestiture and its Implications for Innovation and Productivity Growth in US Telecommunications.”

 

pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, working poor, yield curve

Some of the people who get points for being publicly worried about the financial system in the run-up to the credit crunch now have shadow banking at the top of their list of concerns. shareholder value Described as “the dumbest idea in the world” by one of the men who not long ago was seen as its most formidable exponent, Jack Welch, former CEO of GE (which used to be General Electric, until the law of shareholder value forced the company into other lines of business). It is the belief that—to quote an influential 1970 article expounding it by Milton Friedman—“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business,” in other words of the shareholders.71 The employees’ sole responsibility is to make as much money for the employers, the shareholders, as possible. The idea is to make money irrespective of all considerations of social responsibility and wider context. In the theory of shareholder value, the corporation is a legal fiction, getting in the way of the responsibility to make money for the owners.

In the theory of shareholder value, the corporation is a legal fiction, getting in the way of the responsibility to make money for the owners. The theory of shareholder value has failed even on its own terms, because since it became popular in the late sixties the rate of return on assets and on invested capital has fallen by 75 percent. A countervailing idea of corporations is that they have a life and a character of their own and that the best of them make money by serving customers; customers should come first, rather than shareholders; this idea has gained force as companies that have followed it, such as Apple and Amazon, have had success. sigma The measure of what’s called standard deviation. It tells you how unlikely something is. In a bell curve—that’s the normal distribution of data on a graph—one standard deviation from the middle covers just over two-thirds of all the data.

But the robber baron’s castle glitters so brightly precisely because it devastates the landscape in which it sits. Its glory comes at the cost of the desolation it causes. The City of London is a robber baron’s castle. The move away from neoliberalism is likely to involve higher rates of tax at the top end, dramatically increased education spending, and perhaps a rethinking of some of the ways in which capitalism can be inflected away from shareholder value towards models that include owners, managers, workers, and the surrounding community—a model that has been successful in, for instance, Germany. The provision of employment and training for apprentices is an explicit part of this. There will need to be a sharp increase in levels of social housing. The role model here is Singapore, which as well as consistently being voted the most open economy in the world—a beacon to free marketers everywhere—has the highest level of state and social housing in the world.

 

pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

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asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, liquidity trap, London Interbank Offered Rate, margin call, market clearing, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

When you buy a share of stock, you are buying in reality two things. First, your share represents ownership in a business enterprise, including a vote in how it is managed. If the enterprise increases in value over time for any The Financial Market Made Simple reason, you get to share in that increase. That is why business enterprises ought to be and mostly are managed to maximize shareholder value. The conventional measure of the shareholder value created or destroyed by an enterprise is called market capitalization or market cap. This is simply the market price of a share multiplied by all the shares of the company in the market, in finance-speak ‘‘outstanding.’’ However, you are also buying a claim on the current and future earnings of the enterprise. Stock Prices In principle, the price of a stock should reflect the market view of a company’s ability to grow its earnings.

A new ‘‘science’’ of capital management grew up, again aided and abetted by management consultants and the statistical tools we have already seen. The big idea was something called risk adjusted return on capital or RAROC. This was basically a way of measuring what every dollar of capital used by a bank to support its businesses returned to the shareholders after adjusting for risk, that is, the probable losses. Other tools and concepts like shareholder value added or SVA also got traction. In theory, if a bank took capital out of a business with low-risk adjusted returns and put it into businesses with high-risk adjusted returns, its overall return on shareholder funds should be higher. So would its position on the banking food chain. It seemed like a good idea at the time. In fact, RAROC was riddled with the same problems as VAR in terms of reliance on risk models.

See Stocks silver, xv, xvi, 8, 34, 83, 95 197 198 Index Sixteenth Amendment (to US constitution), 181 Smith, Adam, 179–180 Social Security, 23, 157 Socialism, 124–126, 182–183, 188–189 South Sea Bubble, 137 sovereign immunity, 151 sovereign lending, 151–152 speculation, 53, 109, 132, 138 Spitzer, Eliot, 138 stimulus and crisis management in US, Japan, 114, 169, 172 stocks, x–xi, xix, 3, 7, 13, 20, 22, 25, 27, 42, 49, 50–55, 60, 70–73, 80, 87, 137, 139, 142, 165, 167–168, 188; defined, 46; in Great Depression, 109–110; stock exchange, 88–89; stock prices, 47; versus bonds, 48; why stocks are risky, 47 Strong, Benjamin (‘‘Ben Strong’’), 105–106, 108–111 ‘‘structured finance,’’ 60, 64–68, 72, 133, 175–176, 185 sub prime, 55, 63–64, 176, 185 SVA (Shareholder Value Added), 71 Sweden banking crisis, 166 TARP (Troubled Asset Relief Program), 170 technology in banking and finance, xviii, 11, 40, 61–62, 70, 100, 117, 184 Term Loans, defined, 38–39; history, 143, 146 Thatcher, Margaret, 182, 184, 188 Thrift. See S&L ‘‘Too Big To Fail’’ doctrine, 159, 174 ‘‘Toxic Assets,’’ 72 Uniform Commercial Code, 38 U.S. Treasury, 44, 156, 158, 163, 173 VAR (Value at Risk), explained, 68; uses and abuses of, 69, 71 venture capital, 26–27 ‘‘volatility’’ (of financial markets, of stock and bond prices), 48–49 Volcker, Paul and end of the Great Inflation, 130, 140 Von Clemm, Michael, and Eurodollar CD, 149 Wall Street (short hand for financial economy), 1, 18–19, 22, 24, 57, 91, 102, 104–106, 138–140, 156–157, 159, 176–177, 183, 185 Warburg, Sigmund, and Eurodollar markets, 151 ‘‘working capital’’ and bank lending, 61, 143 World Bank, 115 Wriston, Walt, 149, 151–52; and the invention of the Certificate of Deposit, 145 Zombinakis, Minos, and Eurodollar markets, 148, 151 About the Author KEVIN MELLYN has over 30 years of experience in banking and consulting in London and New York with special emphasis on wholesale financial markets and their supporting technologies and infrastructure.

 

pages: 249 words: 73,731

Car Guys vs. Bean Counters: The Battle for the Soul of American Business by Bob Lutz

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corporate governance, currency manipulation / currency intervention, flex fuel, medical malpractice, Ponzi scheme, profit maximization, Ralph Nader, shareholder value, Steve Jobs, Toyota Production System, transfer pricing, Unsafe at Any Speed, upwardly mobile

Note the purity of that mission statement: Most of the ones you see include something about “serving the communities in which we work” (goal conflict: how much money and time gets deflected for that?), “protecting our environment” (ditto the goal conflict), “treating our people as our most valuable resource” (so, no firings, layoffs, demotions, or early retirement? No salary cuts in hard times?), and, of course, the perennial, all-time sine qua non: “create shareholder value.” That one is almost guaranteed to drive bad behavior on the part of a significant minority. If “shareholder value” is as important as “great product,” why not squeeze a tiny bit of goodness out of the vehicles, reduce cost by a few hundred dollars, improve the margins (before the customers catch on), and have a blowout quarterly result that drives the stock up? It is really only the simple purity of the mission statement “to design, build, and sell the world’s best cars and trucks” that can be conveyed internationally, all the way to the hourly workers in Korea and China.

So, the list is really a compendium of accumulated experience in four automobile companies, plus a strong jigger of medicine for what I thought ailed GM.Addressees were all my direct reports. Strongly Held Beliefs 1. The best corporate culture is the one that produces, over time, the best results for shareholders. Happy, contented employees, and an environment where nobody argues or disagrees, and everyone compromises because the other person has goals, is usually not the culture that produces great shareholder value. A performance-driven culture is often a difficult place to work, and it certainly isn’t “democratic.” Democracy and excessive consensus-building slow the process and result in lowest-common-denominator decisions. As Larry Bossidy, former CEO of Allied Signal, so aptly said, “Tension and conflict are necessary ingredients of a successful organization.” 2. Product portfolio creation is partly disciplined planning, but partly spontaneous, inspired, all-new thinking.

And, while his stubborn sense of infallibility led to one or two colossal blunders (such as the beautiful but failed VW Phaeton, a $100,000 luxury car that was doomed by its VW badge), Piëch’s strong direction and insistence on excellence made the VW Group, including Audi, Seat, Skoda, Lamborghini, and now Porsche and Bentley, into a global automotive powerhouse and currently the largest car company in the world. But does the autocrat, no matter how gifted, create sustainable success? Or does his style drive away other, capable leaders who would form a leadership team after the great man’s departure? Time will tell. But, like him or not (and I would personally prefer not to work for Dr. Piëch), reputation, market share, profitability, and shareholder value all increased dramatically under the my-way-or-the-highway style of the good doctor. The future is another matter, but if the purpose of leadership is to drive results, chalk up one major victory for the supremely skilled autocrat. Contrast this to the benevolent, thoughtful, sharing, “respect other people’s emotional equity” approach that so long characterized GM. Everything was laboriously studied and restudied; personal opinions, as in “I think we should do this and not that,” were discouraged.

 

pages: 258 words: 73,109

The (Honest) Truth About Dishonesty: How We Lie to Everyone, Especially Ourselves by Dan Ariely

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accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Broken windows theory, cashless society, clean water, cognitive dissonance, Credit Default Swap, Donald Trump, fudge factor, new economy, Richard Feynman, Richard Feynman, Schrödinger's Cat, shareholder value, Steve Jobs, Walter Mischel

Perhaps it’s because when traveling the rules are less clear, or maybe it has to do with being away from one’s usual setting. * The smart thing would have been to lead the students through the oath at the start of every lecture, and maybe this is what I will do next time. * I suspect that companies that adapt the ideology of maximizing shareholder value above all else can use this motto to justify a broad range of misbehaviors, from financial to legal to environmental cheating. The fact that the compensation of the executives is linked to the stock price probably only increases their commitment to “shareholder value.” * Another fuzzy rule is the quaint-sounding “principle of prudence,” according to which accountants should not make things appear rosier than they actually are. * Are dentists doing this on purpose, and do the patients know that they are being punished for their loyalty?

They go out to lunch and, over their martinis and steaks, discuss what Bob is doing. In the next booth, some folks from Hugebank overhear them. Word gets around. In a relatively short time, it is clear to many other bankers that Bob isn’t the only person to fudge some numbers. Moreover, they consider him as part of their in-group. To them, fudging the numbers now becomes accepted behavior, at least within the realm of “staying competitive” and “maximizing shareholder value.”* Similarly, consider this scenario: one bank uses its government bailout money to pay out dividends to its shareholders (or maybe the bank just keeps the cash instead of lending it). Soon, the CEOs of other banks start viewing this as appropriate behavior. It is an easy process, a slippery slope. And it’s the kind of thing that happens all around us every day. BANKING, OF COURSE, is not the only place this unfortunate kind of escalation takes place.

., 188 Prada bags: fake, 119, 122 real, given to author, 118–19, 122, 140 Predictably Irrational (Ariely), illegal downloads of, 137–39 preferences, creating logical-sounding reasons for, 163–64 prefrontal cortex, 169–70 Princeton University, honor code study at, 42–44 probabilistic discounting, 194 prostitutes, external signaling of, 120 prudence, principle of, 220n punishment, 13, 52 cost-benefit analysis and, 5, 13, 14 self-cleansing, in resetting rituals, 250–52 Rather, Dan, 152 rationalization of selfish desires: of Austen characters, 154–55 fake products and, 134–35 fudge factor and, 27–28, 53, 237 link between creativity and dishonesty and, 172 revenge and, 177–84 tax returns and, 27–28 see also self-justification reason vs. desire, 97–106 cognitive load and, 99–100 ego depletion and, 100–106 exhaustion and, 97–98 “Recollections of the Swindle Family” (Cary), 246 religion: reminders of moral obligations and, 45, 249–50; see also Ten Commandments resetting rituals and, 249, 250–52 reminders: of made-up achievements, 153–54, 238 see also moral reminders resetting rituals, 249, 250–54 to change views on stealing, 252–53 self-inflicted pain and, 249, 250–52 Truth and Reconciliation Commission in South Africa and, 253–54 résumés, fake credentials in, 135–36, 153 revenge, 177–84 annoyance at bad service and, 177–80 author’s tale of, during European travels, 180–84 Rich, Frank, 150 right brain, 164–65 Roberts, Gilbert, 224 Rogers, Will, 55, 57 Rome, ancient: memento mori reminders in, 247 sumptuary laws in, 120 Romeo and Juliet, 98 Rowley, Coleen, 215 Salant, Steve, 115 Salling, John, 152 Sarbanes-Oxley Act, 234 Schrödinger’s cat, 62–63 Schwartz, Janet, 80, 229, 259 Schweitzer, Maurice, 104, 260 scorekeeping, dishonesty in, 61–64 self-deception, 141–61 author’s personal experience of, 143–44 cheating on IQ-like tests and, 145–49, 151, 153–54, 156–57 “I knew it all along” feeling and, 149 Kubrick imitator and, 150–51 negative aspects of, 158–59 people with higher tendency for, 151 positive aspects of, 158 reducing tendency for, 156–57 reminders of made-up achievements and, 153–54, 238 repeating lies over and over and, 142–43 selfishness of Austen characters and, 154–55 in sports, 155–56 veterans’ false claims and, 152 white lies and, 159–61 self-flagellation, 250–52 self-image: amount of cheating and, 23, 27 fudge factor and, 27–29 self-indulgence, rational, 115–16 selfishness, see rationalization of selfish desires self-justification: creation of logical-sounding explanations and, 163–65 link between creativity and dishonesty and, 172 mulligans and, 60–61 repositioning golf ball and, 61 see also rationalization of selfish desires self-signaling, 122–26 basic idea of, 122 charitable acts and, 122–23 fake products and, 123–26, 135 what-the-hell effect and, 127–31 Sense and Sensibility (Austen), 154–55 service providers, long-term relationships with, 228–31 service records, exaggerated, 152–53 Sessions, Pete, 209 Sex and the City, 103–4 Shakespeare, William, 184 shareholder value, maximizing of, 208n Shiv, Baba, 99–100 shopping malls, susceptibility to temptation in, 113 Shu, Lisa, 45, 259 signing forms at top vs. bottom, 46–51 insurance claims and, 49–51 tax reporting and, 46–49 Silverman, Dan, 114–15 Simple Model of Rational Crime (SMORC), 4–6, 11–29, 53, 201, 238, 248 author’s alternative theory to, 27–28; see also fudge factor theory guest lecturer’s satirical presentation on, 11–14 life in hypothetical world based on, 5–6 matrix task and, 15–23 tested in real-life situations, 23–26 sincerity, principle of, 220n Skilling, Jeffrey, 2 social norms, infectious nature of cheating and, 195, 201–3, 205–7, 209 social utility, collaborative cheating and, 222–23 South Africa, Truth and Reconciliation Commission in, 253–54 split-brain patients, 164 sports, self-deception in, 155–56 stealing: Coca-Cola vs. money, 32–33 joke about, 31 resetting mechanisms and, 252–53 from workplace, 31, 33, 193 steroids, in sports, 155–56 storytelling: creation of logical-sounding explanations and, 163–65 reinterpreting information in self-serving way in, 187–88 self-deception and, 142–43 Stroop task, 109–12 opportunity to cheat on, 111–12 Suckers, Swindlers, and an Ambivalent State (Balleisen), 188 sumptuary laws, 120 sunshine policies, 88, 91–92 suspiciousness of others: fake products and, 131–34 self-deception and, 158–59 Tali (research assistant), 21, 24–26 Taliban, 152 Talmud, 45 Tang, Thomas, 44 tax returns, 45–49 IRS reaction to author’s findings on, 47–49 rationalization of exaggerated deductions in, 27–28 signing at top vs. bottom, 46–49 technological frontiers, potential for dishonesty and, 188 temptation, resisting of: cognitive load and, 99–100 dieting and, 98, 109, 112–13, 114–15 ego depletion and, 100–116 evenings as difficult time for, 102 physical exhaustion and, 97–98 removing oneself from tempting situations and, 108–11, 115–16 in shopping malls, 113 Ten Commandments, 39–40, 41, 44, 204, 250 This American Life, 6–7 Three Men in a Boat (to Say Nothing of the Dog) (Jerome), 28 Time, 215 token experiment, 33–34 Tolkien, J.

 

pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, Long Term Capital Management, margin call, market bubble, McMansion, Menlo Park, mortgage debt, new economy, Northern Rock, oil shock, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War

In July 1986, a BusinessWeek cover story quoted a Harvard Business School professor who compared Mike Milken to J. P. Morgan.35 The comparison was taken to heart: the Harvard Business School class of 1985 included 65 members who were prosecuted for securities violations.36 Some of the corporate restructuring was productive, although much was driven by the call to “align management incentives with shareholder value.” To boost shareholder value—the stock price—every quarter, financial channels combined with clever accounting were necessary. The balance sheet expanded, often through the allure of debt and buying back equity. In 1985, Franco Modigliani won the Nobel Prize in economics. The Modigliani-Miller theorem holds that the value of a business does not decrease when its capital structure is geared toward debt (we are incorporating the efficient market fantasy dementia here.)

Luckily for Greenspan, his nomination preceded the public denouement of Lincoln Savings and Loan and of Charles Keating. Greenspan had been hired by Keating to persuade the Federal Home Loan Bank of San Francisco that Lincoln was in good shape. Greenspan succeeded even though Lincoln was one of Michael Milken’s top three junkbond customers among savings and loans (S&Ls).25 The rise of Milken—and of Greenspan—was attuned to the hectic financialization of America in the 1980s. “Maximizing shareholder value” turned out to be a veil for loading corporate balance sheets with debt, a much cheaper and faster route to growth than from retained profits. The market would not have accommodated such indiscretions 30 years earlier. The capital foundations were growing unstable. Greenspan could (and would) salute the economy’s flexibility. The economy was, in fact, vulnerable to collapse and needed constant infusions of money and credit to sustain it.

He declared that “the essential shortcomings of this economy is [sic] the lack of savings and investment… . Investment is the key to enhanced productivity and higher living standards.”26 23 Investment Company Institute, “Mutual Fund Assets and Flows in 2000,” Perspective, February 2001. 24 Levin, “General Motors to Cut 70,000 Jobs; 21 Plants to Shut.” 25 U.S. Census Bureau, Current Population Reports, Consumer Income, p. 41, Table A-3. That depends on where you sit. “Shareholder value” was paying off. Corporate profits fell 21 percent during 1991, a year in which the S&P 500 rose 31 percent.27 The winnings were rising to the top. The CEOs of the largest 100 companies in America received an average of $2.63 million from grants and options in 1991 when their companies were losing money as if it was 1932.28 In 1976, a CEO had been paid 36 times the average worker’s salary.

 

pages: 184 words: 53,625

Future Perfect: The Case for Progress in a Networked Age by Steven Johnson

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airport security, algorithmic trading, banking crisis, barriers to entry, Bernie Sanders, call centre, Captain Sullenberger Hudson, Cass Sunstein, cognitive dissonance, credit crunch, crowdsourcing, dark matter, Dava Sobel, David Brooks, future of journalism, hive mind, Howard Rheingold, HyperCard, Jane Jacobs, John Gruber, John Harrison: Longitude, Kevin Kelly, Kickstarter, lone genius, Mark Zuckerberg, meta analysis, meta-analysis, Naomi Klein, Nate Silver, Occupy movement, packet switching, Peter Thiel, planetary scale, pre–internet, RAND corporation, risk tolerance, shareholder value, Silicon Valley, Silicon Valley startup, social graph, Steve Jobs, Steven Pinker, Stewart Brand, The Death and Life of Great American Cities, Tim Cook: Apple, urban planning, WikiLeaks, working poor, X Prize

Sisodia and his colleagues began investigating these positive deviants to figure out what made them so successful at winning over the hearts (and wallets) of their customers. It turned out that the companies shared a set of core values that distinguished them from most of their rivals. For starters, unlike most corporations, they did not consider their ultimate responsibility to be “maximizing shareholder value.” When management had to make key decisions, they didn’t focus exclusively on how those decisions would play on Wall Street. Instead, the companies adhered to a “stakeholder” model, whereby decisions had to reflect the varied interests and needs of multiple groups: customers, employees, managers, shareholders, and even the communities that surrounded the company’s stores or offices or factories.

They democratized the decision-making process inside the organization. Yet despite those strategies, the stakeholder-driven firms not only managed to stay in business, but actually outperformed the market by an extraordinary margin. In the ten years leading up to 2006, the public stakeholder firms had generated a 1,026 percent return for their investors, compared with the S&P 500’s 122 percent return. By refusing to focus on maximizing shareholder value, they had created eight times more value for their shareholders. John Mackey has come to call the overall philosophy shared by these firms “conscious capitalism.” “If business leaders become more conscious of the fact that their business is not really a machine,” he writes, “but part of a complex, interdependent, and evolving system with multiple constituencies, they will see that profit is one of the most important purposes of the business, but not the sole purpose.

Performance would be rewarded—not through individual raises, but through an increase in the overall budget of the school, which would then be passed down to all the teachers through bigger paychecks. Just as we saw with Race to the Top, that reward would be fronted by the state, but it would play the same role that increases in publicly held shares do in the private sector. The rising tide of shareholder value would lift all boats. That kind of incentive structure would encourage better teaching and better collaboration with other teachers. The school would be a peer network at its finest: a group of minds gathered together to tackle an important problem, where promising ideas were both rewarded and free to circulate through the network. Note again where the peer progressive comes down on this issue.

 

pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

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accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, buy low sell high, capital asset pricing model, corporate governance, Daniel Kahneman / Amos Tversky, diversified portfolio, Eugene Fama: efficient market hypothesis, hiring and firing, index fund, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, the market place, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

Unfortunately, it recently has become all too common for companies to repurchase their stock when it is overpriced. There is no more cynical waste of a company’s cash—since the real purpose of that maneuver is to enable top executives to reap multimillion-dollar paydays by selling their own stock options in the name of “enhancing shareholder value.” A substantial amount of anecdotal evidence, in fact, suggests that managers who talk about “enhancing shareholder value” seldom do. In investing, as with life in general, ultimate victory usually goes to the doers, not to the talkers. Chapter 12 Things to Consider About Per-Share Earnings This chapter will begin with two pieces of advice to the investor that cannot avoid being contradictory in their implications. The first is: Don’t take a single year’s earnings seriously.

Between June 1, 1999, and May 31, 2000, Oracle issued 101 million shares of common stock to its senior executives and another 26 million to employees at a cost of $484 million. Meanwhile, to keep the exercise of earlier stock options from diluting its earnings per share, Oracle spent $5.3 billion—or 52% of its total revenues that year—to buy back 290.7 million shares of stock. Oracle issued the stock to insiders at an average price of $3.53 per share and repurchased it at an average price of $18.26. Sell low, buy high: Is this any way to “enhance” shareholder value?19 By 2002, Oracle’s stock had fallen to less than half its peak in 2000. Now that its shares were cheaper, did Oracle hasten to buy back more stock? Between June 1, 2001, and May 31, 2002, Oracle cut its repurchases to $2.8 billion, apparently because its executives and employees exercised fewer options that year. The same sell-low, buy-high pattern is evident at dozens of other technology companies.

Edward VII (king of Great Britain), “efficient markets hypothesis” (EMH) Electric Autolite Co. Electronic Data Systems electronics industry Elias, David Ellis, Charles ELTRA Corp. EMC Corp. emerging-market nations Emerson, Ralph Waldo Emerson Electric Co. Emery Air Freight Emhart Corp. employee-purchase plans employees: stock options for. See also managers/management endowment funds “enhancing shareholder value,” Enron Corp. enterprising investors. See aggressive investors EPS. See per-share earnings Erie Railroad ethics eToys Inc. Eversharp Co. exchange-traded index funds (ETFs) Exodus Communications, Inc., Expeditors International of Washington, Inc. expenses/costs: controlling ownership; and convertible issues and warrants; of doing business; of investment funds; of mutual funds; of options; and per-share earnings; of research; and stock selection for aggressive investors; and stock selection for defensive investors; of trading.

 

pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, Nick Leeson, Northern Rock, offshore financial centre, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve

An enabler of a massive shift of power toward love-to-win traders that traditionalists barely understood despite their insistence that they too were “sophisticated.” A mechanism for replicating reality and synthesizing financial robots that allowed complexity to go viral. It’s time to meet our first derivatives. CHAPTER ONE The Bets That Made Banking Sexy Starting in the late 1980s, a new emphasis on shareholder value forced large banks to improve their return on capital and start acting more like traders. This sparked an innovation race between two ways of transferring credit risk: the old-fashioned “letter of credit” versus a recent invention, the credit default swap (CDS). Behind this race were two ways of looking at credit: the long-term actuarial approach versus the market approach. The champion of the market approach, Goldman Sachs, quickly moved to exploit the CDS approach and was richly rewarded for its ambition—and ruthlessness.

Morgan had not anticipated the amount’s becoming so large and had not checked to see whether its Korean client was good for the money. Although the nature of the losses was different, the challenge for Chase Manhattan and J.P. Morgan was the same: they had had to ratchet up credit exposure in order to compete, and now they had to find ways of cutting it back again without jeopardizing revenues. Shapiro explained that this pressure came from the fashionable doctrine of shareholder value added (SVA). Invented in the 1980s and associated with General Electric CEO Jack Welch, SVA argued that nonfinancial companies should ditch low-growth businesses that tied up shareholder capital, and produce a bigger return for shareholders. But how did it apply to banks, whose primary business was lending money? The problem with bank lending as a profit generator is simple: no business is hungrier for capital than the one that hands out money to borrowers and then waits to get paid back.

One of these early investors provided an impetus for this trading when a disastrous experience forced it to take action. Abbey National was once the United Kingdom’s biggest building society, or thrift. However, after demutualizing in the 1980s, the new shareholder-driven bank was bitten by the same credit diversification bug that had bitten the Germans and the Italians. Its 2000 annual report said as much. The headline declared that the bank was “building shareholder value,” and it allocated a quarter of its $150 billion balance sheet to the first generation of CDOs and other exotic securitizations then being sold by Wall Street firms. By the summer of 2002, the folly of this strategy became apparent, as the post-dot-com downturn swept across Abbey’s bond portfolio, resulting in the first of what would be $2 billion write-downs. Abbey fired its chief executive and, following a poacher-turned-gamekeeper principle for hiring, brought in two ex–investment bankers as CEO and CFO to clean up the mess.

 

pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population, World Values Survey

They suggested two main approaches. One is making corporate takeover easier (so more Gordon Gekkos, please), so that managers who do not satisfy the shareholders can be easily replaced. The second is paying large parts of managerial salaries in the form of their own companies’ stocks (stock option), so that they are made to look at things more from the shareholder’s point of view. The idea was summarized in the term shareholder value maximization, coined in 1981 by Jack Welch, the then new CEO and chairman of General Electric, and has since ruled the corporate sector first in the Anglo-American world and increasingly in the rest of the world. Workers and governments also influence corporate decisions Though it is not common in the US and Britain, workers and the government also exercise significant influences on corporate decision-making.

But with the proliferation of so many financial instruments that provide quick and high returns, shareholders have become even more impatient in the last couple of decades. For example, in the UK, the average period of shareholding, which had already fallen from five years in the mid-1960s to two years in the 1980s, plummeted to about 7.5 months at the end of 2007.15 This has resulted in the formation of an ‘unholy alliance’ between the professional managers of corporations and the growing band of short-term shareholders, under the rallying call of ‘shareholder value maximization’ (see Chapter 5). In this alliance, astronomical salaries were paid to managers in return for maximizing short-term profits – even at the cost of product quality and worker morale – and distributing the biggest possible proportions of those profits to the shareholders, in the form of dividends and share buy-backs (companies buying up their own shares in order to prop up the share price).

Between the mid-1970s and the late 1980s, the proportion of countries with banking crisis rose to 5–10 per cent, weighted by their share of world income. The proportion then shot up to around 20 per cent in the mid-1990s. The ratio then briefly fell to zero for a few years in the mid-2000s, but went up again to 35 per cent following the 2008 global financial crisis. The ‘unholy alliance’ between short-term-oriented shareholders and professional managers has reduced the ability of corporations to invest The rise of the ‘shareholder value maximization’ model in the era of new finance has dramatically reduced the resources available for long-term investments in non-financial corporations. The era has seen a dramatic rise in distributed profits, that is, profits given to shareholders in the forms of dividends and share buy-backs. For example, distributed profits as a share of total US corporate profits stood at 35–45 per cent between the 1950s and 70s.18 Between 2001 and 2010, the largest US companies distributed 94 per cent of their profits and the top UK companies 89 per cent of their profits.19 This has significantly reduced the ability of corporations in these countries to invest.

 

pages: 385 words: 101,761

Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

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3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, clean water, collapse of Lehman Brothers, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, follow your passion, game design, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, Joseph Schumpeter, Kickstarter, lone genius, manufacturing employment, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, race to the bottom, reshoring, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, Tim Cook: Apple, too big to fail, tulip mania, We are the 99%, Y Combinator, young professional, Zipcar

Top managers, locked into the stock price of their companies, are expected to meet or exceed the quarterly estimates of Wall Street analysts. “Shareholder value” is the paramount, often the only, guiding principle to corporate behavior, with stock prices on financial markets the one signal of success or failure. After talking to Wall Street recruits while doing fieldwork for her book Liquidated: An Ethnography of Wall Street, Karen Ho, a professor of anthropology at the University of Minnesota, wrote that “shareholder value was the most important concept with which my informants made sense of the world and their place in it: it shaped how they used their ’smartness’ and explained the purpose of their hard work.. . . Creating shareholder value was morally and economically the right thing to do.” THE FINANCIAL CRASH THAT BROUGHT on the worst recession since the Depression has, of course, tarnished the efficient market theory.

From the 1920s through much of the 80s, when professional managers ran most of America’s large corporations, business leaders saw themselves as professionals serving a broad range of interests, many of them social. They felt a collective responsibility to stakeholders—employees, local communities, the national government, customers, suppliers—as well as shareholders. In the 1990s, the CEO’s role was recast as a maximizer of shareholder values, but before that “a higher interest was the sin qua non of business professionalism,” says Harvard Business School professor Rakesh Khurana. The heads of big corporations felt they had a “calling” to do good for the nation. This sense of calling is now rare among CEOs of global corporations, who focus on shareholders and see themselves as global citizens, not leaders of local communities.

 

pages: 382 words: 92,138

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

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Apple II, banking crisis, barriers to entry, Bretton Woods, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

Such a holiday has been estimated to reach $79 billion over the decade and there is no assurance that the repatriated profit would be utilized for further development of existing capabilities (Duhigg and Kocieniewski 2012). The pledge for a ‘repatriation tax holiday’ is even more appalling in light of Apple’s and other major corporations’ share repurchase programmes (Lazonick 2011). Given the pervasive attention paid to ‘maximizing shareholder value’ over all other concerns, nothing therefore guarantees that the repatriated cash will not end up in executives’ and shareholders’ pockets. While public policies on innovation should not just focus on areas like R&D tax credits, but rather on creating the market and technological opportunities that will increase private investment (neither Bill Gates nor Steve Jobs were sitting around thinking of the savings they could find from tax credits), it is also true that once such investments are made, business can make large savings (higher profits) with different types of tax credits and reductions.

The logic here is that shareholders are the biggest risk takers since they only earn the returns that are left over once all the other economic actors are paid (the ‘residual’ if it exists, once workers and managers are paid their salaries, loans and other expenses are paid off, and so on). Hence when there is a large residual, shareholders are the proper claimant – they could in fact have earned nothing since there is no guarantee that there will be a residual (Jensen 1986; for a critique see Lazonick 2012). Or so goes the theory. Shareholder-value ideology is based on this notion of shareholders as the ‘residual claimants’ and thus the lead risk takers with no guaranteed rate of return (Jensen 1986). This argument has been used to justify shareholders’ massive returns (Lazonick 2007; Lazonick and Mazzucato 2013). Yet this framework assumes that other agents in the system (taxpayers, workers) do have a guaranteed rate of return, amongst other things ignoring the fact that some of the riskiest investments by government have no guarantee at all: for every successful investment that leads to a new technology like the Internet, there are a host of failed investments – precisely because innovation is so uncertain.

The latter outcome occurs when certain actors are able to position themselves at the point – along the cumulative innovation curve – where the innovative enterprise generates financial returns; that is, close to the final product market or, in some cases, close to a financial market such as the stock market. These favoured actors then propound ideological arguments, typically with intellectual roots in the efficiency propositions of neoclassical economics (and the related theory of ‘shareholder value’), that justify the disproportionate shares of the gains from innovation that they have been able to appropriate. These ideological arguments invariably favour financial contributions to the innovation process over both worker contributions and taxpayer contributions. Ultimately, precisely because innovation is a collective and cumulative process, the imbalance in the risk–reward nexus not only results in greater inequality but also undermines the innovation process itself.

 

pages: 267 words: 79,905

Creating Unequal Futures?: Rethinking Poverty, Inequality and Disadvantage by Ruth Fincher, Peter Saunders

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barriers to entry, ending welfare as we know it, financial independence, full employment, Gini coefficient, income inequality, income per capita, labour market flexibility, labour mobility, low skilled workers, low-wage service sector, marginal employment, minimum wage unemployment, New Urbanism, open economy, pink-collar, positional goods, purchasing power parity, shareholder value, The Bell Curve by Richard Herrnstein and Charles Murray, urban planning, urban renewal, very high income, women in the workforce, working poor, working-age population

(Froud et al. 1998) This analysis suggests that the combination of ‘high incomes for some plus enforced participation for others’ is a futile one for achieving stable economic development. The secondary investment circuit identified by Froud and her colleagues is responsible for intensifying inequality and unstable labour demand. This occurs because ‘shareholder value’ is the dominant criterion guiding saving and investment. The pursuit of shareholder value causes endless restructures and cost shifting exercises which adversely affect the workforce. Far from solving the problem, the spread of share ownership and of privately based superannuation actually destabilises the situation further. As Froud and her colleagues put it: what we have is a Keynesian paradox about the unequal society where the pursuit of individual security through investment in the capital market spreads collective insecurity through labour market redundancy and reemployment which is part of restructuring.

It is also about power relations within firms, and between firms and their shareholders. Manning (1998, p. 32) emphasises the need for a change in the values underpinning such power relations if unemployment is to be reduced in future, but sees the expectations of rapidly increasing income among bondholders, consumers, executives and professionals as obstacles to its achievement. Watson and Buchanan in Chapter 7 agree that this ‘shareholder value’ is responsible for 17 PDF OUTPUT c: ALLEN & UNWIN r: DP2\BP4401W\MAIN p: (02) 6232 5991 f: (02) 6232 4995 36 DAGLISH STREET CURTIN ACT 2605 17 CREATING UNEQUAL FUTURES? intensifying inequality and spreading insecurity across the workforce. Private sector firms are not the only workplace sites in which unemployment-generating strategies have been deployed. In the public sector, workforces have also been ‘downsized’ as employment for public investment has been reduced in the effort to produce smaller government.

Nieuwenhuysen, Melbourne University Press, Melbourne, pp. 144–64 Fischer, C. et al. 1996 Inequality by Design: Cracking the Bell Curve Myth, Princeton University Press, Princeton, New Jersey Fitchen, J.M. 1995 ‘Spatial redistribution of poverty through migration of poor people to depressed rural communities’ Rural Sociology vol. 60, no. 2, pp. 181–201 FNQ 2010 Regional Planning Project 1998 Strategic Directions and Regional Priorities for Far North Queensland draft for Consultation, Far North Queensland Regional Planning Advisory Committee for the Queensland Department of Local Government and Planning Forde, S. 1997 ‘A descriptive look at the public role of the Australian independent alternative press’ Asia-Pacific Media Educator no. 3, pp. 118–30 ——1998, ‘The development of the alternative press in Australia’ Media International Australia no. 87, pp. 114–33 Fraser, N. 1989 Unruly Practices: Power, Discourse and Gender in Contemporary Social Theory, University of Minnesota Press, Minneapolis Froud, J. et al. 1997 ‘From social settlement to household lottery’ Economy and Society vol. 26, no. 3, pp. 340–72 Froud, J. et al. 1998 ‘Accumulation based on inequality’: a Keynesian analysis of investment for shareholder value, Paper presented at the 20th Conference of the International Working Party on labour market segmentation, Arco (Trento), July ——1999 ‘The Third Way and the jammed economy’ Capital and Class no. 67, Spring, pp. 155–66 Fuchs, V. 1965 Toward a Theory of Poverty in the Concept of Poverty Task Force on Economic Growth and Opportunity, Chamber of Commerce of the United States, Washington Galbraith, J.K. 1992 Culture of Contentment, Sinclair-Stevenson, London 235 PDF OUTPUT c: ALLEN & UNWIN r: DP2\BP4401W\MAIN p: (02) 6232 5991 f: (02) 6232 4995 36 DAGLISH STREET CURTIN ACT 2605 235 CREATING UNEQUAL FUTURES?

 

pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

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3D printing, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business process, buy low sell high, chief data officer, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, Khan Academy, Kickstarter, Lean Startup, Lyft, market design, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, two-sided market, Uber and Lyft, Uber for X, winner-take-all economy, Zipcar

Hillel Aron, “How eBay, Amazon and Alibaba Fuel the World’s Top Illegal Industry—The Counterfeit Products Market,” LA Weekly, December 3, 2014, http://www.laweekly.com/news/how-ebay-amazon-and-alibaba-fuel-the-worlds-top-illegal-industry-the-counterfeit-products-market-5261019. 17. Andrei Shleifer and Robert W. Vishny, “A Survey of Corporate Governance,” Journal of Finance 52, no. 2 (1997): 737–83, esp. 737. 18. Steve Denning, “The Dumbest Idea in the World: Maximizing Shareholder Value,” Forbes, November 28, 2011, http://www .forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/. 19. Alvin E. Roth, “The Art of Designing Markets,” Harvard Business Review 85, no. 10 (2007): 118. 20. Lawrence Lessig, Code and Other Laws of Cyberspace (New York: Basic Books, 1999). 21. Dana Sauchelli and Bruce Golding, “Hookers Turning Airbnb Apartments into Brothels,” New York Post, April 14, 2014, http://nypost.com/2014/04/14/hookers-using-airbnb-to-use-apartments-for-sex-sessions/; Amber Stegall, “Craigslist Killers: 86 Murders Linked to Popular Classifieds Website,” WAFB 9 News, Baton Rouge, LA, April 9, 2015, http://www.wafb.com/story/28761189/craigslist-killers-86-murders-linked-to-popular-classifieds-website. 22.

All these terminological changes reflect the fact that marketing messages once disseminated by company employees and agents now spread via consumers themselves—a reflection of the inverted nature of communication in a world dominated by platforms.2 Similarly, information technology systems have evolved from back-office enterprise resource planning (ERP) systems to front-office consumer relationship management (CRM) systems and, most recently, to out-of-the-office experiments using social media and big data—another shift from inward focus to outward focus. Finance is shifting its focus from shareholder value and discounted cash flows of assets owned by the firm to stakeholder value and the role of interactions that take place outside the firm. Operations management has likewise shifted from optimizing the firm’s inventory and supply chain systems to managing external assets the firm doesn’t directly control. Tom Goodwin, senior vice president of strategy for Havas Media, describes this change succinctly: “Uber, the world’s largest taxi company, owns no vehicles.

The single most heavily cited article on corporate governance is a literature survey that considers only “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”17 The focus here is on the information asymmetry arising from the separation of ownership and control—a critical element of governance design, but far from sufficient.18 Information asymmetry between the community of users and the firm also matters, and their interests too must be aligned. Additionally, platform governance rules must pay special heed to externalities. These are endemic in network markets, since, as we’ve seen when examining network effects, the spillover benefits users generate are a source of platform value. Understanding this forces a shift in corporate governance from a narrow focus on shareholder value to a broader view of stakeholder value. Market designer and Nobel Prize-winning economist Alvin Roth described a model of governance that uses four broad levers to address market failures.19 According to Roth, a well-designed market increases the safety of the market via transparency, quality, or insurance, thereby enabling good interactions to occur. It provides thickness, which enables participants from different sides of a multisided market to find one another more easily.

 

pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, mortgage debt, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

—Benjamin Graham (1973, pp. 286–287) Most active equity investors trade based on discretionary judgment, and many of the most successful ones swear to the principles of Graham and Dodd (1934) and Graham (1973). As is clear from the quote above, this means thoroughly analyzing a firm’s business and its future profit potential, considering whether the management has the ability to deliver on this potential and the integrity to pay the profits out to shareholders, valuing the firm in relation to its price, and acting on your judgment even if it goes against conventional wisdom. The hedge funds that use these strategies are called long–short equity funds. Long–short hedge funds seek to buy excellent stocks that trade at a discount and to short-sell bad stocks that are overvalued. They are often more long than short, perhaps because it is easier to find and implement long investments and because they may also want to earn the equity premium.

One has increased its sales with “same-store sales growth,” that is, it has increased sales in its existing shops, kept expenses constant, and increased profit margins. Clearly such same-store sales growth is good. The other retail chain has also increased sales, but this has been accomplished by buying up other retailers at premium prices. Such a strategy of asset growth, not profit growth, can often be flawed and can hurt shareholder value unless the acquisitions have special synergies or are done at very favorable prices. Profitability and Earnings Quality Clearly a more profitable firm is more valuable than a less profitable (or unprofitable) one. Profitability can be measured in several different ways, ranging from the reported earnings number, to measures focused on cash flows, to the “top line” gross profits (revenues minus cost of goods sold).1 Equity investors seek to determine a company’s ability to continue to make true economic profits in a sustainable way.

Fundamental risk measures are designed to estimate the risk of declining future profits, for instance, by considering the past variation in profitability. Payout and Management Quality A fourth class of quality measures focuses on how shareholder-friendly the firm is and how well managed it is. Specifically, one can look at whether profits are paid out to shareholders as dividends or share repurchases or how they otherwise benefit shareholders. In other words, does the firm’s management seek to maximize shareholders’ value or to extract private benefits for itself? For instance, some managers focus on generating cash for lavish perks, such as corporate jets, rather than for shareholders. Also, some managers act as “empire builders” who go on sprees of expensive acquisitions rather than focusing on profit growth. A sign of poor management can be that the board is packed with cronies rather than independent board members who can add value to the firm and represent the shareholders’ interests.

 

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

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Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business process, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Nick Leeson, P = NP, pattern recognition, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

As I try to summarize the source of my contributions to the industry, I believe that it lies in the early phrasing of the question rather than in the application of any specific quantitative technique, no matter how useful the tool may be for answering the question. Fortunately for me, there was no lack of important and challenging questions raised by the rapid developments in the risk-management world over the past 20 years, especially in the area of market risk in the early 1990s, credit risk in the late 1990s, and, now more than ever, shareholder value creation. Over my career, I have contributed to each of these areas; at times, I have had to learn new statistical, mathematical and financial techniques. As a consequence, my path to becoming a quant has to be seen in the context of the industry developments that I describe in the rest of this section. I then conclude with some advice to the aspiring quant, including outlining some of the lessons that I have learned during the course of my career.

I have always enjoyed identifying and framing the question earlier than others, and been conscious that answering the question, once phrased, would nonetheless require me to learn new quantitative tools. The Questions Fortunately, important, interesting, and challenging questions with substantial business and managerial implications have presented themselves during the past 20 years. They fall roughly into the three main areas of market risk, credit risk, and shareholder value creation. Although many of the questions and answers in each of these areas are taken for granted today, they often challenged conventional wisdom at the time. In the remainder of this section, I summarize the historical context and the questions that I found interesting in each of these areas. For brevity’s sake, I have excluded some themes, including my contributions into asset/liability management for both banks and insurance companies.

Without the development of Raroc models, it is doubtful institutions would have had the courage and the commitment to fundamentally change their corporate credit strategy and practices. JWPR007-Lindsey May 7, 2007 16:50 Thomas C. Wilson 103 This trend in using Raroc measures to guide corporate strategy has continued throughout the 1990s and into the next decade as institutions have reinforced their focus on shareholder value creation. For example, most financial services institutions use Raroc as a cornerstone for their Economic Profit or Economic Value AddedTM framework, guiding their investment in and development of different lines of business. As a consequence, the identification and correction of any possible bias in Raroc has become even more important today than ever. These developments have also opened up new fields in applying quantitative approaches to the measurement of performance, both theoretical and empirical.

 

pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

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Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, Black Swan, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, systematic trading, The Myth of the Rational Market, time value of money, transaction costs

He finds that the decile of stocks that repurchase the most shares in a year gain on average 13.69 percent in the following year against a market return of 10.46 percent for the same period, an outperformance of 3.8 percent. O'Shaughnessy also finds that stocks in the decile of stocks issuing the most shares in a year gain on average just 5.94 percent, underperforming the market return by 4.52 percent per year. Investors should be wary of stocks issuing lots of shares. Capital management is a little understood, yet critical, issue for shareholder value creation. The research is clear: Investors should seek the rare stocks with a manager like Singleton or Buffett at the helm, who buy back shares only at trough valuations, are miserly with options, and issue shares only when the share price exceeds the stock's intrinsic value. Investors should keep a close eye on a management's capital allocation behavior. Typically, net purchasers of shares will turn out to be better investments than net issuers of shares.

Managers who blindly buy back shares, however, are less than ideal. A manager who buys back stock at a peak valuation destroys value as surely as the manager who issues shares at a trough valuation. Investors should avoid managers who play games with buyback announcements, if only because such behavior suggests that they are more focused on the share price than the underlying value and might be squandering an opportunity to enhance shareholder value by not completing the buyback. INSIDER TRADERS BEAT THE MARKET In addition to undertaking buybacks, managements can express their view on the under- or overvaluation of their stock through their own trading. The trading activity of “insiders” (corporate officers, directors, and large stockholders) has attracted the interest of both academics and practitioners for over 40 years. For our purposes, insider trading is the legal buying or selling by corporate insiders.

The paper suggests that the filing of a Schedule 13D notice by an activist hedge fund is a catalytic event for a firm that heralds substantial positive returns in the stock. Klein and Zur find that targeted stocks outperform the market by an average of between 10.2 percent and 5.1 percent during the period surrounding the initial Schedule 13D. These findings suggest that, on average, the market believes activism creates shareholder value. Most interesting, the market-beating returns do not dissipate in the one-year period following the initialSchedule 13D. Instead, target stocks earn an additional 11.4 percent to 17.8 percent above-market return during the year following the activists' interventions. The market-beating returns may be due to changes in stock operations implemented at the behest of the activist investors (see Table 9.1).

 

pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, Flash crash, income inequality, index fund, invisible hand, London Whale, Long Term Capital Management, moral hazard, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

(Committee for Economic Development and Yale School of Management-Millstein Center for Corporate Governance and Performance, October 2011), 13. 3. Some scholars assert that institutional investors are not technical owners of public companies even though they own company stock. Lynn A. Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public (Berrett-Koehler Publishers, 2012). Others such as Yale Law School’s Jon Macey counter that shareowner value is the default objective of public corporations regardless of the legal distinction. See a May 1, 2013, debate at the American Enterprise Institute at www.aei.org/events/2013/05/01/shareholder-value-theory-myth-or-motivator/. 4. Keith Ambachtsheer, Ronald Capelle, and Hubert Lum, “The Pension Governance Deficit: Still with Us” (Social Science Research Network, 2008), http://papers.ssrn.com/sol3/papers.cfm?

John Bogle, who founded Vanguard as a low-fee mutual fund alternative in the United States, and the late Alastair Ross Goobey, who built the UK-based Hermes into a global force for improved corporate governance, are just two examples. 25. This book uses the term “owner” to describe the relationship an investor has with a public company when that investor holds one or more shares in the firm. However, it should be noted that some scholars assert that investors are not technically “owners” of public companies but only of the stock. Lynn A. Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public (Berrett-Koehler, 2012). In practice, market participants, and many courts, commonly treat investors effectively as owners. 26. Deputy Prime Minister Nick Clegg, Mansion House Speech, January 16, 2012, www.gov.uk/government/speeches/deputy-prime-ministers-speech-at-mansion-house. 27. Board Practices 2012, Institutional Shareholder Services (ISS). 28.

 

pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

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bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, inventory management, job-hopping, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, shareholder value, sovereign wealth fund, the payments system, too big to fail

One week it’s Diversity Week, the next it’s I-don’t-know-what Week…’ Amorality ensures a level playing field, according to interviewees. What’s more, they added: it is not like banks have a choice. This brought us to the second counter-argument that came up in the interviews. Amorality as an organising principle is imposed on us and enforced by shareholders, who look at returns and returns only. The term here is shareholder value, essentially a doctrine holding that companies listed on the stock exchange must be judged by one criterion: the value they create for their owners, the shareholders. The rock’n’roll trader needed only a few sentences to sketch the straitjacket: ‘If you are a pension fund with shares in Morgan Stanley, and you see that Goldman Sachs made 50 per cent more profit, you will not like that. These numbers make you look like a bad investor.

It took a while for it all to click but of course, why would bankers treat their clients better than they are treated themselves, by their own bank and by the bank’s shareholders? The Sauvignon Blanc employee relations manager had often witnessed how from one day to the next headquarters could announce a 5 per cent ‘headcount reduction’ – another sterilising term to describe sudden mass lay-offs. The logic is inexorable: lower costs mean higher profits and hence more shareholder value. This is an environment where it is everyone for themselves, people would say, often with a shrug. ‘I could tell you crazy stories about people being dragged from the toilets, from hospital, from holidays …’ said the former PR and communications officer. ‘A colleague would get a call at 2 a.m. from her boss in New York: “Send me X right away!” So she says: “I already sent it to you.” Reply: “Well, whatever, send it again.”’

If on New Year’s Eve the oil price ends up below that level you collect your premium – like a travel insurer who does not need to pay out after a problem-free holiday. But if instead the oil price has risen you have to pay. The point is that the oil price can go up a long way, and with it your losses. Bankers are correct to point out that virtually all multinational corporations are publicly listed and therefore subject to the amoral regime of shareholder value. However, a handful of employees in a division somewhere at Shell or McDonald’s are highly unlikely to cause their company a few billions in losses. At investment banks this is a very real possibility, as former investment banker Rainer Voss says in the Master of the Universe documentary: ‘I cannot think of another industry where one individual can lose his company so much money.’ Think of an upside-down pyramid, he explained, since: ‘Die Leute die richtigen Schade anrichten können, die sitzen unten’ – those who build or trade the explosive products are sitting very far from the top.

 

pages: 713 words: 203,688

Barbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough, John Helyar

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buy low sell high, Donald Trump, Gordon Gekko, margin call, Ronald Reagan, shareholder value, South Sea Bubble

“I don’t understand you,” Johnson replied. “I’m making the biggest deal in the world and you’re not impressed.” Horrigan tried to make it simple for him. For one thing, he said, think about how all this will look to the board. How on earth could the management group maintain it was trying to serve shareholder value if it was cutting a deal with Kravis that would no doubt hold down the company’s selling price? “The board will shove it right up our butt,” Horrigan declared. Johnson disagreed. With the $90 floor established by Kravis, shareholder value had already been served. Now, he said, it was important to make sure this bidding contest didn’t get out of control, that it didn’t get to the point where the debt they piled on would make it impossible to run the company. Horrigan didn’t want to hear any more about consorting with Kravis.

“It’s plain as the nose on your face that this company is wildly undervalued,” Johnson said. “We tried to put food and tobacco businesses together, and it hasn’t worked. Diversification is not working. We are sitting on food assets that are worth twenty-two, twenty-five times earnings and we trade at nine times earnings, because we’re still seen as a tobacco company. As a result, we have studied alternative ways of increasing shareholder values.” Here, he paused. “The only way to recognize these values, I believe, is through a leveraged buyout.” There was a crashing silence. Everyone in the room knew about leveraged buyouts, often called LBOs. In an LBO, a small group of senior executives, usually working with a Wall Street partner, proposes to buy its company from public shareholders, using massive amounts of borrowed money. Critics of this procedure called it stealing the company from its owners and fretted that the growing mountain of corporate debt was hindering America’s ability to compete abroad.

There was no earthly reason Kravis couldn’t do this deal with Shearson and Salomon. There was every reason he should. It was all about egos, Linda Robinson knew. She considered herself finely attuned to the ways of her swaggering Wall Street clients. As so often happened, Peter Cohen and Tommy Strauss and Henry Kravis and the rest had totally lost sight of their real objective, RJR Nabisco. Their disagreements had nothing to do with shareholder values or fiduciary duties. It was all a test of wills among an intensely competitive clique of macho, Park Avenue bullies in pinstripes. At this point, she was well aware, Cohen would never give in to Kravis, or vice versa. Kravis certainly wasn’t going to cut a deal with Strauss. Each was determined to be King of the Sandbox. Someone had to cut through all the bullshit, she told herself. Absent the built-up emotions, the knot ought to be easy to cut.

 

pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

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Affordable Care Act / Obamacare, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mortgage debt, new economy, Occupy movement, Own Your Own Home, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

Still, Dunlap walked away with a fortune big enough to retire to a much larger estate than the one I had seen—a 9,700-square-foot mansion with its own pond and an indoor swimming pool. Short-Term vs. Long-Term At every step, Dunlap’s defense echoed the mantra of New Economy CEOs: He was creating shareholder value. “I work for you,” he told Sunbeam shareholders. “You own the company.” To Wall Street, that signaled a CEO focused on boosting the company’s stock price in the short term for investor gains. That cost-cutting, shareholder-value formula rankled more traditional corporate leaders such as Bob Galvin at Motorola and Henry Schacht, former CEO of Lucent Technologies, who believed in long-term growth and value. “Firing people and slashing things and selling it to somebody else, that’s a no-brainer,” Schacht said.

Close behind were Michael Eisner, former CEO of Disney, with $575.6 million in 1998 and another $203 million in 1993; and Sandy Weill, former Citigroup CEO, who pulled down $621.8 million in three big years between 1997 and 2000. Pay for Performance The economic rationale for those big stock grants by Corporate America was “pay for performance”—rewarding CEOs and senior executives by supposedly aligning management’s interests with stockholder interests. As Milton Friedman put it, that would motivate the captains of industry to “maximize shareholder value” by steadily improving the stock price of their companies. “Shareholder value”—that is, stock price—became the be-all and end-all of corporate CEOs in the New Economy. The idea sprang from an academic paper by two of Friedman’s graduate students who became assistant professors, Michael C. Jensen of Harvard Business School and William H. Meckling of Rochester University. Writing about potential conflicts between CEO and shareholder interests, Jensen and Meckling argued that one way to match the interests of the two sides was to make the CEO an owner of the company, like stockholders—“to give him stock options.”

With America’s changing political climate and the rising influence of pro-business conservatism, CEOs went from being under fire in the 1960s and 1970s, as Lewis Powell observed, to being lionized as superstars in the 1990s and 2000s, supposedly entitling them to pay on a par with Hollywood celebrities and star athletes. Paul Volcker: The Lake Wobegon Syndrome CEOs and their corporate boards boldly argued that rising CEO pay was merited because CEOs increased shareholder value; moreover, they said, the rise was dictated by the invisible hand of the market. Shareholder activists and scholars dispute this. Princeton economist Paul Krugman suggested that the seedbed for CEO fortunes was the cozy fraternity inside corporate boards of directors. “The key reason executives are paid so much now is that they appoint the members of the corporate board that determines their compensation …,” Krugman said.

 

pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

A much larger share of total corporate profits now went to the financial sector: between 1960 and 1984, the financial sector’s share of domestic corporate profits averaged 17 percent; from then through 2007 it averaged 30 percent, peaking at 44 percent in 2002.106 In this context, there was an enormous increase in dividends paid to stockholders: dividends as a share of the profits of nonfinancial corporations averaged a steady 32 percent between 1960 and 1980; they then rose sharply, and averaged almost 60 percent between 1981 and 2007.107 The new age of finance was often portrayed as diverting corporate funds from potentially productive investment to speculative activity, forcing corporations to look for high immediate rates of return rather than longer-term growth in order to maximize “shareholder value.”108 The new age of finance certainly did involve enormous speculation, and was accompanied by much economic irrationality. Yet, as was proved in the following decade’s remarkable productivity growth in manufacturing, amid an expansion of unprecedented length, it is a mistake to see the dominance of finance in terms of speculation displacing productive activity. The greed that lay behind the assertion of shareholder value, and that drove so many of the corporate mergers and industrial closures, should not blind us to the way in which the broadening and deepening of US financial markets, including their ability to attract so much capital from abroad, expanded the availability of relatively cheap credit for US firms.

Nevertheless these trade deficits, combined with the manifest effect of economic restructuring in industrial shutdowns and layoffs, fomented further widespread angst about “American decline.”43 An insistent theme of more critical analysts was that the new age of finance was a symptom of the failure to resolve the profitability crisis of the 1970s.44 In fact, the weakening of labor provided American capital with competitive flexibility, and the explosion of finance contributed to the restoration of general profitability, both through the disciplinary impact of the “shareholder value” precepts it sponsored within firms and through the allocation of capital across firms. Firms restructured key production processes, outsourced others to cheaper and more specialized suppliers, and relocated to the US south—all as part of an accelerated general reallocation of capital within the American economy. Amid the bravado and almost manic competitiveness of Wall Street, pools of venture capital were made available for the high-tech firms of the “new economy.”

Yet the Daimler executives themselves explicitly saw it in terms of embracing “American spirit, attitude and drive” as well as flexible production methods, venture capital markets, broad distribution networks—and lower taxes.29 Since Daimler’s CEO Jurgen Schrempp had already famously “taken on board the American management values of the 1990s” by the time Daimler-Benz (whose main shareholder was Deutsche Bank) acquired Chrysler in 1998, this “confirmed the survival of German industrial muscle but it was the very reverse of European over American managerialism.”30 Schrempp’s popularization of “shareholder value” was explained by his successor, Dieter Zetsche, as being “one of the mechanisms for putting pressure” on Daimler managers and workers to stay competitive, while its “short-termist” drawbacks were seen as inevitable in light of the fact that “the American system is now more or less a world-wide system.”31 US banks and MNCs were themselves major players in the corporate mergers and acquisitions in Europe that were so important to regional integration.

 

pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Rajesh Aggharwal (1995) argued that that happened because creditors were unwilling to forgive enough debt to make a firm viable; they feared that if they forgave, someone else (like a nonpar-ticipating creditor) would gain what they lost. rioting rentiers The failure of the LBO movement to transform the fundamental nature of the corporate form left shareholders at a bit of a loss. Not satisfied with one of the great long-term bull markets in U.S. history, they continued to whine about "unlocking shareholder value" hidden in the crevices of corporate America. Since leverage turned out to be a very risky way of liberating those hidden dollars, a new strategy was in order. As the decade turned, that strategy turned out to be shareholder activism. Ironically, one of the early signs of the new activism was the anti-apartheid movement's pressure on universities, churches, public pension funds, and other institutional investors to sell the shares of firms doing business in South Africa.

His stab at Gulf was one of the great early moments of the deal decade. During the 1980s, Pickens made relentless fun of CEOs like Andrew Sigler, the boss of Champion International who was managerial America's mouthpiece while the likes of Pickens were wilding their way across the corporate landscape. While Sigler argued that "society" owned firms, not "shareholders," Pickens countered that shareholder value was all. His oil company didn't really drill much — he preferred to explore for oil on the New York Stock Exchange, by buying up other companies with borrowed money (Henwood 1987). Companies that tried to block takeovers with poison pills and other schemes were Pickens' great enemies.-' But in 1995, Mesa found itself under attack by hostile suitors including Pickens' former sidekick David Batchelder.

Maybe the present wave of shareholder assertiveness will wane; the temptation to sell a stock rather than take the trouble of lobbying management may eventually triumph over the apparently meager gains to activism. It may be that even with the institutionalization of ownership, shareholding still remains too dispersed to sustain the kind of "relationship investing" advocated by Calpers, the Twentieth Century Fund (1992), or Robert Monks (1995). Professional rentiers and their bankers will no doubt find a new fad designed to unlock shareholder value, and devise a fresh set of arguments for why their enrichment is synonymous with the common good. Aside from Margaret Blair — though she is far more measured than I — no prominent student of corporate governance has drawn the obvious conclusion from all this research: if outside shareholders serve no useful WALL STREET purpose, then there is no better argument for turning firms over to their workers."

 

pages: 482 words: 122,497

The Wrecking Crew: How Conservatives Rule by Thomas Frank

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affirmative action, anti-communist, barriers to entry, Berlin Wall, Bernie Madoff, British Empire, collective bargaining, corporate governance, Credit Default Swap, David Brooks, edge city, financial deregulation, full employment, George Gilder, guest worker program, income inequality, invisible hand, job satisfaction, Mikhail Gorbachev, Mont Pelerin Society, mortgage debt, Naomi Klein, new economy, P = NP, Plutocrats, plutocrats, Ponzi scheme, Ralph Nader, rent control, Richard Florida, road to serfdom, rolodex, Ronald Reagan, school vouchers, shareholder value, Silicon Valley, stem cell, Telecommunications Act of 1996, the scientific method, too big to fail, union organizing, War on Poverty

When the liberal machine worked, it delivered 5 or 6 percent growth per year—a great deal for the nation, but a handful of crumbs when compared to the return-on-investment that Norquist was talking about. Who will stand up for the liberal state when there are hundred-thousand-fold returns to be made from wrecking it? Money gravitates to right-wing pressure groups like Norquist’s—as well as the Club for Growth, and the Chamber of Commerce—because that is the rational thing for money to do. That’s how you deliver shareholder value. And the conservative movement delivered. But in order to do so, it had to put itself through a remarkable metamorphosis. * * * *According to progressive lore, the Vanderbilt family’s personal public servant was Chauncey Depew, a senator from New York from 1899 to 1911. “Everyone knew he was the Vanderbilts’ creature,” wrote David Graham Phillips in The Treason of the Senate, pp. 72–73.

The classic study of the American corporation in the sixties, John Kenneth Galbraith’s The New Industrial State, described an organization in which shareholders had virtually no role at all and managers answered instead to government and to one another. For average citizens this arrangement made for the greatest period of mass prosperity in the nation’s history. For conservatives, though, it was an intolerable state of affairs, and the upper stratum of society watched as its cut of the nation’s wealth fell to its lowest level ever in the mid-seventies.14 The point of the business enterprise is to maximize shareholder value, they started to scream, nothing else. Schemes to return the corporation to the free-market paths of righteousness and profitability have danced through the conservative imagination ever since. The list of innovations designed to discipline the corporation—to force managers to concern themselves solely with profit—is long and getting longer every day: leveraged buyouts, stock options for senior management, shareholder revolts, stock buybacks, mergers, spinoffs, downsizing, outsourcing, and offshoring, to name a few.15 Lobbying could be a valuable weapon in the war for profit, but conservatives had apparently lost sight of its potential.

See also specific individuals and lobbying firms adversarial fantasy of antigovernment cynicism of attack on government by, as corrupt attack on regulations by appointees of “bad apples” and business capture of government and CNMI as result of rule by College Republicans and rise of debt as weapon of economic optimism of “freedom fighter” ideal of free-market paradises of image of, as rebels and outsiders as industry Iran-Contra and leaders of, as imposters lobbyists and loss of congressional majority by Loudoun County and maximizing shareholder value and mimicking of enemies and misrule by, as consequence of antigovernment philosophy of permanent defeat of liberalism as goal of profits made from activism by revolution vs. liberals and moderates revolving door and South Africa and uprising vs. moderate republicans by Conservative Student Support Foundation Conservative Youth Federation of America conspiracy theories Constitution Party consumer groups Consumer Product Safety Commission container deposit laws contractors “Contract with America” convict labor Coors Copulos, Milton “corporate conscience” movement corporations corruption.

 

pages: 561 words: 114,843

Startup CEO: A Field Guide to Scaling Up Your Business, + Website by Matt Blumberg

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airport security, Albert Einstein, bank run, Broken windows theory, crowdsourcing, deskilling, fear of failure, high batting average, high net worth, hiring and firing, Inbox Zero, James Hargreaves, Jeff Bezos, job satisfaction, Kickstarter, knowledge economy, knowledge worker, Lean Startup, Mark Zuckerberg, minimum viable product, pattern recognition, performance metric, pets.com, rolodex, shareholder value, Silicon Valley, Skype

Build your proposed plan based on what you think the most important objectives are for the company to build shareholder value each year. Answer this question for yourself: “If we did all of this, would we be totally excited at the end of the year?” If the answer is yes, you have a good plan, regardless of the specific metrics. It could be entirely based on revenue or revenue growth. It could be entirely based on EBITDA, operating profit, a combination of the two, or neither. Whatever you do, make the plan as simple and quantitative as possible (even if it’s a series of black-and-white qualitative goals, each worth a percentage of the overall plan). Another guidepost could be uncapped, which, particularly when your metrics are revenue and profit, makes a lot of sense. If you achieve revenue or profit metrics that clearly build a ton of shareholder value beyond plan, you should participate in that success.

Scott Petry, Co-founder, Postini and Authentic8 SUBSTANCE OR STYLE? I had an interesting conversation the other day with a friend who sits on a couple of boards, as do I. We ended up in a conversation about some challenges one of his boards is having with their CEO and the question to some extent boiled down to this: a board is responsible for hiring/firing the CEO and for being the guardians of shareholder value but what does a board do when it doesn’t like the CEO’s style? The biggest challenge I’ve had over the years sitting on other boards is trying to figure out the line of proper governance between being a director and being a CEO. My natural instinct is to speak up, to define and solve problems. That’s not necessarily the right role for an outside director who is there to help guide management (and, sure, ultimately hire and fire management).

The only way to reach that potential is to scale and grow at a rate of at least 25 to 30 percent annually. When growth slips, so does the likelihood of an eventual initial public offering. Given the active M&A market for emerging growth companies, it is extremely difficult to build long-term stand-alone company, especially in the tech sector. The best way to reduce the chances of an unwanted sale while maximizing shareholder value is to grow at the fastest rate possible. In that case, only a premium valuation would cause shareholders to opt for a strategic sale. However, these two outcomes aren’t mutually exclusive. It’s always good practice to consider the possibility of an acquisition before or even after an IPO. Regardless of whether you eventually sell, go public or do both, the imperative for startup CEOs remains the same: grow!

 

pages: 436 words: 141,321

Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage of Human Consciousness by Frederic Laloux, Ken Wilber

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Albert Einstein, augmented reality, blue-collar work, Buckminster Fuller, call centre, carbon footprint, conceptual framework, corporate social responsibility, crowdsourcing, failed state, future of work, hiring and firing, index card, interchangeable parts, invisible hand, job satisfaction, Johann Wolfgang von Goethe, Kenneth Rogoff, meta analysis, meta-analysis, pattern recognition, post-industrial society, quantitative trading / quantitative finance, randomized controlled trial, shareholder value, Silicon Valley, the market place, the scientific method, Tony Hsieh

The paradox, of course, is that while they don’t have Orange’s obsession with growth, Buurtzorg, Patagonia, and the other organizations surveyed in this research have fantastic growth records. Teal practices unleash tremendous energies; when these energies meet a noble purpose and a deep hunger in the world, how could anything but growth ensue? Profit Shareholder value has become the dominant perspective of Orange Organizations. It states that corporations have one overriding duty: to maximize profits. In many countries, this perspective is legally binding; management can be sued for decisions that jeopardize profitability. Under the spell of shareholder value, public companies focus relentlessly on the bottom line. Profits and losses are forecasted month-by-month, quarter-by-quarter, and every element that could increase or reduce the bottom line is analyzed and analyzed some more. The for-profit organizations researched for this book have a different perspective on profit.

The Seven Habits of Highly Effective People, In Search of Excellence, Built to Last, From Good to Great, Competitive Advantage?and the very titles of the books reveal what most leaders today believe to be the primary objective in business: being successful, beating the competition, and making it to the top.120 With that perspective, profit and market share are the name of the game. It’s the essence of the shareholder model: the manager’s duty is not to serve some purpose in the world, but to maximize shareholder value. More recently, we’ve seen the emergence of a new perspective, the stakeholder model, which insists that companies have to answer not only to investors, but also to customers, employees, suppliers, the local community, the environment, and others. An organization’s leadership must mediate between the often-conflicting needs of stakeholders, so that everybody is satisfied in the long run. A number of highly successful companies like Whole Foods and Southwest Airlines are vocal advocates of this more balanced perspective.

They face the prospect of civil claims if they stray from their fiduciary duties by taking environmental or social concerns into account at the expense of shareholders. The duty of directors of B-Corps is extended to include non-financial interests, such as social benefit, concerns of employees and suppliers, and environmental impact. To put it in different words, where C-Corps are based on the (Orange) notion of shareholder value, B-Corps stem from the (Green) concept of stakeholder perspective. In B-Corps, a special provision requires at least two-thirds or more of the votes on the board for changes of control, structure, or purpose. These provisions offer some protection to entrepreneurs who wish to raise capital but fear losing control of their business’s social or environmental mission. As society as a whole shifts toward the Evolutionary-Teal paradigm, I believe we will see many more legal experiments along the line of Holacracy’s constitution and B-Corps.

 

pages: 506 words: 146,607

Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market by Daniel Reingold, Jennifer Reingold

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barriers to entry, Berlin Wall, corporate governance, estate planning, Fall of the Berlin Wall, George Gilder, high net worth, informal economy, margin call, new economy, pets.com, rolodex, Saturday Night Live, shareholder value, short selling, Silicon Valley, stem cell, Telecommunications Act of 1996, thinkpad, traveling salesman

Bernie Ebbers, a one-time milkman and high school basketball coach in rural Mississippi, had taken a tiny long distance company and built it into MCI WorldCom Inc., the second largest telecommunications company in the world behind AT&T. He had become a billionaire, a celebrity, the CEO atop the mountain, at a time when his industry and mine—telecom—was one of the sexiest in the world. But by mid-2002, his company had collapsed in a web of lies and deception. Over $180 billion in shareholder value had evaporated. Over 30,000 WorldCom employees and nearly 200,000 others at related companies had lost their jobs in the telecom bust that followed. And Bernie had gone from a hero to a villain, his reputation as a master of the deal replaced by that of the man who presided over the biggest fraud in history. Although Bernie and I had never much liked each other, we’d struck up an odd camaraderie in the courtroom, where we’d make small talk or discuss the most recent testimony.

Since Salomon would be collecting a fat fee for advising SBC, it would face a conflict of interest between its corporate client, SBC, and its investor clients. Nevertheless, he did brashly add a few sentences that 99 out of 100 compliance officers would have—and should have—deleted. “From an SBC perspective, assuming this line is kept in by our lawyers,” he wrote, “we think the strategic moves they are making will clearly be additive to long-term shareholder value.”7 In effect, he had issued a buy recommendation on SBC, and even Jack thought he was going too far, hinting that that line would be deleted. But it wasn’t. In conversations with my buy-side clients, I also learned that Jack had been telling people that morning that SBC had been planning to announce a deal to purchase an unnamed startup local carrier at the same time as it announced its Ameritech acquisition.

But the two stocks had already moved and some investors had already profited: in the sixteen days before the Journal’s “scoop,” Sprint shares had risen by a total of $5.4 billion, or $6 3/16 per share; and WorldCom shares had dropped by $1.9 billion, or 93 cents per share. And the market value of Sprint PCS, also likely to be acquired in the transaction, rose $6.4 billion, or $6.75 per share during the same 16-day period. Together, that added up to a total of $13.7 billion of shareholder value that had changed hands, with some investors winning thanks to their inside information and others losing thanks to their lack of it. If you or your mutual fund sold shares of Sprint during that time, the buyer of your shares may have been armed with an unfair edge. Alternatively, you or your fund manager may have bought shares of WorldCom without realizing what the seller may have known—that WorldCom shares would likely fall once the deal was announced.

 

pages: 651 words: 161,270

Global Spin: The Corporate Assault on Environmentalism by Sharon Beder

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battle of ideas, business climate, centre right, clean water, corporate governance, Exxon Valdez, Gary Taubes, global village, invisible hand, laissez-faire capitalism, oil shale / tar sands, price mechanism, profit maximization, Ralph Nader, RAND corporation, Ronald Reagan, shareholder value, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, the market place, The Wealth of Nations by Adam Smith, urban planning

According to the AFR, Gilding and Roux recognized that a green investment fund was not a new idea. But in the past “these have usually been ethical or emotional funds,” whereas theirs was to be driven by profit. “It could even invest in chemical companies, or at least the greenest ones.” Their idea was that this new fund would be “marketed off the back of Sydney’s green 2000 Olympics”.43 This venture has since fallen through. The idea of increasing shareholder value by increasing environmental performance, or at least the perception of it, has been promoted by the World Business Council for Sustainable Development, an international corporate lobbying organization set up in 1990 in the lead-up to the Earth Summit. According to Joyce Nelson, author of Sultans of Sleeze: “With the able assistance of public relations giant Burson-Marsteller, a very elite group of business people (including Burson-Marsteller itself ) was seemingly able to plan the agenda for the Earth Summit with little interference from NGOs or government leaders.”44 Its members include the CEOs of Dow, DuPont, Shell, Mitsubishi, Browning-Ferris Industries and many more.

The Council’s 1992 book, Changing Course, quotes Ben Woodhouse, director of global environmental issues at Dow Chemical and a member of the Council’s liaison group, as pointing out that “the degree to which a company is viewed as being a positive or negative participant in solving sustainability issues will determine, to a very great degree, their long term business viability”.45 Woodhouse joined Ecos as CEO having retired after 33 years with Dow Chemical, most recently as Vice-President and Global Director of Issues Management, Crisis Management and Industry Affairs. Woodhouse received special thanks in the acknowledgments of the Council’s 1997 report, Environmental Performance and Shareholder Value, that was written by Jerald Blumberg from DuPont, Georges Blum of the Swiss Bank Corporation, and Age Korsvald of Storebrand—all corporations that featured in the report as case studies. This report promoted the idea that investors were more likely to invest in companies they believed had a better environmental record.46 This claim has since been reinforced by an Ecos study. Following the Business Council’s lead, Ecos, “in association with a leading fund manager in Sydney,” undertook a survey of the top 150 companies on the Australian Stock Exchange in order to develop a portfolio of 50 ‘green’ companies.47 The companies chosen by Ecos and its associates as ‘environmental leaders’ included mining companies with poor reputations amongst environmentalists, such as WMC and Placer Dome (both Ecos clients) and Rio Tinto.

Ecos claims to assist its clients to: “develop and implement business strategies which deliver competitive edge and superior financial performance through the interpretation of key environmental and social business drivers; identify specific new business opportunities and strategies to capture them; [and] increase efficiency and reduce risks and costs through advanced environmental, social and economic performance”. 49 But how real are the improvements in environmental and social performance? To what extent is shareholder value being added through communications rather than substance? Ecos has few, if any, environmental scientists and engineers who can offer environmental solutions; staff tend to be financial, public relations and communications specialists. Staff include: 50 • Michael Ward, CEO and Managing Director of Ecos, formerly media director for OzEmail, an internet provider; • Leah Barrett, former Environmental Affairs Director for TetraPak, a UK packaging company; • Sheena Boughen, an educator, formerly of mining company Placer Dome Asia Pacific; • Cath Bremner, a business analyst from multinational management consulting firm McKinsey & Co; • Sandra Davey, internet communications expert; • Victor Del Rio, “extensive experience in the television and print media industry”; • Kats Fisher, formerly Chief of Staff for US Republican congressman John Porter; • Carl Frankel, writer and journalist, formerly editor of Tomorrow magazine published by the World Business Council for Sustainable Development, WBCSD; • Suse Hahn, financial administration; • Murray Hogarth, formerly environment editor for the Sydney Morning Herald; • Rick Humphries, formerly from Greenpeace International and the Wilderness Society in Australia; • Rebecca Melkman, public relations consultant; • Blair Palese, former Head of Public Relations for the Body Shop International and Director of Communications for Greenpeace; • Don Reed, formerly Director of Corporate Engagement at the World Resources Institute, • Alan Tate, television news reporter before joining Ecos (described in public relations hyperbole in Ecos publicity material as “one of Australia’s preeminent experts in the full range of business, political and scientific aspects of climate change”); • Cathy Zoi, formerly Deputy Director and Chief of Staff of the White House Office on Environment Policy.

 

pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

I am old enough to have known both the CEOs of twenty years ago and those of today. I can assure you that we CEOs of today are not ten times better than those of twenty years ago. What happened? Sadly, all too many members of the inner circle of the business elite participated in the over-expansion of executive compensation. It was justified by a claimed identity between the motivation of the executives and shareholder value. It is reasonably clear now that this theory has left a large number of poorer stockholders, especially including employee stockholders, not only unconvinced, but understandably disillusioned and angry. The policy of vastly increasing executive compensation was also, at least with the brilliant vision of hindsight, terribly bad social policy and perhaps even bad morals.42 A similar if less spectacular progression was under way in Europe.

Given the choice, many executives in the Anglo-American world, whose average tenure at the top has shrunk to very short time periods in recent years, appear to be choosing to invest in share buybacks in preference to plant and machinery. So while bonuses have been going up as these people seize their brief window of opportunity, business investment as a percentage of GDP has been on a persistent declining trend in the US and UK.219 This is a travesty of shareholder value, the supposed objective of modern managers who run publicly quoted companies. It reflects a huge and egregious corporate governance vacuum – another profound imbalance at the heart of modern capitalism. Institutional investors have done little to prevent a pattern of behaviour that damages the long-term value of their investments. This is because, as we saw in Chapter Seven, they are mere proxy capitalists, driven by perverse incentives that ensure that their own interests are misaligned with those of the pension fund beneficiaries and other savers they are supposed to serve.

Chilton 1 railway mania (Britain 1840s) 1 Rajan, Raghuram 1, 2, 3, 4 Rand, Ayn 1, 2 Raphael 1 Reading, Brian 1, 2, 3, 4 Reagan, Ronald 1, 2, 3, 4, 5 Reformation 1, 2 regulators 1 regulatory arbitrage 1 Renaissance 1, 2, 3 Republic (Plato) 1, 2 retail banking 1 Reynolds, Joshua 1, 2 Ricardo, David 1 Richelieu, Cardinal 1 Ring of the Nibelung (Wagner) 1, 2, 3 Ritblat, John 1 Roaring Twenties 1, 2 robber barons 1, 2, 3 Robinson Crusoe (Daniel Defoe) 1 Rockefeller, John D. 1, 2 rogue traders 1 Rolls-Royce 1 Roman republic 1 Roosevelt, Franklin 1 Rosenberg, Harold 1 Roseveare, Henry 1 Roubini, Nouriel 1 Rousseau, Jean-Jacques 1, 2 de Rouvroy, Claude-Henri 1 Royal Exchange (London) 1 Rubens, Peter Paul 1, 2 rural exodus 1 Ruskin, John 1, 2, 3 Saatchi, Maurice 1, 2 Samuelson, Paul 1 Sandel, Michael 1 sarakin banks (Japan) 1 Sarkozy, Nicolas 1 Sassoon, Donald 1 Satyricon (Petronius) 1 Savage, Richard 1, 2 Schama, Simon 1, 2 Schiller, Friedrich 1 Scholes, Myron 1 Schopenhauer 1 Schuman, Robert 1 Schumpeter, Joseph 1, 2, 3, 4, 5, 6, 7 Schwed, Fred 1, 2 second industrial revolution (1920s) 1 Sen, Amartya 1 separation of powers 1 Shakespeare 1, 2, 3, 4, 5, 6 shareholder activists 1 shareholder value 1 shareholders 1 Shaw, George Bernard 1 Sherman Antitrust Act (US 1890) 1 Shiller, Robert 1, 2, 3, 4 Shleifer, Andrei 1 short selling 1, 2 Siemens 1 von Siemens, Werner 1 Sinclair, Upton 1 Skidelsky, Robert 1, 2 Smith, Adam 1, 2, 3, 4, 5, 6, 7, 8 Smith, Sidney 1 Smithers, Andrew 1, 2 Smollett, Tobias 1 social democratic model 1, 2 Société Générale 1 Socrates 1 Solon 1 Sombart, Werner 1, 2 Soros, George 1, 2 Sotheby’s 1 South Sea Bubble 1, 2, 3, 4, 5, 6, 7 sovereign debt 1 sovereign debt crisis (2009) 1 Spain 1, 2, 3, 4, 5, 6 speculation 1 Spenser, Edmund 1 Stabilising an Unstable Economy (Hyman Minsky) 1 Steed, Wickham 1 Stephenson, George 1 Stevens, Wallace 1 Streeck, Wolfgang 1 subprime mortgages 1, 2, 3, 4 Sutter, John 1 Sutton, Willie 1 swarf 1 Sweden 1 Swift, Jonathan 1, 2, 3 Tale of Two Cities (Charles Dickens) 1 Taleb, Nassim Nicholas 1, 2 Talleyrand, Charles Maurice de 1 Taoism 1 tax farming 1 tax havens 1 tax revolts 1 taxation 1 Taylor, John 1 Tea Party movement 1 Tennyson, Alfred 1 Thaler, Richard 1 Thatcher, Margaret 1, 2, 3, 4, 5, 6 Theory of Moral Sentiments (Adam Smith) 1 ‘thingism’ 1 Thomas Aquinas 1, 2 Thompson, E.

 

pages: 307 words: 94,069

Switch: How to Change Things When Change Is Hard by Chip Heath, Dan Heath

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Atul Gawande, Cass Sunstein, clean water, cognitive dissonance, corporate social responsibility, en.wikipedia.org, fundamental attribution error, impulse control, medical residency, Piper Alpha, placebo effect, publish or perish, Richard Thaler, shareholder value, Silicon Valley, Steve Jobs

But in many circumstances this is a false choice for one compelling reason: If a message can’t be used to make predictions or decisions, it is without value, no matter how accurate or comprehensive it is. Herb Kelleher could tell a flight attendant that her goal is to “maximize shareholder value.” In some sense, this statement is more accurate and complete than that the goal is to be “THE low-fare airline.” After all, the proverb “THE low-fare airline” is clearly incomplete—Southwest could offer lower fares by eliminating aircraft maintenance, or by asking passengers to share napkins. Clearly, there are additional values (customer comfort, safety ratings) that refine Southwest’s core value of economy. The problem with “maximize shareholder value,” despite its accuracy, is that it doesn’t help the flight attendant decide whether to serve chicken salad. An accurate but useless idea is still useless. We discussed the Curse of Knowledge in the introduction — the difficulty of remembering what it was like not to know something.

We discussed the Curse of Knowledge in the introduction — the difficulty of remembering what it was like not to know something. Accuracy to the point of uselessness is a symptom of the Curse of Knowledge. To a CEO, “maximizing shareholder value” may be an immensely useful rule of behavior. To a flight attendant, it’s not. To a physicist, probability clouds are fascinating phenomena. To a child, they are incomprehensible. People are tempted to tell you everything, with perfect accuracy, right up front, when they should be giving you just enough info to be useful, then a little more, then a little more. Schemas in Hollywood: High-concept Pitches A great way to avoid useless accuracy, and to dodge the Curse of Knowledge, is to use analogies. Analogies derive their power from schemas: A pomelo is like a grapefruit.

 

pages: 391 words: 102,301

Zero-Sum Future: American Power in an Age of Anxiety by Gideon Rachman

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Asian financial crisis, bank run, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Bretton Woods, BRICs, capital controls, centre right, clean water, collapse of Lehman Brothers, colonial rule, currency manipulation / currency intervention, deindustrialization, Deng Xiaoping, Doha Development Round, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, global reserve currency, greed is good, Hernando de Soto, illegal immigration, income inequality, invisible hand, Jeff Bezos, laissez-faire capitalism, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, offshore financial centre, open borders, open economy, Peace of Westphalia, peak oil, pension reform, Plutocrats, plutocrats, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, trickle-down economics, Washington Consensus, Winter of Discontent

In the nine months after the fall of Lehman Brothers, governments all over the world poured in over $100 billion in direct or indirect aid to keep car plants running.31 In extraordinary circumstances and facing extraordinary pressures, many of the assumptions about business and economics that had prevailed for the previous thirty years were tossed overboard. “Shareholder value,” the doctrine that companies should be managed above all in the interests of their shareholders, had been accepted business wisdom for decades. But suddenly Jack Welch, the most revered American manager of his age and the foremost champion of shareholder value, popped up to announce that it was “a dumb idea.”32 The notion that the market should be allowed to set pay was abandoned. As it became conventional wisdom that the financial crash had been caused, at least in part, by incentives to take excessive risks, so governments all over the world moved to regulate bankers’ pay.

Quoted in Elitsa Vucheva, “Laissez-faire capitalism is finished says France,” EUObserver.com, September 26, 2008. 30. Piergiorgio Alessandri and Andrew Haldane, “Banking on the State,” Bank of England, November 2009. Available from http://www.bankofengland.co.uk/publications/ speeches/2009/speech409.pdf. 31. John Reed, “Back on the road,” Financial Times, June 18, 2009. 32. Francesco Guerrera, “Welch condemns shareholder value focus,” Financial Times, March 12, 2009. 33. Charles Grant, “Liberalism Retreats in China,” Centre for European Reform, London, July 2009. 34. Geoff Dyer and Guy Dinmore, “GE Chief Gives Vent to Frustration Over China,” Financial Times, July 15, 2010. 35. Ian Bremmer, “State Capitalism Comes of Age: The End of the Free Market?,” Foreign Affairs 88:3 (May/June 2009). 36. Ibid. 37.

 

pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

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AltaVista, Andrei Shleifer, asset allocation, Cass Sunstein, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, moral hazard, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, Yogi Berra

The problem with this was not just the hype, or the massive salary packages that CEOs of all stripes were able to pull down during the decade. The problem was that people actually believed the hype, taking it for granted that putting the right individual at the top was the key to corporate success. This idea found its expression in the familiar refrain that a successful CEO such as Cisco’s John Chambers had created “$300 billion in shareholder value,” as if he had single-handedly not just given Cisco its domination of an entire technology sector but also made investors inflate Cisco’s stock price. Of course, the latter assumption was not entirely unjustified. One of the more remarkable surveys done in the 1990s, a Burson Marsteller poll, found that 95 percent of investors said that they would buy a stock based on what they thought of the company’s CEO.

But the data we do have does not exactly inspire. Something like 80 percent of all new products introduced in a given year—products that CEOs presumably have signed off on—do not survive their first twelve months. Corporate profit margins did not increase over the course of the 1990s, even as executive compensation was soaring. And, tellingly, roughly two-thirds of all mergers end up destroying shareholder value, meaning that the acquiring company would have been better off never making the deal. Mergers involve a yes/no decision. They are, as a rule, decided on and initiated by the CEO (and rubber-stamped by the board of directors). They have a relatively clear outcome. And most of the time, making the deal is the wrong decision. This suggests that, at the very least, CEOs are not in general extraordinary decision makers.

Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production (New York: HarperCollins, 1991). Keller, Rude Awakening: 101. Frederick Winslow Taylor is cited in Stephan H. Haeckel, Adaptive Enterprise (Boston: Harvard Business School Press, 1999): 30. Rakesh Khurana, Searching for a Corporate Savior (Princeton: Princeton University Press, 2002). As an example, this article claims that Chambers has “created more shareholder value” than virtually any other high-tech CEO; see http://www.edgewater.com/site/news_events/in_the_news_articles/042501_VARBusiness.html. Results from the Burson Marsteller 2001 survey “Building CEO Capital” available at: http://www.bm.com/insights/ceo_rep.html. See, among others, Mark Sirower, The Synergy Trap (New York: The Free Press, 1997). The value of the average firm that is acquired in a merger does not shrink, so perhaps you could say that CEOs of acquired firms are doing a good job.

 

pages: 452 words: 110,488

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead by David Callahan

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1960s counterculture, affirmative action, corporate governance, David Brooks, deindustrialization, East Village, forensic accounting, full employment, game design, greed is good, high batting average, housing crisis, illegal immigration, income inequality, job satisfaction, market fundamentalism, McMansion, microcredit, moral hazard, new economy, New Urbanism, offshore financial centre, oil shock, Plutocrats, plutocrats, postindustrial economy, profit maximization, profit motive, RAND corporation, Ray Oldenburg, rolodex, Ronald Reagan, shareholder value, Silicon Valley, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, Thorstein Veblen, War on Poverty, winner-take-all economy, World Values Survey, young professional

See "Pew Values Update: American Social Beliefs, 1997–1987," The Pew Research Center for the People and the Press, 20 April 1998. [back] 5. Neil Fligstein and Taek-Jin Shin, "The Shareholder Value Society: A Review of the Changes in the Working Conditions and Inequality in the U.S., 1976–2000," unpublished paper. [back] 6. David Brooks, "The Triumph of Hope," New York Times, 12 January 2003. [back] 7. On anxiety, see Robert Putnam's analysis of DDB Needham Life Style Survey data, Bowling Alone: The Collapse and Revival of American Community (New York: Simon & Schuster, 2000), 475. On job satisfaction, see Fligstein and Shin, "The Shareholder Value Society." Evidence of growing insecurity and anxiety is by no means ironclad and this remains a disputed point among scholars. See, for example, Kenneth Deavers, "Downsizing, Job Insecurity, and Wages: No Connection," Employment Policy Foundation, May 1998.

They are on AEI's board because their companies are among the dozens that donate handsomely to AEI, funding a steady stream of highbrow studies that trash government regulation, advocate repealing taxes on corporations and the rich, propose ways to dismantle America's social safety net—and even seek to rehabilitate social Darwinist ideas about the innate superiority of some groups of human beings over others, as AEI did when it supported Charles Murray's research for his controversial book on human intelligence, The Bell Curve. "Corporations provide important input to AEI on a wide variety of issues," admits AEI's annual report. Yet what serious think tank would want input from entities designed solely to maximize shareholder value? Self-interest is why so many corporations give money to AEI—over $5 million a year—but self-interest is antithetical to what sound scholarship is all about. Even as the American Enterprise Institute has tacked to the right over the past two decades, it remains known as one of the more reasonable conservative think tanks. A number of well-respected scholars still reside at AEI. The Heritage Foundation, with nearly twice the annual budget of AEI, has no such reputation.

 

pages: 366 words: 94,209

Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity by Douglas Rushkoff

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3D printing, Airbnb, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Burning Man, business process, buy low sell high, California gold rush, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, centralized clearinghouse, citizen journalism, clean water, cloud computing, collaborative economy, collective bargaining, colonial exploitation, Community Supported Agriculture, corporate personhood, crowdsourcing, cryptocurrency, disintermediation, diversified portfolio, Elon Musk, Erik Brynjolfsson, ethereum blockchain, fiat currency, Firefox, Flash crash, full employment, future of work, gig economy, Gini coefficient, global supply chain, global village, Google bus, Howard Rheingold, IBM and the Holocaust, impulse control, income inequality, index fund, iterative process, Jaron Lanier, Jeff Bezos, jimmy wales, job automation, Joseph Schumpeter, Kickstarter, loss aversion, Lyft, Mark Zuckerberg, market bubble, market fundamentalism, Marshall McLuhan, means of production, medical bankruptcy, minimum viable product, Naomi Klein, Network effects, new economy, Norbert Wiener, Oculus Rift, passive investing, payday loans, peer-to-peer lending, Peter Thiel, post-industrial society, profit motive, quantitative easing, race to the bottom, recommendation engine, reserve currency, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, social graph, software patent, Steve Jobs, TaskRabbit, trade route, transportation-network company, Turing test, Uber and Lyft, Uber for X, unpaid internship, Y Combinator, young professional, Zipcar

We might better call stocks with no dividends “growth traps.” If a company is depending entirely on quarter-over-quarter growth in order to deliver value to its shareholders, it is in a much more precarious position—particularly in a contracting economy—than a company that has managed to achieve sustainable prosperity. It’s one thing to grow. It’s another to be dependent on growth in order to pay back debts and generate shareholder value. Or, worse, to simply promise that real earnings are coming at some point in the future. The disproportionate emphasis on share price is magnified further by our increasingly digital stock exchanges. Algorithms can trade only on changes in share price. They depend on volatility, not consistent returns. To an algorithm, a stable stock market is a profitless one. And a high-speed, high-frequency trading program never sticks around long enough to collect its dividend, anyway.

In other words, even if someone like Elon Musk or Richard Branson creates an earth-shatteringly beneficial new transportation or energy technology, the corporation he creates to make and market it may itself cause more harm than it repairs. Yes, such corporations bail some water out of the sinking ship, but they are, themselves, the cause of the leak. In fact, none of these new corporate structures addresses the central flaw that precedes each of runaway capitalism’s social, environmental, or economic excesses: the idea that more profit equates to more prosperity. Profit might lead to more shareholder value, but it doesn’t necessarily maximize the wealth that could be generated by the enterprise over the long term and for everyone involved—even its founders. That’s why the not-for-profit, or NFP, might ultimately be the best model for the future of enterprise on a digital landscape. Many mistake the term “nonprofit” (as the not-for-profit is also called) to mean “charity” or “volunteer.” This isn’t the case.

“Febreze Embracing C+D to Become a Billion $ Brand,” pgconnectdevelop.com, January 1, 2013. 49. Clark Gilbert, Matthew Eyring, and Richard N. Foster, “Two Routes to Resilience,” Harvard Business Review, December 2012. 50. Field Maloney, “Is Whole Foods Wholesome?” slate.com, March 17, 2006. 51. Lynn Forester de Rothschild, “Capitalists for Inclusive Growth,” project-syndicate.org, April 17, 2013. 52. Ibid. 53. Ibid. 54. Steven Pearlstein, “How the Cult of Shareholder Value Wrecked American Business,” washingtonpost.com, September 9, 2013. 55. Oliver Staley and Hui-Yong Yu, “Hilton Sells Itself to Blackstone for $20 Billion,” bloomberg.com, July 4, 2007. 56. Henry Sender, “How Blackstone Revived Hilton Brand,” ft.com, August 19, 2013. 57. David Gelles, “A Surprise from Hilton: Big Profit for Blackstone,” nytimes.com, December 12, 2013. 58. Nanette Byrnes and Peter Burrows, “Where Dell Went Wrong,” businessweek.com, February 18, 2007. 59.

 

pages: 330 words: 91,805

Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Reinventing Capitalism by Robin Chase

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3D printing, Airbnb, Amazon Web Services, Andy Kessler, banking crisis, barriers to entry, bitcoin, blockchain, Burning Man, business climate, call centre, car-free, cloud computing, collaborative consumption, collaborative economy, collective bargaining, congestion charging, crowdsourcing, cryptocurrency, decarbonisation, don't be evil, Elon Musk, en.wikipedia.org, ethereum blockchain, Ferguson, Missouri, Firefox, frictionless, Gini coefficient, hive mind, income inequality, index fund, informal economy, Internet of things, Jane Jacobs, Jeff Bezos, jimmy wales, job satisfaction, Kickstarter, Lean Startup, Lyft, means of production, megacity, Minecraft, minimum viable product, Network effects, new economy, Oculus Rift, openstreetmap, optical character recognition, pattern recognition, peer-to-peer lending, Richard Stallman, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, self-driving car, shareholder value, sharing economy, Silicon Valley, six sigma, Skype, smart cities, smart grid, Snapchat, sovereign wealth fund, Steve Crocker, Steve Jobs, Steven Levy, TaskRabbit, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Turing test, Uber and Lyft, Zipcar

Advocates for pure unregulated capitalism, where the only thing that matters is money, will build platforms that maximize shareholder value. If platforms are funded and run to please traditional private sector investors, particularly those looking for short-term gains, things that have no financial value (known as externalities), such as social benefits and environmental damages, won’t enter into the calculation. The power and income inequality that exists today will likely continue, and the innovation potential of Peers Inc will fall short. These platforms will lead short (if profitable) lives. “Benevolent dictators” are cited as an alternative to bottom-line-focused CEOs. Google and Facebook come to mind. Their founders were able to retain majority control, giving them leeway to manage far more than simple shareholder value. CEOs who choose to deliver on a triple bottom line (people, planet, profit) are great … except that they eventually have to leave.

In economic theory a public good is non-rivalrous (like a lighthouse, one person using it doesn’t preclude anyone else from benefiting or diminish the benefits anyone else can get) and non-excludable (like national defense, everyone gets the benefit, whether or not they pay for it). Gruen then asked us to think about Google, Facebook, and Twitter. They are free and open to everyone. No matter how many people partake in them, they can’t be used up. Here, I thought, was a striking insight: The private sector is beginning to see that investments in maximally open platforms have the potential to deliver the greatest shareholder value. Then Gruen said something remarkable: “Private companies are delivering important public goods. Public goods are assembling themselves without the government.”24 Consider Bitcoin’s creation of a currency, an activity that we really thought was in the government purview. As Nicholas puts it, there is a spectrum of possibility as to how public goods get created, ranging from voluntary, opt-in “emergent public goods” to those that are protected through coercion (rules, regulations, and taxes).

 

pages: 176 words: 55,819

The Start-Up of You by Reid Hoffman

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Airbnb, Andy Kessler, Black Swan, business intelligence, Cal Newport, Clayton Christensen, David Brooks, Donald Trump, en.wikipedia.org, fear of failure, follow your passion, future of work, game design, Jeff Bezos, job automation, late fees, Mark Zuckerberg, Menlo Park, out of africa, Paul Graham, Peter Thiel, recommendation engine, Richard Bolles, risk tolerance, rolodex, shareholder value, side project, Silicon Valley, Silicon Valley startup, social web, Steve Jobs, Steve Wozniak, Tony Hsieh, transaction costs

“I believe I am skilled at X, I believe I want to do Y, I believe the market needs Z.” All plans contain these sorts of assumptions; good ones make them explicit so that you can track them over time. Essentially, you want to make explicit the things that need to be true for your plan to work. These hypotheses should lead you to specific actions. Companies often have broad missions like maximizing shareholder value, but as Jack Welch has said, maximizing shareholder value “is not a strategy that tells you what to do when you come to work every day.”4 Similarly, you may have broad aspirations, like “help interesting people do interesting things” or “design human ecosystems.” But real planning means plotting the specific steps it will take to make those aspirations happen. Prioritize Learning Many people defer collecting full-time wages by spending twenty-three consecutive years in school.

 

pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Therefore, the required ROE, which we introduced in Chapter 7 as a benchmark return that shareholders expect to receive on average, is also lower when banks have more equity. If the decrease in average ROE and the decrease in required ROE are the same, the compensation shareholders receive is still sufficient for the risk they bear. Shareholders are harmed only if the average ROE actually decreases by more than the required ROE. Target ROE and Shareholder Value Bankers often set high figures for target ROE that they promise their shareholders they will try to achieve. They also tell politicians, regulators, and the public that shareholders “require” them to strive to hit these targets. In the years before the financial crisis, Josef Ackermann, the CEO of Deutsche Bank from 2002 to 2012, repeatedly announced that an ROE of 25 percent before taxes was the benchmark for a competent investment bank and that Deutsche Bank was aiming to meet this benchmark, at least on average, over a number of years.12 On a more modest scale, Bob Diamond, CEO of Barclays from 1996 to 2012, announced in April 2011 that he was targeting a 13 percent ROE by 2013.13 These statements presume that ROE is a meaningful measure of performance and that it makes sense to set benchmarks and targets for ROE.

In the years before the financial crisis, Josef Ackermann, the CEO of Deutsche Bank from 2002 to 2012, repeatedly announced that an ROE of 25 percent before taxes was the benchmark for a competent investment bank and that Deutsche Bank was aiming to meet this benchmark, at least on average, over a number of years.12 On a more modest scale, Bob Diamond, CEO of Barclays from 1996 to 2012, announced in April 2011 that he was targeting a 13 percent ROE by 2013.13 These statements presume that ROE is a meaningful measure of performance and that it makes sense to set benchmarks and targets for ROE. However, if no account is taken of how much debt has been taken to create leverage and, more generally, of the risk of the equity per dollar invested, ROE is not a meaningful measure of performance, nor does it measure shareholder value. If no account is taken of the market environment, such as market rates of interest, comparison of ROE with a given benchmark is also not meaningful. Implying otherwise is another article of the bankers’ new clothes. Mr. Ackermann’s 25 percent would have meant something different at a time when the interest rate on long-term bonds was 6 percent than it does at a time when this interest rate is at 2 or 3 percent.

Haldane (2012b) compared the mentality of bankers, the desire to “keep up with the Goldmans,” to that of elephant seals who compete, in a “winner-takes-all” manner, to mate with all the females, in the process becoming excessively bloated. Competition between banks to achieve higher returns has led banks to take more risk and to use more leverage. 31. See, for example, “Citi Chief on Buyouts: ‘We’re Still Dancing,’ ” New York Times, July 10, 2007. 32. For a skeptical view of the shareholder value concept, see Stout (2012). On governance problems, including ineffective boards that often lack expertise, see Pozen (2009, Chapter 11), Smith (2010, Chapter 7), Allison (2011, loc. 474), and Stanton (2012, Chapter 4). Mayo (2011, loc. 3226–29) states, “Boards are typically responsible for three things: (1) hiring a CEO and evaluating that person’s compensation and performance; (2) setting an overall risk appetite at the bank; and (3) providing the company with some kind of independent oversight.

 

pages: 306 words: 78,893

After the New Economy: The Binge . . . And the Hangover That Won't Go Away by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Asian financial crisis, barriers to entry, borderless world, Branko Milanovic, Bretton Woods, capital controls, corporate governance, correlation coefficient, credit crunch, deindustrialization, dematerialisation, deskilling, ending welfare as we know it, feminist movement, full employment, gender pay gap, George Gilder, glass ceiling, Gordon Gekko, greed is good, half of the world's population has never made a phone call, income inequality, indoor plumbing, Internet Archive, job satisfaction, joint-stock company, Kevin Kelly, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, manufacturing employment, means of production, minimum wage unemployment, Naomi Klein, new economy, occupational segregation, pets.com, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, statistical model, structural adjustment programs, Telecommunications Act of 1996, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, total factor productivity, union organizing, War on Poverty, women in the workforce, working poor, Y2K

According to Cappelli, it's not enough to teach students "responsibility, self-discipline, and adherence to rules"; schools must emit graduates with good attitudes—which, as we've learned, means being cheerful, self-sacrificing, and prosocial. Though he is too respectable to say so, Cappelli makes it clear that talk of teaching "values" in the classroom is in part about the most important value of aU, shareholder value. Employers, CappeUi and his sources say, should use fear of "losing face" as a motivational tool, and, through "role modeHng," use "conformity pressures [to] produce a positive result." It's not enough that employers control your time; they should control your mind and heart as well. But if that doesn't work, there's always snooping. Ideologists say the new workplace is more spontaneous and less hierarchical than the old one, friendlier to self-expression.

The Myth of Asia's Mimcley Foreign Affairs, November <web.mit.edu/ krugman/www/myth. html>. Landefeld, J. Steven, and Bruce T. Grimm (2000). "A Note on the Impact of Hedon-ics and Computers on Real GDP," Survey of Current Business, December, pp. 17—22 <www.bea.doc.gov/bea/articles/beawide/2000/1200hm.pdf^. Lev, Baruch (n.d.). "Communicating Knowledge Capabilities," unpublished paper <www.stern.nyu.edu/~blev/communicating.doc>. (2000). "Knowledge and Shareholder Value," unpublished paper <www.stern.nyu.edu/ -blev/knowledge&shareholdervalue. doc >. - (2001). Intangibles: Management, Measurement, and Reporting (Washington: Brookings Institution), forthcoming. Lewis, Peter H. (2000). "Wireless Valhalla: Hints of the Cellular Future," NewYork Times, jub/ 13,p.Gl. Lex (2003). "AT&T Wireless," Financial Times, January 28. Linder, Marc (2000). Moments Are the Elements of Profit: Overtime and the Deregulation of Labor Under the Fair Labor Standards Act (Iowa City: Fanpihua Press).

 

pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, laissez-faire capitalism, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, mortgage debt, mortgage tax deduction, mutually assured destruction, new economy, Nick Leeson, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

The government adopted City models of behavior and the vocabulary to go with them—the language of targets and goals being a sign of uncritical and uninformed governmental Cityphilia. David Kynaston, the author of a magisterial four-volume history of the City of London, comes in his fourth book to discuss “City cultural supremacy” and concludes that “in all sorts of ways (short-term performance, shareholder value, league tables) and in all sorts of areas (education, the NHS and the BBC, to name but three), bottom-line City imperatives had been transplanted wholesale into British society.”6 Successive governments gave the City more or less everything it wanted. This process began with Margaret Thatcher’s election in 1979: one of the incoming government’s first actions, practically as well as symbolically important, was the abolition of exchange controls, which opened the United Kingdom to the international flow of capital.

The car industry makes cars, the television industry makes TV programs, the publishing industry makes books, and with a bit of luck they all make money too, but for the most part the people engaged in them don’t regard money as the ultimate purpose and justification of what they do. Money is a by-product of the business, rather than its fundamental raison d’être. Who goes to work in the morning thinking that the most important thing he’s going to do that day is to maximize shareholder value? Ideologists of capital sometimes seem to think that that’s what we should be doing—which only goes to show how out of touch they are. Most human enterprises, especially the most worthwhile and meaningful ones, are in that sense industries, focused primarily on doing what they do; health care and education are both, from this anthropological perspective, industries. At least that’s what they are from the point of view of the people who work in them.

 

pages: 283 words: 73,093

Social Democratic America by Lane Kenworthy

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affirmative action, Affordable Care Act / Obamacare, barriers to entry, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

But in the 2000s the bloom fell off the rose.56 The early years of recovery after the 2001 recession featured feeble job growth, and things didn’t improve much after that. By the peak year of the 2000s business cycle, 2007, the employment rate had not yet reached its prior peak.57 And during the subsequent economic crash nearly all the progress of the 1980s and 1990s was erased. What happened? We don’t know. It may be that economic and institutional forces—strong competition, the shareholder value orientation in corporate governance, Wall Street’s appetite for downsizing, weakened unions—have made management reluctant to hire.58 Perhaps it was manufacturing jobs fleeing to China and service jobs shifting to India.59 Or perhaps the computer-robotics revolution finally began to hit full force.60 Maybe it was a combination of these and other factors. Whatever the cause, it doesn’t bode well for employment going forward.

Cambridge, MA: National Bureau of Economic Research. Fishman, Charles. 2012. “The Insourcing Boom.” Atlantic, December. Fitzgerald, Joan. 2006. Moving Up in the New Economy: Career Ladders for U.S. Workers. Ithaca, NY: ILR Press. Fletcher, Michael A. 2013. “401(k) Breaches Undermining Retirement Security for Millions.” Washington Post, January 15. Fligstein, Neil and Taek-Jin Shin. 2003. “The Shareholder-Value Society.” Indicators, Fall: 5–43. Florida, Richard and Martin Kenney. 1990. The Breakthrough Illusion. New York: Basic Books. Fölster, Stefan and Magnus Henrekson. 2001. “Growth Effects of Government Expenditure and Taxation in Rich Countries.” European Economic Review 45: 1501–1520. Frank, Robert H. 2008. “Progressive Consumption Tax.” Democracy, Spring: 21–23. Freeman, Richard B. and James L.

 

pages: 274 words: 66,721

Double Entry: How the Merchants of Venice Shaped the Modern World - and How Their Invention Could Make or Break the Planet by Jane Gleeson-White

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Affordable Care Act / Obamacare, Bernie Madoff, Black Swan, British Empire, carbon footprint, corporate governance, credit crunch, double entry bookkeeping, full employment, Gordon Gekko, income inequality, invention of movable type, invention of writing, Islamic Golden Age, Johann Wolfgang von Goethe, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, means of production, Naomi Klein, Ponzi scheme, shareholder value, Silicon Valley, Simon Kuznets, spice trade, spinning jenny, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, traveling salesman, upwardly mobile

All three companies attempted to expand their market share as rapidly as possible, a strategy which entailed significant risks which were not clearly reflected in their financial statements, as head of accounting at the University of Western Sydney Philip Ross explains. The risk inherent in the business practices of ABC Learning had been pointed out to the Australian Securities and Investments Commission (ASIC) in 2006 by a complainant in the following statement: ‘It’s suggested that the methods of financial reporting being employed here are designed to artificially create apparent shareholder value, when, in fact, that shareholder value associated with the child-care licences (92 percent of net assets) is based entirely on future net cash flows of the company, which may or may not be realised.’ Needless to say, accounting for future possible cash flows in the company’s present assets is seriously misleading to potential investors. But instead of acknowledging this, ASIC, the national watchdog, replied in 2006: ‘after carefully considering the results of these inquiries, ASIC will not be taking any further action in relation to the issues you have raised’.

 

pages: 244 words: 79,044

Money Mavericks: Confessions of a Hedge Fund Manager by Lars Kroijer

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Bernie Madoff, capital asset pricing model, diversification, diversified portfolio, family office, fixed income, forensic accounting, Gordon Gekko, hiring and firing, implied volatility, index fund, Jeff Bezos, Just-in-time delivery, Long Term Capital Management, merger arbitrage, new economy, Ponzi scheme, risk-adjusted returns, risk/return, shareholder value, Silicon Valley, six sigma, statistical arbitrage, Vanguard fund, zero-coupon bond

To Lennart’s credit, he listened to my arguments and his main objection was to the idea of selling companies that were just beginning to turn around before he had had time to correct things. At one point in the meeting he even said: ‘So you don’t even think I should sit here? Should I be next door buying warrants?’ Investors will often hear hedge funds discuss investor activism. Although activism is less prevalent in Europe than in the USA, some investors have been very successful in steering (or forcing) companies in the right direction of creating shareholder value. But sometimes I think activism is like another hedge-fund buzzword used by managers to publicly illustrate to investors that the managers are somehow doing something to improve performance. In my experience we found it more productive to approach management as a friendly shareholder with productive suggestions, almost in lieu of an investment banker. Over the years we spoke to company management on an ongoing basis and perhaps wrote seven to eight letters to boards of companies, but always with the prior knowledge of management, and always trying to be friendly and forthcoming.

It is a wildly overused term but we felt that we had helped to create value for the Bure shareholders and bondholders. That we made good money along the way was obviously the main selfish objective but the feeling that we had actively helped make this happen gave a great sense of meaning to what we do. Corporate finance summary For those with an interest in corporate finance, here is a brief explanation of why Bure’s actions were likely to enhance shareholder value and why we could profit from them. Soon after the shares, warrants and bonds were issued it was obvious that there was a lot for us to do. The bonds traded at a very high yield to maturity, and the warrants traded below their intrinsic value (i.e., you could buy a warrant, exercise it, and pay less than the share price – this should not theoretically happen, but the exercise process took about two or three weeks).

 

pages: 72 words: 21,361

Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy by Erik Brynjolfsson

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Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business process, call centre, combinatorial explosion, corporate governance, crowdsourcing, David Ricardo: comparative advantage, easy for humans, difficult for computers, Erik Brynjolfsson, factory automation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, hiring and firing, income inequality, job automation, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, Kickstarter, knowledge worker, labour mobility, Loebner Prize, low skilled workers, minimum wage unemployment, patent troll, pattern recognition, Ray Kurzweil, rising living standards, Robert Gordon, self-driving car, shareholder value, Skype, too big to fail, Turing test, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, winner-take-all economy

They can develop new business models that combine the swelling numbers of mid-skilled workers with ever-cheaper technology to create value. There has never been a worse time to be competing with machines, but there has never been a better time to be a talented entrepreneur. Entrepreneurial energy in America’s tech sector drove the most visible reinvention of the economy. Google, Facebook, Apple, and Amazon, among others, have created hundreds of billions of dollars of shareholder value by creating whole new product categories, ecosystems, and even industries. New platforms leverage technology to create marketplaces that address the employment crisis by bringing together machines and human skills in new and unexpected ways: eBay and Amazon Marketplace spurred over 600,000 people to earn their livings by dreaming up new, improved, or simply different or cheaper products for a worldwide customer base.

 

pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

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accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mutually assured destruction, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk-adjusted returns, risk/return, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

Financial obfuscation was the best idea that MBA-toting managers could offer. It was the quick fix that everybody wanted. Dealers always understand that making managers look good translates into uber fees. They jumped at the chance; they coined a sexy term for it all – ‘equity capital management’. Firms needed to manage their equity just like they managed other risks – interest rates, currency, commodity. The mantra of shareholder value hid the fundamental reality. It was about manipulating the company’s own share price. In 1992, Cemex (the second largest industrial company in Mexico) purchased two Spanish cement manufacturers. Cemex’s stock price plunged by 37%; its earnings had actually increased. The acquisitions would provide incremental earnings growth and were strategically necessary. Investors who had purchased Cemex as a ‘pure play’ on Mexico did not like the Spanish acquisitions.

There didn’t seem much blue sky for the investor. Issuers couldn’t believe their luck. The reset preference shares qualified as equity capital. The issuer got equity at a cost of around 7.00% when issuing shares would have cost around 18%. Future earnings growth and capital price appreciation didn’t go to the reset preference shareholders. It was all reserved for the shareholders. Management pontificated on EPS accretion, shareholder value and dynamic equity capital management. The investors had in effect agreed to buy a bond and had agreed to underwrite the shares of the issuer in the future. They had done all this for a bit of extra return. If they understood how the deals worked, then they probably consoled themselves with the thought that the issuers were high quality (AA or better rated issuers). In the 1980s, most major Japanese banks were rated AAA, the highest credit quality.

It is the ‘push Banks can only buy protection from and pull’ of credit markets. other banks. Bank regulations framed by the BIS (Bank of International Settlements) mean that banks have to hold capital against credit risk. If a bank lends to a company then it has to hold a minimum of $8 in share capital for every $100 of the loan. If it hedges the risk then it needs to reduce the amount of capital it must hold. The bank has to pay a fee that reduces its return. In the world of shareholder value, it needs to reduce capital or its RAROC will go down. Only if banks hedge with an OECD government or bank will capital be reduced. In practice, this means that you have to buy protection from OECD banks. The bank also has to be of good credit quality. It doesn’t help to buy protection from a bank that is likely to default before the reference entity defaults. There aren’t enough well-rated, OECD banks to go around.

 

pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

Remuneration committees in leading public companies sign off pay deals to CEOs that are breathtaking. For instance, Bart Becht, CEO of Reckitt Benckiser, collected £36.8 million in 2009 in base pay, bonuses and share options – while exercising his rights to more millions of share options on top. The Guardian computed that his pay was 1374 times that of the average worker in his company. The doctrine is that because he maximised shareholder value successfully he is more than worth the money. But Mr Becht, while clearly a good chief executive, is also a very lucky one. When CEOs get disproportionately paid on this scale – up to ten times more than his peers – more generally there is strong evidence that the recipients have hit the jackpot: paid for being in the right place at the right time but with no accompanying penalties if the luck runs the other way.11 There is also evidence that the comparisons used by remuneration committees to support pay on this scale have been creatively deployed, with some CEOs imaginatively stretching the definition of their peers to include bigger, more complex rivals – inevitably handsomely paid.12 Prevalent in the US, this practice, along with pay, is becoming more widespread in Britain.

Corporate and financial Britain cannot pay senior executives millions of pounds while the rest of the population tightens its belt. If it insists on doing so, there will be a revolt from below. Jack Welch, former CEO of General Electric, has pronounced that it is stupid to think that the sole purpose of a company is to maximise value for its shareholders, the formal reason that is trotted out for such exorbitant executive pay. ‘Shareholder value is a result, not a strategy,’ he declared, abandoning the credo he had championed for twenty-five years. ‘Your main constituencies are your employees, your customers and your products.’5 British companies have yet to get the message. Too few place their business purpose at the heart of their operations, or recognise the need for fairness. Directors remain overwhelmingly concerned with their own remuneration packages before thinking about anything else.

The reason, as CEO Tony Hayward concedes, is that BP developed a management style which has made a ‘virtue of doing more for less’ – cutting corners and taking excessive risks because the priorities have been financial rather than organisational integrity. Certainly the era of his predecessor John Browne was defined by aggressive cost-cutting and deal-making, so that BP’s share price quadrupled. Hayward tried vainly to row back – but too late. Today the company faces takeover and dismemberment, or at best a long struggle to win back its reputation. Shareholder value maximisation has endangered a great British corporate asset. There needs to be change. Unfortunately, British politics has never been good at squaring up to vested interest groups and challenging the sometimes absurd assumptions on which they build their arguments in the wider public interest. Nor is it good at long-term planning for the future. Most politicians in any democracy find it hard to think beyond the next election.

 

pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

In contrast, in Europe (where share ownership has traditionally been less dispersed), corporate boards have less to fear if they interpret their duties more broadly than making money for shareholders.3 Institutional structures encourage less focus on shareholder value. In Germany, for example, the supervisory board (Aufsichtsrat) of a corporation must by law, in most kinds of companies, have members representing labor, and boards often include representatives of labor unions.4 Surely such boards will be less focused on maximizing shareholder value. There is of late a movement under way in the United States to persuade state governments to create what is envisioned as a “fourth sector,” comprising a new kind of corporation—called a bene t corporation—that includes in its charter acknowledgment of some broader cause, beyond simply making a pro t.

Implicit in much e cient-markets theorizing by economists is the notion that those who trade in markets are perfect rational calculators. Such a belief gives economic thinking a solid core. Yet our belief in the perfect applicability of the e cient markets theory goes even further than that, to an impulse to simplify the mission we expect businesspeople to pursue, and hence to moral implications. For example, consider the theory that corporate executives should take as their sole goal the maximization of shareholder value. If that is what executives do, it greatly simpli es the theory. One single objective, measured by the price of a share, becomes the driver of everything, just as energy in physics is the driver of everything, and this objective manifests itself, subject to mathematical transformations, in every other financial variable. As another example, our faith in e cient markets seems to have given rise to the notion of Ricardian equivalence, as expounded most notably by Harvard economist Robert Barro, re ning the work of nineteenth-century economist David Ricardo, who had suggested the concept over a century earlier.6 The principle is that government de cit spending to stimulate the economy is in a sense a trick, for savvy taxpayers will know that any such expenditure needs to be followed by increased taxes to pay back the debt.

 

pages: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

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asset-backed security, bank run, banking crisis, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, housing crisis, Maui Hawaii, mortgage debt, naked short selling, NetJets, shareholder value, short selling, Skype, too big to fail, Y2K

I am glad to have this chance to spend some time with you today as we take a look at our 2007 results and what 2008 holds for WaMu. First off, I have been informed we have a quorum so I will officially call the meeting to order. “Clearly, 2007 was an extraordinarily difficult year for WaMu but, you know, today I believe that we are at the beginning of the road back, back on a path of profitability and to creating the shareholder value that we all desire. Now, I expect that when we look back a year from now we are going to view April 2008 as a turning point in this company’s history. “And let me tell you why I think this is the case. What has happened the last couple of years in the mortgage and credit markets has never happened before in my lifetime. In fact, nothing of this scale has occurred since the Great Depression.

And what I have to say is somewhat difficult. “To our great regret and alarm, Washington Mutual has become a poster child of board failure to protect the interests of shareholders. Specifically, from 2005 through 2007, the finance committee knew the housing bubble would burst, would collapse, yet allowed Washington Mutual to expand its Option ARM and subprime exposure, leading to a devastating 75 percent decline in shareholder value. Our board of directors, chaired by yourself, CEO, Mr. Killinger, joined Ms. Pugh’s committee and ignored the risks to shareholders. Ms. Pugh’s committee and the board failed to protect shareholders.” The anger poured out of shareholders, one after the other. Said another activist: “Sadly, here at WaMu, we really feel we have a board that has lost its way. It’s no longer a WaMu board; it’s more like a ‘WaMe’ board, short for ‘What’s in it for me?’

Not only had he raised money, he had raised money from David Bonderman, whose investment decisions were respected in the financial world. This capital, Killinger said in announcing the deal, “will position us for a return to profitability as these elevated credit costs subside. With the support of these investors, we have every confidence in our ability to deal with today’s market conditions and restore shareholder value.”59 The money had placated the OTS, which believed WaMu was in stable condition. But the private equity infusion had not been Bair’s preference, and the FDIC was now still left with the possibility that WaMu might fail, affecting the deposit insurance fund. The agency would be stuck with cleaning up its mess. While that possibility was dimmer now, it still existed. The Wall Street Journal, citing unnamed sources, soon broke the news that JPMorgan had made a play for WaMu—and had been uncharacteristically spurned.

 

pages: 319 words: 89,477

The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion by John Hagel Iii, John Seely Brown

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Albert Einstein, Andrew Keen, barriers to entry, Black Swan, business process, call centre, Clayton Christensen, cleantech, cloud computing, corporate governance, Elon Musk, en.wikipedia.org, future of work, game design, George Gilder, Isaac Newton, job satisfaction, knowledge economy, knowledge worker, loose coupling, Louis Pasteur, Malcom McLean invented shipping containers, Maui Hawaii, medical residency, Network effects, packet switching, pattern recognition, pre–internet, profit motive, recommendation engine, Ronald Coase, shareholder value, Silicon Valley, Skype, smart transportation, software as a service, supply-chain management, The Nature of the Firm, too big to fail, trade liberalization, transaction costs

Consider firms, where corporate performance, despite steady gains in labor productivity, has steeply declined over the past four decades. The economy-wide return on assets (ROA) in the United States has fallen to nearly one-quarter of its 1965 levels, even as business’s reliance on physical assets to generate a profit (asset intensity) has dropped 40 percent.9 Moreover, the gap between the most and least successful businesses has increased over time, as measured by both ROA and shareholder value creation. This doesn’t imply a simple averaging out, in which big winners are being dragged down by a few big losers. The “winners” in aggregate are barely maintaining their previous ROA levels, while the losers are experiencing bigger and bigger losses. Our research shows that this is a long-term pattern that was established and that was sustained well before the “Great Recession” began in 2007.

In this wave, push-oriented institutions will fall by the wayside as more pull-based companies learn to harness the first two waves of changes through innovations to institutional architectures (such as the ability to foster and participate in creation spaces where performance accelerates as more participants join). Over time, these innovations will enable firms to develop and adopt new ways of creating and capturing wealth in the digital era. Shareholder value and ROA may initially deteriorate, but these things will eventually improve as firms harness the foundational and flow forces of the first two waves of change and accelerate their rate of performance improvement. We hope that you now understand that we’re in the midst of a radical transformation—the Big Shift. But to surf the wave of change, we must do more than acquire a new understanding of the foundations of our economy and our lives: We must adopt new techniques.

 

pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

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accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, new economy, passive investing, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, statistical arbitrage, the market place, transaction costs, Y2K, yield curve

An article a few years back in Barron’s illustrates this point.4 The argument of the piece was that a large component of General Electric’s (GE) profits was being generated by the company’s investments, making GE a hedge fund in drag. The article suggested then-CEO 54 UNDERSTANDING ASSET ALLOCATION Jack Welch was timing the realization of investment profits to keep GE’s profits above analyst expectations. Thus, in support of my point, GE was doing what every well-run firm should do: It was taking advantage of a reduction of uncertainty to maximize profits and thus shareholder value. (This article also illustrates how much the world has changed in a short period of time. Only a few years ago, it was okay to say GE was managing its earnings. Saying so now could get a company in trouble.) There’s a simple explanation for the relative performance of small- and largecap stocks over the last 30 years. The 1970s were characterized by high and climbing inflation, rising tax rates, and ever-mounting regulations.

It seems during the 1990s, greedy corporate officers paired themselves with unscrupulous accountants to simultaneously mislead shareholders and the IRS. That was quite a feat. Regardless, the problem can be traced directly from tax incentives to many corporate management changes enacted during the last decade. These changes supposedly included the creation of incentives for management to behave like owners and maximize shareholder value. The motivation for financial engineering generated by compensation plans is fairly straightforward: With the same corporate revenue amount, economies of scale and the tax treatment of different transactions can generate higher aftertax cash flows to investors. So far so good. But add in the accounting treatment of unusual transactions and you have the makings of a very complicated system.

 

pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

However, in the UK the five largest banks (HSBC, Barclays, Santander, RBS, Lloyds/HBOS) account for 85% of the current account market (2010), 61% of the savings account market (2010), 64% of the unsecured personal loan market (2009), 74% of the mortgage market (2009) and 84% of liquidity management services to small and medium-sized businesses. (Treasury, 2011)8 As of September 2011, these five banks had just a total of 78 board members.9 The force driving the board members of banks is the need to maximise profit over the short term (to maximise shareholder value). However, what’s profitable in the short term is likely to be bad for the bank and the economy in the longer term. In the short run banks prefer to lend to the unproductive sector: it’s easier, cheaper, and appears to be safer than lending to real business. Indeed, as long as the price of the asset that collateralises the loan is increasing, the bank doesn’t even need to worry about the borrower’s ability to repay, as it can repossess the asset and recover the amount originally lent (the same applies if the bank can securitise the loan.)

The private sector is often unwilling to engage in the primary scientific research that advances scientific knowledge, due to extremely long and uncertain time periods between project implementation and fruition, the lack of certainty that anything of (marketable) value will be discovered, and the difficulties in monopolising and monetising the profits on anything that is. 6. The requirement to maximise short term shareholder value is passed on to bank staff through bonus and incentive structures. 7. For information about speculation on food prices see Schutter (2010) and Baffes & Haniotis (2010). 8. For this calculation Santander is not one of the five largest providers, and as such the figure instead includes data from Alliance and Leicester. 9. RBS: 14 board members; Lloyds 12; HSBC 19; Santander 20; Barclays 13.

 

pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

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Albert Einstein, asset allocation, asset-backed security, Brownian motion, business process, capital asset pricing model, clean water, collateralized debt obligation, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, fixed income, implied volatility, index fund, interest rate swap, inventory management, London Interbank Offered Rate, margin call, market fundamentalism, mortgage debt, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Related Terms: • Fannie Mae—Federal National Mortgage Association (FNMA) • Ginnie Mae—Government National Mortgage Association (GNMA) • Mortgage • Real Estate Investment Trust—REIT • Subprime Meltdown Free Cash Flow (FCF) What Does Free Cash Flow (FCF) Mean? A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it is tough to develop 110 The Investopedia Guide to Wall Speak new products, make acquisitions, pay dividends, and reduce debt. FCF is calculated as follows: It also can be calculated by taking operating cash flow and subtracting capital expenditures. Net Income + Amortization/Depreciation − Changes in Working Capital − Capital Expenditures = Free Cash Flow Investopedia explains Free Cash Flow (FCF) Some people believe that Wall Street focuses too much on earnings while ignoring the “real” cash that a firm generates.

If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would have been if the investment had been made with cash; leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder 160 The Investopedia Guide to Wall Speak wealth, but if it fails to do so, the interest expense and credit risk of default can destroy shareholder value. Related Terms: • Debt Ratio • Leveraged Buyout—LBO • Operating Leverage • Deleverage • Margin Leverage Ratio What Does Leverage Ratio Mean? (1) Any ratio used to calculate the financial leverage of a company to get an idea of that company’s methods of financing or measure its ability to meet its financial obligations. There are several ratios, but the main factors evaluated by a ratio include debt, equity, assets, and interest expenses. (2) A ratio used to measure a company’s mix of operating costs that yields an approximation of how changes in output will affect operating income.

 

pages: 357 words: 91,331

I Will Teach You To Be Rich by Sethi, Ramit

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Albert Einstein, asset allocation, buy low sell high, diversification, diversified portfolio, index fund, late fees, mortgage debt, mortgage tax deduction, prediction markets, random walk, risk tolerance, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Vanguard fund

One of the biggest tricks they use is to never admit they were wrong. Daniel Solin, author of The Smartest Investment Book You’ll Ever Read, describes a study that illustrates how financial-ratings companies like Morningstar, which provides stock ratings that investors can use to get a quick take on many stocks’ performance, continue to give thumbsup ratings even as the companies they purport to be evaluating crater and lose billions of dollars of shareholder value. (Aside from their stock ratings, they do have an excellent website with tools that I use all the time. So it’s not like they’re all bad.) The study found the following: Three Legendary Investors Who Prove Me Wrong—Sort of * * * Now, there are indeed investors who have beaten the market consistently for years. Warren Buffett, for example, has produced a 22 percent annualized return over forty years.

Lots of people understand that, logically, they should create a well-diversified portfolio of low-cost funds. But they also want to have fun investing. If you feel this way, sure, use a small part of your portfolio for “high risk” investing—but treat it as fun money, not as money you need. I set aside about 10 percent of my portfolio for fun money, which includes particular stocks I like, know, and use (companies like Amazon.com that focus on customer service, which I believe drives shareholder value); sector funds that let me focus on particular industries (I own an index fund that focuses on health care); and even angel investing, which is personal venture-capital investing for private ultra-early-stage companies. (I occasionally see these angel opportunities because I work in Silicon Valley and have friends who start companies and look for early friends-and-family money.) All these are very-high-risk investments and they’re funded by just-for-fun money that I can afford to lose.

 

pages: 372 words: 89,876

The Connected Company by Dave Gray, Thomas Vander Wal

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A Pattern Language, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, Atul Gawande, Berlin Wall, business process, call centre, Clayton Christensen, complexity theory, en.wikipedia.org, factory automation, Googley, index card, interchangeable parts, inventory management, Jeff Bezos, Kevin Kelly, loose coupling, market design, minimum viable product, more computing power than Apollo, profit maximization, Richard Florida, self-driving car, shareholder value, side project, Silicon Valley, skunkworks, software as a service, South of Market, San Francisco, Steve Jobs, Steven Levy, Stewart Brand, The Wealth of Nations by Adam Smith, Tony Hsieh, Toyota Production System, Vanguard fund, web application, WikiLeaks, Zipcar

Carlino, Satyajit Chatterjee, and Robert M. Hunt, “Urban Density and the Rate of Invention,” by the Federal Reserve Bank of Philadephia, Working Paper, 2006, http://www.phil.frb.org/research-and-data/publications/working-pa-pers/2006/wp06-14.pdf. PRODUCTIVITY Jonah Lehrer, “A Physicist Solves the City,” The New York Times, December 17, 2010. Chapter 9. Connected companies have a purpose Maximizing shareholder value is the dumbest idea in the world. — Jack GE Welch Learning happens in the context of a goal, an attempt to do something or to make something happen. Without a purpose to drive learning, it is haphazard—not much more useful than blind flailing about. The purpose of a company is to do something for customers while making a profit. Purpose Accelerates and Focuses Learning Sometimes you learn things by accident.

This is a bit of a simplification, but at a high level, customers care about service, shareholders care about profit, and employees care about pay and work conditions. These things are dependent on one another. Some are causes—drivers of value—and some are effects. Customer demand for services, and those services provided well, is the primary driver of value for any organization. It is the cause of growth, profits, and shareholder value. Employee pay and work conditions, profits, and returns to shareholders are all effects—things that result from the primary driver of delivering value to customers. Many companies get this backwards. Company executives focus on pleasing shareholders, because it’s the shareholders that drive the stock price of a company. It’s easy to understand why this is the case. It goes back to the historical focus on explicit measures.

 

pages: 315 words: 99,065

The Virgin Way: Everything I Know About Leadership by Richard Branson

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barriers to entry, call centre, carbon footprint, Celtic Tiger, clean water, collective bargaining, Costa Concordia, Donald Trump, Elon Musk, friendly fire, glass ceiling, illegal immigration, index card, inflight wifi, Lao Tzu, low cost carrier, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, Northern Rock, profit motive, Ralph Waldo Emerson, Ronald Reagan, shareholder value, Silicon Valley, stem cell, Steve Jobs, Tesla Model S, trade route

As it turned out, however, I was the one who was about to get repaid by getting myself into a lot of trouble. We lived just around the corner from a sweet shop and I’d been using my ill-gotten gains to buy chocolate, with Cadbury’s fruit and nut being my particular favourite. One day, though, I’d taken a much bigger ‘loan’ than usual from Dad’s wardrobe bank and promptly done my part to boost Cadbury’s shareholder value. The ‘old lady’ who owned the shop, who at the time was probably all of forty years old, quickly smelled a rat. She said nothing to me, but the next time I was in her shop in the company of my father she staggered me by blurting out, ‘Now I don’t want to get him into any trouble, Mr Branson, but I don’t know where young Richard’s getting all his money from. He’s becoming quite my best customer – so I do hope he isn’t stealing it.’

It crossed my mind more than once that if we’d had to explain to one of these people why I thought we should put out an entirely instrumental record, Tubular Bells would never have seen the light of day! And as for Virgin Atlantic? Forget it – that one would never have made it on to the drawing board let alone off the ground. As a public company it suddenly felt like the Virgin genie, something that had always thrived as a free spirit, had suddenly been forced into a bottle and was in serious danger of suffocating there. I realised there and then that, if working to improve shareholder value was now our raison d’être, as opposed to doing the things we wanted to do in the way that we had to do them, then we could never function successfully as a listed company. I’ve always seen a business as a group of people trying to improve other people’s lives – how do you monetise that in a quarterly report? So, having learned an important lesson we finally cried ‘uncle’ and in 1988 we went out and raised the money to take the company private again.

 

Frugal Innovation: How to Do Better With Less by Jaideep Prabhu Navi Radjou

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3D printing, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, barriers to entry, Baxter: Rethink Robotics, Bretton Woods, business climate, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, cloud computing, collaborative consumption, collaborative economy, connected car, corporate social responsibility, crowdsourcing, Elon Musk, financial innovation, global supply chain, income inequality, industrial robot, Internet of things, job satisfaction, Khan Academy, Kickstarter, late fees, Lean Startup, low cost carrier, M-Pesa, Mahatma Gandhi, megacity, minimum viable product, more computing power than Apollo, new economy, payday loans, peer-to-peer lending, Peter H. Diamandis: Planetary Resources, precision agriculture, race to the bottom, reshoring, ride hailing / ride sharing, risk tolerance, Ronald Coase, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, software as a service, Steve Jobs, supply-chain management, TaskRabbit, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, transaction costs, unbanked and underbanked, underbanked, women in the workforce, X Prize, yield management, Zipcar

MacArthur Foundation, workers who are able to make a social or environmental impact on the job are twice as satisfied and motivated as those who are not. This is particularly true of millennials, who are more sceptical of big business and less loyal to their employers compared with earlier generations. Over half of the millennials surveyed by Deloitte, one of the big four professional services firms, believe that innovation and social development, rather than maximising profit and shareholder value, should be the primary purpose of business. Yet the majority also believe that business is collectively most able to solve pressing social problems. Large, frugal companies now have a means to attract this values-conscious generation. None of this suggests that the transformation will be easy. As they attempt to adopt frugal innovation, Western corporations especially are likely to encounter deeply entrenched thinking and processes.

MacArthur Foundation 14 John Deere 67 John Lewis 195 Johnson & Johnson 100, 111 Johnson, Warren 98 Jones, Don 112 jugaad (frugal ingenuity) 199, 202 Jugaad Innovation (Radjou, Prabhu and Ahuja, 2012) xvii, 17 just-in-time design 33–4 K Kaeser, Joe 217 Kalanick, Travis 163 Kalundborg (Denmark) 160 kanju 201 Karkal, Shamir 124 Kaufman, Ben 50–1, 126 Kawai, Daisuke 29–30 Kelly, John 199–200 Kennedy, President John 138 Kenya 57, 200–1 key performance indicators see KPIs Khan Academy 16–17, 113–14, 164 Khan, Salman (Sal) 16–17, 113–14 Kickstarter 17, 48, 137, 138 KieranTimberlake 196 Kimberly-Clark 25, 145 Kingfisher 86–7, 91, 97, 157, 158–9, 185–6, 192–3, 208 KissKissBankBank 17, 137 Knox, Steve 145 Knudstorp, Jørgen Vig 37, 68, 69 Kobori, Michael 83, 100 KPIs (key performance indicators) 38–9, 67, 91–2, 185–6, 208 Kuhndt, Michael 194 Kurniawan, Arie 151–2 L La Chose 108 La Poste 92–3, 157 La Ruche qui dit Oui 137 “labs on a chip” 52 Lacheret, Yves 173–5 Lada 1 laser cutters 134, 166 Laskey, Alex 119 last-mile challenge 57, 146, 156 L’Atelier 168–9 Latin America 161 lattice organisation 63–4 Laury, Véronique 208 Laville, Elisabeth 91 Lawrence, Jamie 185, 192–3, 208 LCA (life-cycle assessment) 196–7 leaders 179, 203–5, 214, 217 lean manufacturing 192 leanness 33–4, 41, 42, 170, 192 Learnbox 114 learning by doing 173, 179 learning organisations 179 leasing 123 Lee, Deishin 159 Lego 51, 126 Lego Group 37, 68, 69, 144 Legrand 157 Lenovo 56 Leroy, Adolphe 127 Leroy Merlin 127–8 Leslie, Garthen 150–1 Lever, William Hesketh 96 Levi Strauss & Co 60, 82–4, 100, 122–3 Lewis, Dijuana 212 life cycle of buildings 196 see also product life cycle life-cycle assessment (LCA) 196–7 life-cycle costs 12, 24, 196 Lifebuoy soap 95, 97 lifespan of companies 154 lighting 32, 56, 123, 201 “lightweighting” 47 linear development cycles 21, 23 linear model of production 80–1 Link 131 littleBits 51 Livi, Daniele 88 Livi, Vittorio 88 local communities 52, 57, 146, 206–7 local markets 183–4 Local Motors 52, 129, 152 local solutions 188, 201–2 local sourcing 51–2, 56, 137, 174, 181 localisation 56, 137 Locavesting (Cortese, 2011) 138 Logan car 2–3, 12, 179, 198–9 logistics 46, 57–8, 161, 191, 207 longevity 121, 124 Lopez, Maribel 65–6 Lopez Research 65–6 L’Oréal 174 Los Alamos National Laboratory 170 low-cost airlines 60, 121 low-cost innovation 11 low-income markets 12–13, 161, 203, 207 Lowry, Adam 81–2 M m-health 109, 111–12 M-KOPA 201 M-Pesa 57, 201 M3D 48, 132 McDonough Braungart Design Chemistry (MBDC) 84 McDonough, William 82 McGregor, Douglas 63 MacGyvers 17–18, 130, 134, 167 McKelvey, Jim 135 McKinsey & Company 81, 87, 209 mainstream, frugal products in 216 maintenance 66, 75, 76, 124, 187 costs 48–9, 66 Mainwaring, Simon 8 Maistre, Christophe de 187–8, 216 Maker Faire 18, 133–4 Maker platform 70 makers 18, 133–4, 145 manufacturing 20th-century model 46, 55, 80–1 additive 47–9 continuous 44–5 costs 47, 48, 52 decentralised 9, 44, 51–2 frugal 44–54 integration with logistics 57–8 new approaches 50–4 social 50–1 subtractive method 48 tools for 47, 47–50 Margarine Unie 96 market 15, 28, 38, 64, 186, 189, 192 R&D and 21, 26, 33, 34 market research 25, 61, 139, 141 market share 100 marketing 21–2, 24, 36, 61–3, 91, 116–20, 131, 139 and R&D 34, 37, 37–8 marketing teams 143, 150 markets 12–13, 42, 62, 215 see also emerging markets Marks & Spencer (M&S) 97, 215 Plan A 90, 156, 179–81, 183–4, 186–7, 214 Marriott 140 Mars 57, 158–9, 161 Martin Marietta 159 Martin, Tod 154 mass customisation 9, 46, 47, 48, 57–8 mass market 189 mass marketing 21–2 mass production 9, 46, 57, 58, 74, 129, 196 Massachusetts Institute of Technology see MIT massive open online courses see MOOCs materials 3, 47, 48, 73, 92, 161 costs 153, 161, 190 recyclable 74, 81, 196 recycled 77, 81–2, 83, 86, 89, 183, 193 renewable 77, 86 repurposing 93 see also C2C; reuse Mayhew, Stephen 35, 36 Mazoyer, Eric 90 Mazzella, Frédéric 163 MBDC (McDonough Braungart Design Chemistry) 84 MDI 16 measurable goals 185–6 Mechanical Engineer Laboratory (MEL) 52 “MEcosystems” 154–5, 156–8 Medicare 110 medication 111–12 Medicity 211 MedStartr 17 MEL (Mechanical Engineer Laboratory) 52 mental models 2, 193–203, 206, 216 Mercure 173 Merlin, Rose 127 Mestrallet, Gérard 53, 54 method (company) 81–2 Mexico 38, 56 Michelin 160 micro-factories 51–2, 52, 66, 129, 152 micro-robots 52 Microsoft 38 Microsoft Kinect 130 Microsoft Word 24 middle classes 197–8, 216 Migicovsky, Eric 137–8 Mikkiche, Karim 199 millennials 7, 14, 17, 131–2, 137, 141, 142 MindCET 165 miniaturisation 52, 53–4 Mint.com 125 MIT (Massachusetts Institute of Technology) 44–5, 107, 130, 134, 202 mobile health see m-health mobile phones 24, 32, 61, 129–30, 130, 168, 174 emerging market use 198 infrastructure 56, 198 see also smartphones mobile production units 66–7 mobile technologies 16, 17, 103, 133, 174, 200–1, 207 Mocana 151 Mochon, Daniel 132 modular design 67, 90 modular production units 66–7 Modularer Querbaukasten see MQB “mompreneurs” 145 Mondelez 158–9 Money Dashboard 125 Moneythink 162 monitoring 65–6, 106, 131 Monopoly 144 MOOCs (massive open online courses) 60, 61, 112, 113, 114, 164 Morieux, Yves 64 Morocco 207 Morris, Robert 199–200 motivation, employees 178, 180, 186, 192, 205–8 motivational approaches to shaping consumer behaviour 105–6 Motorola 56 MQB (Modularer Querbaukasten) 44, 45–6 Mulally, Alan 70, 166 Mulcahy, Simon 157 Mulliez family 126–7 Mulliez, Vianney 13, 126 multi-nodal innovation 202–3 Munari, Bruno 93 Murray, Mike 48–9 Musk, Elon 172 N Nano car 119, 156 National Geographic 102 natural capital, loss of 158–9 Natural Capital Leaders Platform 158–9 natural resources 45, 86 depletion 7, 72, 105, 153, 158–9 see also resources NCR 55–6 near-shoring 55 Nelson, Simon 113 Nemo, Sophie-Noëlle 93 Nest Labs 98–100, 103 Nestlé 31, 44, 68, 78, 94, 158–9, 194, 195 NetPositive plan 86, 208 networking 152–3, 153 new materials 47, 92 New Matter 132 new technologies 21, 27 Newtopia 32 next-generation customers 121–2 next-generation manufacturing techniques 44–6, 46–7 see also frugal manufacturing Nigeria 152, 197–8 Nike 84 NineSigma 151 Nissan 4, 4–5, 44, 199 see also Renault-Nissan non-governmental organisations 167 non-profit organisations 161, 162, 202 Nooyi, Indra 217 Norman, Donald 120 Norris, Greg 196 North American companies 216–17 North American market 22 Northrup Grumman 68 Norton, Michael 132 Norway 103 Novartis 44–5, 215 Novotel 173, 174 nudging 100, 108, 111, 117, 162 Nussbaum, Bruce 140 O O2 147 Obama, President Barack 6, 8, 13, 134, 138, 208 obsolescence, planned 24, 121 offshoring 55 Oh, Amy 145 Ohayon, Elie 71–2 Oliver Wyman 22 Olocco, Gregory 206 O’Marah, Kevin 58 on-demand services 39, 124 online communities 31, 50, 61, 134 online marketing 143 online retailing 60, 132 onshoring 55 Opel 4 open innovation 104, 151, 152, 153, 154 open-source approach 48, 129, 134, 135, 172 open-source hardware 51, 52, 89, 130, 135, 139 open-source software 48, 130, 132, 144–5, 167 OpenIDEO 142 operating costs 45, 215 Opower 103, 109, 119 Orange 157 Orbitz 173 organisational change 36–7, 90–1, 176, 177–90, 203–8, 213–14, 216 business models 190–3 mental models 193–203 organisational culture 36–7, 170, 176, 177–9, 213–14, 217 efficacy focus 181–3 entrepreneurial 76, 173 see also organisational change organisational structure 63–5, 69 outsourcing 59, 143, 146 over-engineering 27, 42, 170 Overby, Christine 25 ownership 9 Oxylane Group 127 P P&G (Procter & Gamble) 19, 31, 58, 94, 117, 123, 145, 195 packaging 57, 96, 195 Page, Larry 63 “pain points” 29, 30, 31 Palmer, Michael 212 Palo Alto Junior League 20 ParkatmyHouse 17, 63, 85 Parker, Philip 61 participation, customers 128–9 partner ecosystems 153, 154, 200 partners 65, 72, 148, 153, 156–8 sharing data with 59–60 see also distributors; hyper-collaboration; suppliers Partners in Care Foundation 202 partnerships 41, 42, 152–3, 156–7, 171–2, 174, 191 with SMBs 173, 174, 175 with start-ups 20, 164–5, 175 with suppliers 192–3 see also hyper-collaboration patents 171–2 Payne, Alex 124 PE International 196 Pearson 164–5, 167, 181–3, 186, 215 Pebble 137–8 peer-to-peer economic model 10 peer-to-peer lending 10 peer-to-peer sales 60 peer-to-peer sharing 136–7 Pélisson, Gérard 172–3 PepsiCo 38, 40, 179, 190, 194, 215 performance 47, 73, 77, 80, 95 of employees 69 Pernod Ricard 157 personalisation 9, 45, 46, 48, 62, 129–30, 132, 149 Peters, Tom 21 pharmaceutical industry 13, 22, 23, 33, 58, 171, 181 continuous manufacturing 44–6 see also GSK Philippines 191 Philips 56, 84, 100, 123 Philips Lighting 32 Picaud, Philippe 122 Piggy Mojo 119 piggybacking 57 Piketty, Thomas 6 Plan A (M&S) 90, 156, 179–81, 183–4, 186–7, 214 Planet 21 (Accor) 174–5 planned obsolescence 24, 121 Plastyc 17 Plumridge, Rupert 18 point-of-sale data 58 Poland 103 pollution 74, 78, 87, 116, 187, 200 Polman, Paul 11, 72, 77, 94, 203–5, 217 portfolio management tools 27, 33 Portugal 55, 103 postponement 57–8 Potočnik, Janez 8, 79 Prabhu, Arun 25 Prahalad, C.K. 12 predictive analytics 32–3 predictive maintenance 66, 67–8 Priceline 173 pricing 81, 117 processes digitising 65–6 entrenched 14–16 re-engineering 74 simplifying 169, 173 Procter & Gamble see P&G procurement priorities 67–8 product life cycle 21, 75, 92, 186 costs 12, 24, 196 sustainability 73–5 product-sharing initiatives 87 production costs 9, 83 productivity 49, 59, 65, 79–80, 153 staff 14 profit 14, 105 Progressive 100, 116 Project Ara 130 promotion 61–3 Propeller Health 111 prosumers xix–xx, 17–18, 125, 126–33, 136–7, 148, 154 empowering and engaging 139–46 see also horizontal economy Protomax 159 prototypes 31–2, 50, 144, 152 prototyping 42, 52, 65, 152, 167, 192, 206 public 50–1, 215 public sector, working with 161–2 publishers 17, 61 Pullman 173 Puma 194 purchasing power 5–6, 216 pyramidal model of production 51 pyramidal organisations 69 Q Qarnot Computing 89 Qualcomm 84 Qualcomm Life 112 quality 3, 11–12, 15, 24, 45, 49, 82, 206, 216 high 1, 9, 93, 198, 216 measure of 105 versus quantity 8, 23 quality of life 8, 204 Quicken 19–21 Quirky 50–1, 126, 150–1, 152 R R&D 35, 67, 92, 151 big-ticket programmes 35–6 and business development 37–8 China 40, 188, 206 customer focus 27, 39, 43 frugal approach 12, 26–33, 82 global networks 39–40 incentives 38–9 industrial model 2, 21–6, 33, 36, 42 market-focused, agile model 26–33 and marketing 34, 37, 37–8 recommendations for managers 34–41 speed 23, 27, 34, 149 spending 15, 22, 23, 28, 141, 149, 152, 171, 187 technology culture 14–15, 38–9 see also Air Liquide; Ford; GSK; IBM; immersion; Renault; SNCF; Tarkett; Unilever R&D labs 9, 21–6, 70, 149, 218 in emerging markets 40, 188, 200 R&D teams 26, 34, 38–9, 65, 127, 150, 194–5 hackers as 142 innovation brokering 168 shaping customer behaviour 120–2 Raspberry Pi 135–6, 164 Ratti, Carlo 107 raw materials see materials real-time demand signals 58, 59 Rebours, Christophe 157–8 recession 5–6, 6, 46, 131, 180 Reckitt Benckiser 102 recommendations for managers flexing assets 65–71 R&D 34–41 shaping consumer behaviour 116–24 sustainability 90–3 recruiting 70–1 recyclable materials 74, 81, 196 recyclable products 3, 73, 159, 195–6 recycled materials 77, 81–2, 83, 86, 89, 183, 193 recycling 8, 9, 87, 93, 142, 159 e-waste 87–8 electronic and electrical goods (EU) 8, 79 by Tarkett 73–7 water 83, 175 see also C2C; circular economy Recy’Go 92–3 regional champions 182 regulation 7–8, 13, 78–9, 103, 216 Reich, Joshua 124 RelayRides 17 Renault 1–5, 12, 117, 156–7, 179 Renault-Nissan 4–5, 40, 198–9, 215 renewable energy 8, 53, 74, 86, 91, 136, 142, 196 renewable materials 77, 86 Replicator 132 repurposing 93 Requardt, Hermann 189 reshoring 55–6 resource constraints 4–5, 217 resource efficiency 7–8, 46, 47–9, 79, 190 Resource Revolution (Heck, Rogers and Carroll, 2014) 87–8 resources 40, 42, 73, 86, 197, 199 consumption 9, 26, 73–7, 101–2 costs 78, 203 depletion 7, 72, 105, 153, 158–9 reducing use 45, 52, 65, 73–7, 104, 199, 203 saving 72, 77, 200 scarcity 22, 46, 72, 73, 77–8, 80, 158–9, 190, 203 sharing 56–7, 159–61, 167 substitution 92 wasting 169–70 retailers 56, 129, 214 “big-box” 9, 18, 137 Rethink Robotics 49 return on investment 22, 197 reuse 9, 73, 76–7, 81, 84–5, 92–3, 200 see also C2C revenues, generating 77, 167, 180 reverse innovation 202–3 rewards 37, 178, 208 Riboud, Franck 66, 184, 217 Rifkin, Jeremy 9–10 robots 47, 49–50, 70, 144–5, 150 Rock Health 151 Rogers, Jay 129 Rogers, Matt 87–8 Romania 2–3, 103 rookie mindset 164, 168 Rose, Stuart 179–80, 180 Roulin, Anne 195 Ryan, Eric 81–2 Ryanair 60 S S-Oil 106 SaaS (software as a service) 60 Saatchi & Saatchi 70–1 Saatchi & Saatchi + Duke 71–2, 143 sales function 15, 21, 25–6, 36, 116–18, 146 Salesforce.com 157 Santi, Paolo 108 SAP 59, 186 Saunders, Charles 211 savings 115 Sawa Orchards 29–31 Scandinavian countries 6–7 see also Norway Schmidt, Eric 136 Schneider Electric 150 Schulman, Dan 161–2 Schumacher, E.F. 104–5, 105 Schweitzer, Louis 1, 2, 3, 4, 179 SCM (supply chain management) systems 59 SCOR (supply chain operations reference) model 67 Seattle 107 SEB 157 self-sufficiency 8 selling less 123–4 senior managers 122–4, 199 see also CEOs; organisational change sensors 65–6, 106, 118, 135, 201 services 9, 41–3, 67–8, 124, 149 frugal 60–3, 216 value-added 62–3, 76, 150, 206, 209 Shapeways 51, 132 shareholders 14, 15, 76, 123–4, 180, 204–5 sharing 9–10, 193 assets 159–61, 167 customers 156–8 ideas 63–4 intellectual assets 171–2 knowledge 153 peer-to-peer 136–9 resources 56–7, 159–61, 167 sharing economy 9–10, 17, 57, 77, 80, 84–7, 108, 124 peer-to-peer sharing 136–9 sharing between companies 159–60 shipping costs 55, 59 shopping experience 121–2 SIEH hotel group 172–3 Siemens 117–18, 150, 187–9, 215, 216 Sigismondi, Pier Luigi 100 Silicon Valley 42, 98, 109, 150, 151, 162, 175 silos, breaking out of 36–7 Simple Bank 124–5 simplicity 8, 41, 64–5, 170, 194 Singapore 175 Six Sigma 11 Skillshare 85 SkyPlus 62 Small is Beautiful (Schumacher, 1973) 104–5 “small is beautiful” values 8 small and medium-sized businesses see SMBs Smart + Connected Communities 29 SMART car 119–20 SMART strategy (Siemens) 188–9 smartphones 17, 100, 106, 118, 130, 131, 135, 198 in health care 110, 111 see also apps SmartScan 29 SMBs (small and medium-sized businesses) 173, 174, 175, 176 SMS-based systems 42–3 SnapShot 116 SNCF 41–3, 156–7, 167 SoapBox 28–9 social business model 206–7 social comparison 109 social development 14 social goals 94 social learning 113 social manufacturing 47, 50–1 social media 16, 71, 85, 106, 108, 168, 174 for marketing 61, 62, 143 mining 29, 58 social pressure of 119 tools 109, 141 and transaction costs 133 see also Facebook; social networks; Twitter social networks 29, 71, 72, 132–3, 145, 146 see also Facebook; Twitter social pressure 119 social problems 82, 101–2, 141, 142, 153, 161–2, 204 social responsibility 7, 10, 14, 141, 142, 197, 204 corporate 77, 82, 94, 161 social sector, working with 161–2 “social tinkerers” 134–5 socialising education 112–14 Sofitel 173 software 72 software as a service (SaaS) 60 solar power 136, 201 sourcing, local 51–2, 56 Southwest Airlines 60 Spain 5, 6, 103 Spark 48 speed dating 175, 176 spending, on R&D 15, 22, 23, 28, 141, 149, 152, 171, 187 spiral economy 77, 87–90 SRI International 49, 52 staff see employees Stampanato, Gary 55 standards 78, 196 Starbucks 7, 140 start-ups 16–17, 40–1, 61, 89, 110, 145, 148, 150, 169, 216 investing in 137–8, 157 as partners 42, 72, 153, 175, 191, 206 see also Nest Labs; Silicon Valley Statoil 160 Steelcase 142 Stem 151 Stepner, Diana 165 Stewart, Emma 196–7 Stewart, Osamuyimen 201–2 Sto Corp 84 Stora Enso 195 storytelling 112, 113 Strategy& see Booz & Company Subramanian, Prabhu 114 substitution of resources 92 subtractive manufacturing 48 Sun Tzu 158 suppliers 67–8, 83, 148, 153, 167, 176, 192–3 collaboration with 76, 155–6 sharing with 59–60, 91 visibility 59–60 supply chain management see SCM supply chain operations reference (SCOR) model 67 supply chains 34, 36, 54, 65, 107, 137, 192–3 carbon footprint 156 costs 58, 84 decentralisation 66–7 frugal 54–60 integrating 161 small-circuit 137 sustainability 137 visibility 34, 59–60 support 135, 152 sustainability xix, 9, 12, 72, 77–80, 82, 97, 186 certification 84 as competitive advantage 80 consumers and 95, 97, 101–4 core design principle 82–4, 93, 195–6 and growth 76, 80, 104–5 perceptions of 15–16, 80, 91 recommendations for managers 90–3 regulatory demand for 78–9, 216 standard bearers of 80, 97, 215 see also Accor; circular economy; Kingfisher; Marks & Spencer; Tarkett; Unilever sustainable design 82–4 see also C2C sustainable distribution 57, 161 sustainable growth 72, 76–7 sustainable lifestyles 107–8 Sustainable Living Plan (Unilever) 94–7, 179, 203–4 sustainable manufacturing 9, 52 T “T-shaped” employees 70–1 take-back programmes 9, 75, 77, 78 Tally 196–7 Tarkett 73–7, 80, 84 TaskRabbit 85 Tata Motors 16, 119 Taylor, Frederick 71 technical design 37–8 technical support, by customers 146 technology 2, 14–15, 21–2, 26, 27 TechShop 9, 70, 134–5, 152, 166–7 telecoms sector 53, 56 Telefónica 147 telematic monitoring 116 Ternois, Laurence 42 Tesco 102 Tesla Motors 92, 172 testing 28, 42, 141, 170, 192 Texas Industries 159 Textoris, Vincent 127 TGV Lab 42–3 thermostats 98–100 thinking, entrenched 14–16 Thompson, Gav 147 Timberland 90 time 4, 7, 11, 41, 72, 129, 170, 200 constraints 36, 42 see also development cycle tinkerers 17–18, 133–5, 144, 150, 152, 153, 165–7, 168 TiVo 62 Tohamy, Noha 59–60 top-down change 177–8 top-down management 69 Total 157 total quality management (TQM) 11 total volatile organic compounds see TVOC Toyota 44, 100 Toyota Sweden 106–7 TQM (total quality management) 11 traffic 108, 116, 201 training 76, 93, 152, 167, 170, 189 transaction costs 133 transparency 178, 185 transport 46, 57, 96, 156–7 Transport for London 195 TrashTrack 107 Travelocity 174 trial and error 173, 179 Trout, Bernhardt 45 trust 7, 37, 143 TVOC (total volatile organic compounds) 74, 77 Twitter 29, 62, 135, 143, 147 U Uber 136, 163 Ubuntu 202 Uchiyama, Shunichi 50 UCLA Health 202–3 Udacity 61, 112 UK 194 budget cuts 6 consumer empowerment 103 industrial symbiosis 160 savings 115 sharing 85, 138 “un-management” 63–4, 64 Unboundary 154 Unilever 11, 31, 57, 97, 100, 142, 203–5, 215 and sustainability 94–7, 104, 179, 203–4 University of Cambridge Engineering Design Centre (EDC) 194–5 Inclusive Design team 31 Institute for Sustainability Leadership (CISL) 158–9 upcycling 77, 88–9, 93, 159 upselling 189 Upton, Eben 135–6 US 8, 38, 44, 87, 115, 133, 188 access to financial services 13, 17, 161–2 ageing population 194 ageing workforce 13 commuting 131 consumer spending 5, 6, 103 crowdfunding 137–8, 138 economic pressures 5, 6 energy use 103, 119, 196 environmental awareness 7, 102 frugal innovation in 215–16, 218 health care 13, 110, 208–13, 213 intellectual property 171 onshoring 55 regulation 8, 78, 216 sharing 85, 138–9 shifting production from China to 55, 56 tinkering culture 18, 133–4 user communities 62, 89 user interfaces 98, 99 user-friendliness 194 Utopies 91 V validators 144 value 11, 132, 177, 186, 189–90 aspirational 88–9 to customers 6–7, 21, 77, 87, 131, 203 from employees 217 shareholder value 14 value chains 9, 80, 128–9, 143, 159–60, 190, 215 value engineering 192 “value gap” 54–5 value-added services 62–3, 76, 150, 206, 209 values 6–7, 14, 178, 205 Vandebroek, Sophie 169 Vasanthakumar, Vaithegi 182–3 Vats, Tanmaya 190, 192 vehicle fleets, sharing 57, 161 Verbaken, Joop 118 vertical integration 133, 154 virtual prototyping 65 virtuous cycle 212–13 visibility 34, 59–60 visible learning 112–13 visioning sessions 193–4 visualisation 106–8 Vitality 111 Volac 158–9 Volkswagen 4, 44, 45–6, 129, 144 Volvo 62 W wage costs 48 wages, in emerging markets 55 Waitrose, local suppliers 56 Walker, James 87 walking the walk 122–3 Waller, Sam 195 Walmart 9, 18, 56, 162, 216 Walton, Sam 9 Wan Jia 144 Washington DC 123 waste 24, 87–9, 107, 159–60, 175, 192, 196 beautifying 88–9, 93 e-waste 24, 79, 87–8, 121 of energy 119 post-consumer 9, 75, 77, 78, 83 reducing 47, 74, 85, 96, 180, 209 of resources 169–70 in US health-care system 209 see also C2C; recycling; reuse water 78, 83, 104, 106, 158, 175, 188, 206 water consumption 79, 82–3, 100, 196 reducing 74, 75, 79, 104, 122–3, 174, 183 wealth 105, 218 Wear It Share It (Wishi) 85 Weijmarshausen, Peter 51 well-being 104–5 Wham-O 56 Whirlpool 36 “wicked” problems 153 wireless technologies 65–6 Wiseman, Liz 164 Wishi (Wear It Share It) 85 Witty, Andrew 35, 35–6, 37, 39, 217 W.L.

 

pages: 128 words: 38,187

The New Prophets of Capital by Nicole Aschoff

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3D printing, affirmative action, Affordable Care Act / Obamacare, Airbnb, Bretton Woods, clean water, collective bargaining, crony capitalism, feminist movement, follow your passion, Food sovereignty, glass ceiling, global supply chain, global value chain, helicopter parent, hiring and firing, income inequality, Khan Academy, late capitalism, Lyft, Mark Zuckerberg, means of production, performance metric, profit motive, rent-seeking, Ronald Reagan, Rosa Parks, school vouchers, shareholder value, sharing economy, Silicon Valley, Slavoj Žižek, structural adjustment programs, Thomas L Friedman, Tim Cook: Apple, urban renewal, women in the workforce, working poor

Mackey does not see crony capitalism as “real” capitalism. Instead it is a product of big government in which politicians trying to preserve their cushy jobs develop symbiotic, parasitic relationships with businesspeople too lazy or unimaginative to compete successfully in the marketplace. 10 In Mackey’s story, crony capitalism has been exacerbated by the rising power of the financial sector and shareholder-value ideology—the idea that firms are nothing more than a stream of assets designed to maximize profits for shareholders. Mackey argues that this obsession with greed and profits has “robbed most businesses of their ability to engage and connect with people” and has created “long-term systemic problems” that destroy profitability and that can be deeply damaging to people and to the planet. “Too many businesses fail to recognize the significant impacts they have on the environment, on other creatures that inhabit the planet (such as wildlife and livestock animals), and on the physical health and psyches of team members and customers.”11 Instead of trying to get a handout from the government or make a quick buck on the stock market, Mackey says that companies need to roll up their sleeves and rethink how to run a business.

 

pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

Perhaps it’s because when traveling the rules are less clear, or maybe it has to do with being away from one’s usual setting. * The smart thing would have been to lead the students through the oath at the start of every lecture, and maybe this is what I will do next time. * I suspect that companies that adapt the ideology of maximizing shareholder value above all else can use this motto to justify a broad range of misbehaviors, from financial to legal to environmental cheating. The fact that the compensation of the executives is linked to the stock price probably only increases their commitment to “shareholder value.” * Another fuzzy rule is the quaint-sounding “principle of prudence,” according to which accountants should not make things appear rosier than they actually are. * Based on these results, we could speculate that people who work for ideological organizations such as political groups and not-for-profits might actually feel more comfortable bending moral rules—because they are doing it for a good cause and to help others

They go out to lunch and, over their martinis and steaks, discuss what Bob is doing. In the next booth, some folks from Hugebank overhear them. Word gets around. In a relatively short time, it is clear to many other bankers that Bob isn’t the only person to fudge some numbers. Moreover, they consider him as part of their in-group. To them, fudging the numbers now becomes accepted behavior, at least within the realm of “staying competitive” and “maximizing shareholder value.”* Similarly, consider this scenario: one bank uses its government bailout money to pay out dividends to its shareholders (or maybe the bank just keeps the cash instead of lending it). Soon, the CEOs of other banks start viewing this as appropriate behavior. It is an easy process, a slippery slope. And it’s the kind of thing that happens all around us every day. BANKING, OF COURSE, is not the only place this unfortunate kind of escalation takes place.

., 188 Prada bags: fake, 119, 122 real, given to author, 118–19, 122, 140 Predictably Irrational (Ariely), illegal downloads of, 137–39 preferences, creating logical-sounding reasons for, 163–64 prefrontal cortex, 169–70 Princeton University, honor code study at, 42–44 probabilistic discounting, 194 prostitutes, external signaling of, 120 prudence, principle of, 220n punishment, 13, 52 cost-benefit analysis and, 5, 13, 14 self-cleansing, in resetting rituals, 250–52 Rather, Dan, 152 rationalization of selfish desires: of Austen characters, 154–55 fake products and, 134–35 fudge factor and, 27–28, 53, 237 link between creativity and dishonesty and, 172 revenge and, 177–84 tax returns and, 27–28 see also self-justification reason vs. desire, 97–106 cognitive load and, 99–100 ego depletion and, 100–106 exhaustion and, 97–98 “Recollections of the Swindle Family” (Cary), 246 religion: reminders of moral obligations and, 45, 249–50; see also Ten Commandments resetting rituals and, 249, 250–52 reminders: of made-up achievements, 153–54, 238 see also moral reminders resetting rituals, 249, 250–54 to change views on stealing, 252–53 self-inflicted pain and, 249, 250–52 Truth and Reconciliation Commission in South Africa and, 253–54 résumés, fake credentials in, 135–36, 153 revenge, 177–84 annoyance at bad service and, 177–80 author’s tale of, during European travels, 180–84 Rich, Frank, 150 right brain, 164–65 Roberts, Gilbert, 224 Rogers, Will, 55, 57 Rome, ancient: memento mori reminders in, 247 sumptuary laws in, 120 Romeo and Juliet, 98 Rowley, Coleen, 215 Salant, Steve, 115 Salling, John, 152 Sarbanes-Oxley Act, 234 Schrödinger’s cat, 62–63 Schwartz, Janet, 80, 229, 259 Schweitzer, Maurice, 104, 260 scorekeeping, dishonesty in, 61–64 self-deception, 141–61 author’s personal experience of, 143–44 cheating on IQ-like tests and, 145–49, 151, 153–54, 156–57 “I knew it all along” feeling and, 149 Kubrick imitator and, 150–51 negative aspects of, 158–59 people with higher tendency for, 151 positive aspects of, 158 reducing tendency for, 156–57 reminders of made-up achievements and, 153–54, 238 repeating lies over and over and, 142–43 selfishness of Austen characters and, 154–55 in sports, 155–56 veterans’ false claims and, 152 white lies and, 159–61 self-flagellation, 250–52 self-image: amount of cheating and, 23, 27 fudge factor and, 27–29 self-indulgence, rational, 115–16 selfishness, see rationalization of selfish desires self-justification: creation of logical-sounding explanations and, 163–65 link between creativity and dishonesty and, 172 mulligans and, 60–61 repositioning golf ball and, 61 see also rationalization of selfish desires self-signaling, 122–26 basic idea of, 122 charitable acts and, 122–23 fake products and, 123–26, 135 what-the-hell effect and, 127–31 Sense and Sensibility (Austen), 154–55 service providers, long-term relationships with, 228–31 service records, exaggerated, 152–53 Sessions, Pete, 209 Sex and the City, 103–4 Shakespeare, William, 184 shareholder value, maximizing of, 208n Shiv, Baba, 99–100 shopping malls, susceptibility to temptation in, 113 Shu, Lisa, 45, 259 signing forms at top vs. bottom, 46–51 insurance claims and, 49–51 tax reporting and, 46–49 Silverman, Dan, 114–15 Simple Model of Rational Crime (SMORC), 4–6, 11–29, 53, 201, 238, 248 author’s alternative theory to, 27–28; see also fudge factor theory guest lecturer’s satirical presentation on, 11–14 life in hypothetical world based on, 5–6 matrix task and, 15–23 tested in real-life situations, 23–26 sincerity, principle of, 220n Skilling, Jeffrey, 2 social norms, infectious nature of cheating and, 195, 201–3, 205–7, 209 social utility, collaborative cheating and, 222–23 South Africa, Truth and Reconciliation Commission in, 253–54 split-brain patients, 164 sports, self-deception in, 155–56 stealing: Coca-Cola vs. money, 32–33 joke about, 31 resetting mechanisms and, 252–53 from workplace, 31, 33, 193 steroids, in sports, 155–56 storytelling: creation of logical-sounding explanations and, 163–65 reinterpreting information in self-serving way in, 187–88 self-deception and, 142–43 Stroop task, 109–12 opportunity to cheat on, 111–12 Suckers, Swindlers, and an Ambivalent State (Balleisen), 188 sumptuary laws, 120 sunshine policies, 88, 91–92 suspiciousness of others: fake products and, 131–34 self-deception and, 158–59 Tali (research assistant), 21, 24–26 Taliban, 152 Talmud, 45 Tang, Thomas, 44 tax returns, 45–49 IRS reaction to author’s findings on, 47–49 rationalization of exaggerated deductions in, 27–28 signing at top vs. bottom, 46–49 technological frontiers, potential for dishonesty and, 188 temptation, resisting of: cognitive load and, 99–100 dieting and, 98, 109, 112–13, 114–15 ego depletion and, 100–116 evenings as difficult time for, 102 physical exhaustion and, 97–98 removing oneself from tempting situations and, 108–11, 115–16 in shopping malls, 113 Ten Commandments, 39–40, 41, 44, 204, 250 This American Life, 6–7 Three Men in a Boat (to Say Nothing of the Dog) (Jerome), 28 Time, 215 token experiment, 33–34 Tolkien, J.

 

pages: 351 words: 102,379

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

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affirmative action, Asian financial crisis, Berlin Wall, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Fall of the Berlin Wall, fear of failure, fixed income, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Mikhail Gorbachev, moral hazard, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, rolodex, Ronald Reagan, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise

As he leaned into his jog, CNBC reported that Lehman Brothers had just announced its earnings ahead of its conference call. The firm, the reporter elaborated, had also described its extraordinary spin-off plans in its press release. When Fleming returned to his room, he got a colleague to send him the announcement, which included an important headline buried at the bottom: “The firm remains committed to examining all strategic alternatives to maximize shareholder value,” which meant that it was open to just about anything. He knew the company had been quietly shopping pieces of itself, but that statement effectively made it official, at least to those paying attention. Lehman, the entire firm, was up for sale. From his days as a merger banker focusing on financial services, he knew that if Lehman was on the auction block, Bank of America would be the likely buyer.

Given the conversation he’d had with Dan Jester at 6:00 that morning, however, it was looking increasingly likely that AIG and the global financial system were now in such peril that the government would have no choice but to intervene. Paulson had seen the panic gripping the markets in the past twenty-four hours, which was duly reflected in the headlines on every newsstand. That morning’s Washington Post was typical of the tone of the coverage: “Stocks Plunge as Crisis Intensifie s; AIG at Risk; $700 Billion in Shareholder Value Vanishes.” The Dow Jones Industrial Average had slumped 504.48 points on Monday, the biggest point decline for the index since September 17, 2001, when trading started up again after the September 11 terrorist attacks. AIG’s stock had fallen 65 percent to close at $4.76. 241 By 7:45 a.m., Ben Bernanke was in his office preparing for the Federal Open Market Committee meeting that was due to begin forty-five minutes later in the boardroom just down the hall from his office.

I respectfully suggest to you, and to the Board, that the continuing refusal to work together to save this great company is far more important than any concern over personal positions or perceptions. I do not know whether or not it is now too late to save AIG. However, we owe it to AIG’s shareholders, creditors and our country to try. Since you became Chairman of AIG, you and the Board have presided over the virtual destruction of shareholder value built up over 35 years. It is not my intention to try to point fingers or be critical. My only point is that under the circumstance, I am truly bewildered at the unwillingness of you and the Board to accept my help. 249 Geithner began to prepare in his office for a conference call with Bernanke. They were going to do this, he thought. They were really going to do this. Jester and Norton were poring over all the terms.

 

pages: 525 words: 142,027

CIOs at Work by Ed Yourdon

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8-hour work day, Apple's 1984 Super Bowl advert, business intelligence, business process, call centre, cloud computing, crowdsourcing, distributed generation, Flash crash, Googley, Grace Hopper, Infrastructure as a Service, Innovator's Dilemma, inventory management, Julian Assange, knowledge worker, Mark Zuckerberg, Nicholas Carr, rolodex, shareholder value, Silicon Valley, six sigma, Skype, smart grid, smart meter, software as a service, Steve Ballmer, Steve Jobs, Steven Levy, the scientific method, WikiLeaks, Y2K, Zipcar

I think you probably know the answer and where I was going to come at it from. In every business I’ve been in, I’ve been very, very lucky. I seldom had many challenges in working with my colleagues to get the job done. And I think part of it is, if you look at it from a customer view, fundamentally, and you understand the end customer, then they’re all partners, they’re all partnered together. I’m incentivized as much as they are to deliver business results and shareholder value by driving customer growth. So if I’m addressing the same problem they’re trying to address, we’re on the same side. Now, we may have different views of how we think we may address it, but we’re fundamentally trying to solve the same issue, and it often is the ground of convergence, as a result, because you’re comparing notes on how best to solve it and often find, “Yes, they’ve got great ideas.

There is a future life, and I think it will continue to evolve because I think increasingly technology enables the business and the running of the business are fusing even closer. When we’re in roles like the ones I’ve held and I’ve had the luxury of holding, they’re always closely associated with the front end, customer end, and the solutioning of the services. So every role I’ve had has been technology-intense with the customer at the core. Delivering product platform and solutions to enable enterprise value, shareholder value and customer experience. Effectively, I’ve been on both sides of the fence as being a pure “CIO” and running technology and product marketing for a B2B and B2C. So, increasingly, I think, roles will fuse and will evolve. I think the people who want to grow and evolve will continue to have fascinating roles, especially when you come at it from a solution view and you get technology, and you get the customer.

 

pages: 423 words: 149,033

The fortune at the bottom of the pyramid by C. K. Prahalad

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barriers to entry, business process, call centre, cashless society, clean water, collective bargaining, corporate social responsibility, deskilling, disintermediation, farmers can use mobile phones to check market prices, financial intermediation, Hernando de Soto, hiring and firing, income inequality, late fees, Mahatma Gandhi, market fragmentation, microcredit, new economy, profit motive, purchasing power parity, rent-seeking, shareholder value, The Fortune at the Bottom of the Pyramid, time value of money, transaction costs, working poor

The e-Choupal network was conceived to achieve virtual vertical integration by extending ITC’s engagement all the way to the farmer in the field. The Social Imperative The social agenda is an integral part of ITC’s philosophy. ITC is widely recognized as dedicated to the cause of nation-building. Chairman Y. C. Deveshwar noted, “ITC believes its aspiration to create enduring value for the nation provides the force to sustain growing shareholder value.” This vibrant view of social conscience allowed ITC to recognize the unique opportunity of blending shareholder value creation with social development. The social impact of the e-Choupals as envisioned by ITC ranges from the 332 The Fortune at the Bottom of the Pyramid short-term provision of Internet access to the long-term development of rural India as a competitive supplier (and buyer) of a range of goods and services to and from the global economy.

 

pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

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accounting loophole / creative accounting, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

Defenders of American arrangements argue that they are in the best interests of shareholders.44 By negotiating with executives on behalf of the diffuse interests of those owning stock, this argument goes, boards of directors act as faithful defenders of shareholder value. Many of those who study how this process actually works are more doubtful. Looking at corporate governance in a number of rich democracies, the political economists Peter Gourevitch and James Shinn argue that a better description is “managerism,” a system in which managerial elites are in a strong position to extract resources.45 The financier John Bogle has contended that instead of an “ownership society” in which managers serve owners, the United States is moving toward an “agency society” in which managers serve themselves.46 Two of the nation’s leading experts on corporate compensation, Lucian Bebchuk and Jesse Fried, provide many findings more consistent with a “board capture” view than a “shareholder value” perspective. In their telling, boards are typically so beholden to CEOs—who influence the nomination of board members and have substantial influence over those members’ pay and perks—they offer little countervailing authority.47 The most revealing findings concern the design of executive compensation.

 

pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

Congress:4 “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity—myself especially—are in a state of shocked disbelief.” The media and Greenspan’s many detractors after the crisis were indeed shocked by this public admission of error by “the Master.” The real shock, however, was the repudiation by the world’s most celebrated market economist of the key tenet of modern financial ideology: the idea that corporate managements’ focus on shareholder value is the most reliable and efficient way of achieving economic progress. Following this repudiation, it is clear that the directors of any institution with a banking license and any possibility of ever requiring financial guarantees must accept a fiduciary duty of care to the government and the public. The taxpayer is effectively a silent partner in every banking business whether it is openly nationalized, like Royal Bank of Scotland, or purely private, such as Goldman Sachs or HSBC.

For the thirty years following the Thatcher-Reagan revolutions, business leaders took it as axiomatic that virtually all regulation and government intervention was damaging to their interests and that companies should devote substantial resources to campaigning for a minimalist state. The closure of manufacturing industries was justified as a natural and unavoidable consequence of market economics. Ruthless industrial restructuring and the single-minded pursuit of shareholder value were not only presented as inevitable but also seen as desirable, or at least rational and efficient. What will happen now that these economic concepts of rationality and efficiency have been discredited? As the dust settles after the recession and financial crisis, a deep reconsideration of the relationships between corporate managements, shareholders, and governments will occur. Businesses will have to acknowledge wider definitions of their objectives than maximizing their company’s share price, especially in the short term.

 

pages: 458 words: 135,206

CTOs at Work by Scott Donaldson, Stanley Siegel, Gary Donaldson

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Amazon Web Services, bioinformatics, business intelligence, business process, call centre, centre right, cloud computing, computer vision, connected car, crowdsourcing, data acquisition, distributed generation, domain-specific language, glass ceiling, pattern recognition, Pluto: dwarf planet, Richard Feynman, Richard Feynman, shareholder value, Silicon Valley, Skype, smart grid, smart meter, software patent, thinkpad, web application, zero day

Ferguson: The pilot's not going to let that guy down. S. Donaldson: Right. Ferguson: So, anyway, managers came and managers went, and we were reorg'd again and again. I worked with the same technical guys, Tom Storey, Tim Holloway, Rob High, Jerry Cuomo, Eric Herness, Martin Nally for years. They were my brothers in arms. I would do anything for them and vice versa. S. Donaldson: So these folks made decisions to advance shareholder value for the whole corporation – they had that thought in mind? Ferguson: Yep. We were a team, and no matter how the company reorg'd, it was the same people. We'd be in different roles, but we were a team. We were the constant. And then the third thing for our success was communication—I am with customers all the time. So unlike a lot of technical people and many engineers in development, I spend as much time with customers as I can.

Then I'll look at things like, “Is their patent viable? Is their technology real or slideware? Has it been put together with duct tape and rubber bands?” I'll crawl under the hood a little bit. If it has an odd smell to it, I'll bring our architects and our senior developers to dive in a little bit deeper. So it's the technology aspects of the M&A. It also comes down to financial feasibility, shareholder value, all of those other things, because then you consider your fiduciary responsibility, the company hat goes on. S. Donaldson: How much do you do in terms of patents? Tolnar: I'll need to split that one up between hardware and software. Inour hardware area where we have a number of patents for our transformer monitoring solution both filed and approved. With software it's a bit different in that you really can't clearly file for software patents and some countries simply do not allow them.

 

pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

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airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K

—but they are not individuals. In some very important ways, they differ from individuals. These differences may affect corporations' defection characteristics: They have a single strong self-interest: the profit motive. The case can be made that it's the only relevant interest a corporation has. A corporation is legally required to follow its charter, which for a non-profit corporation means maximizing shareholder value. Individuals have many more competing motivations. They try to hire people who will maximize their selfish interest. The people who run corporations, as well as the people promoted within them, tend to be willing to put the corporation's selfish interest (and sometimes their own selfish interest) ahead of any larger group interest. Individuals can't hire arms and feet selected to meet their needs.

Now to the final change, which is organization behavior. In addition to allowing organizations to grow in size, and therefore power, and facilitating new types of organizational structures, information technology is also changing how organizations act. There have been many books and articles discussing how corporations today are putting short-term stock prices above all other business considerations, including company health and long-term shareholder value. I've read lots of explanations for this change. That executives' bonuses are based on short-term numbers. That stocks are used more for short-term “bets” than for long-term investments. That mutual funds and complex index options further remove investors from the companies they invest in. And that investors have access to more information faster—and can act on that information faster. You get what you measure,6 and things like short-term profitability are much easier to measure than abstract concepts like long-term viability, or intangibles like customer satisfaction or reputation.

 

pages: 418 words: 128,965

The Master Switch: The Rise and Fall of Information Empires by Tim Wu

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accounting loophole / creative accounting, Alfred Russel Wallace, Apple II, barriers to entry, British Empire, Burning Man, Cass Sunstein, Clayton Christensen, don't be evil, Douglas Engelbart, Howard Rheingold, Hush-A-Phone, informal economy, intermodal, Internet Archive, invention of movable type, invention of the telephone, invisible hand, Jane Jacobs, Joseph Schumpeter, Menlo Park, open economy, packet switching, PageRank, profit motive, road to serfdom, Ronald Coase, shareholder value, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Telecommunications Act of 1996, The Chicago School, The Death and Life of Great American Cities, the market place, The Wisdom of Crowds, too big to fail, Upton Sinclair, urban planning

For while AT&T was never formally required to run Bell Labs as a research laboratory, it did so out of exactly the sort of noblesse oblige that Vail espoused. AT&T ran Bell Labs not just for its corporate good but for the greater good as well. This is not to be naïve about the corporate profit motive: Bell Labs contributed to AT&T’s bottom line far more than plastic wire insulation. Nevertheless, it’s hard to see how funding theoretical quantum physics research would be of any immediate benefit to shareholder value. More to the point, it is hard to imagine a phone company today hiring someone to be their quantum physicist, with no rules and no boss. For, in part, the privileges AT&T enjoyed as a government-sanctioned monopoly with government-set prices were understood as being offset by this contribution to basic scientific research, an activity with proportionately more direct government funding in most other countries.

In communications, the temptations of size and monopoly arise from an interest in running a fully integrated system and controlling every possible source of revenue. Yet in the rebuilt industries something is missing, like a part overlooked, and this is the sense of civic responsibility. The old empires were suppressive and controlling in their own ways, yet each had some sense of public duty, informal or regulated, that they bore with their power. At their best, they were enlightened despots. But the new industries’ ethos held that profit and shareholder value were the principal duty of an information company. What reemerged was similar in body but different in its soul. The information empires created in the 1980s shared many of the worst aspects of both open and closed forms. The new giants had much of the power of the old, without the noblesse oblige. And by the late 1990s it began to seem inevitable that just two industries, the Bell companies and the media conglomerates, would soon control everything in the world of information.

 

pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

At a business such as Microsoft or Exxon Mobil, the term “enhancing shareholder value” really means something. Since these firms have very little debt, acting in the shareholders’ interest is equivalent to maximizing the value of the firm. But Wall Street banks employ enormous leverage. At the end of 2006, Lehman Brothers had $19.2 billion in shareholders’ equity and $484 billion in liabilities; Bear Stearns had $12.1 billion of equity and $338 billion in liabilities; Merrill Lynch had $39 billion in equity and $802 billion in liabilities. In thinly capitalized businesses like these, the debt holders’ investments represent a great deal of the company’s value, whereas the shareholders’ equity is a mere sliver. Incentivizing a CEO to focus exclusively on shareholder value creates a potential conflict of interest. Finally, some economists are recognizing these problems.

 

pages: 518 words: 147,036

The Fissured Workplace by David Weil

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accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business process, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, corporate governance, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, Y2K, yield management

Pizza Hut’s franchise agreement includes the right to close an outlet where a failure to meet standards potentially threatens the health and safety of either employees or customers.67 The ultimate penalty for failing to live up to standards is loss of the franchise itself and the associated investments of the franchisee. Given the size of these investments, they are an area of significant tension and litigation. But as I explore in Chapter 6, the franchisor retains significant authority to terminate franchisees.68 Coming Full Circle: Capital Market Responses to Shedding Employment Financial markets increasingly drive companies under their exacting scrutiny to focus on shareholder value. This leads them to shed business units and products no longer viewed as core and to prune away remaining activities even in the core that might be viewed as peripheral. Several recent studies provide evidence underscoring the connection between capital market pressure and employment restructuring. Employment Impacts of Private Equity Activity Based on a study of 3,200 firms that were targeted by private equity firms between 1980 and 2005 and the 150,000 establishments connected to them, Steven Davis et al. estimate the impact of private equity buyouts on employment growth and destruction relative to a control sample of similar firms and establishments that were not acquired.

Jacoby (1999). 3. Why Fissure? 1. In a famous essay at the time, Milton Friedman (1970) raised a very different concern related to the same detachment between ownership and management. He argued that the growing discussion among business executives about social responsibility was naïve at best and counterproductive at worst, since the prime responsibility for management was to maximize shareholder value. “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

 

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

In 1980, General Motors dismissed contemptuously an inquiry from its largest shareholder, the Californian public employees retirement plan, about its succession planning. In the 1980s, corporations were urged to direct economic rents exclusively to shareholders. The threat of hostile takeover focused managers on the pursuit of "shareholder value." Imaginative financiers put together packages that made it possible to attack even the largest of companies. Michael Milken, who put together some extraordinary deals for shady figures in the United States, was jailed, and the firm for which he worked, Drexel Burnham Lambert, went into liquidation. 10 But the effect ofhis activities led to a continuing emphasis on shareholder value even if Milken himself was out of business. As this trend developed, executives in large corporations no longer compared themselves with those who had risen to the top of other professions or large organizations-top lawyers or doctors, civil servants, managers of nationalized industries.

 

pages: 159 words: 45,073

GDP: A Brief but Affectionate History by Diane Coyle

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Asian financial crisis, Berlin Wall, big-box store, Bretton Woods, BRICs, clean water, computer age, conceptual framework, crowdsourcing, Diane Coyle, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Fall of the Berlin Wall, falling living standards, financial intermediation, global supply chain, happiness index / gross national happiness, income inequality, income per capita, informal economy, John von Neumann, Kevin Kelly, Long Term Capital Management, mutually assured destruction, Nathan Meyer Rothschild: antibiotics, new economy, Occupy movement, purchasing power parity, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thorstein Veblen, University of East Anglia, working-age population

The payment of multimillion-dollar and -pound remuneration packages by the elite to itself (all remuneration committees being filled with the same kind of people). The creation of toxic financial instruments that multiplied and focused risks. The self-delusions and inadequacies of regulatory bodies that grew too close to those people and businesses they were supposed to be regulating. Above all, the loss of perspective about the purpose of business, which is not at all the maximization of short-term profit or even shareholder value, but rather delivering goods and services to customers (in ways they might not even know they want), in a mutually beneficial transaction. Profit and share price increases are a side effect, not a goal.3 Finally, the tragic downfall, the nemesis. By the mid-2000s, despite the turmoil of the earlier Asian financial crisis and dot-com bust (in 2001), so-called Anglo-Saxon capitalism appeared triumphant.

 

How to Be Black by Baratunde Thurston

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affirmative action, carbon footprint, Columbine, dark matter, desegregation, housing crisis, phenotype, Plutocrats, plutocrats, Rosa Parks, shareholder value, supply-chain management, the scientific method, transatlantic slave trade

Part B is about defending the company against charges of racism or lack of diversity, and your membership on the company’s diversity committee is essential to fulfilling this job requirement. The primary functions of the diversity committee are to establish meetings, generate reports, and use the word “diversity.” A sample description might look like this: Here at Optimus Research Group, we believe in three things: maximizing shareholder value, providing an exciting environment for professional development, and diversity. We heart diversity. Diversity is a core value and has been since our founding. The diversity committee embraces a diverse definition of diversity and seeks to provide programs and other opportunities that encourage knowledge of and respect for diversity. This includes, but is not limited to, race, gender, religion, age, sexual orientation, ethnicity, geography, socioeconomic background, taste in music, hairstyles, language, preferred airline, mental health status, body size, and mobile phone service provider.

 

The Orbital Perspective: Lessons in Seeing the Big Picture From a Journey of 71 Million Miles by Astronaut Ron Garan, Muhammad Yunus

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Airbnb, barriers to entry, book scanning, Buckminster Fuller, clean water, corporate social responsibility, crowdsourcing, global village, Google Earth, Indoor air pollution, jimmy wales, optical character recognition, ride hailing / ride sharing, shareholder value, Silicon Valley, Skype, smart transportation, Stephen Hawking, transaction costs, Turing test, Uber for X, web of trust

You don’t have to be in orbit to participate in the orbital perspective. In this view, directing all of your giving to a charity, where a significant portion of the money might go to overhead, may make less sense than investing some portion in a social business that operates like any other business, but with a primary and overarching goal to create some type of social and/or environmental good rather than to maximize profits, return on investment, or shareholder value. Now a much higher percentage of your money (potentially one hundred percent, if business operations are able to cover overhead) is going to create the intended good. Instead of creating a one-time, partial good, you’re creating long-term, sustainable good. And if all goes well, the money invested will eventually be returned to you to do with as you wish, including reinvesting in another social business helping to solve another problem.

 

The Corporation: The Pathological Pursuit of Profit and Power by Joel Bakan

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Berlin Wall, Cass Sunstein, corporate governance, corporate personhood, corporate social responsibility, energy security, Exxon Valdez, IBM and the Holocaust, joint-stock company, laissez-faire capitalism, market fundamentalism, Naomi Klein, new economy, race to the bottom, Ralph Nader, Ronald Reagan, shareholder value, South Sea Bubble, The Wealth of Nations by Adam Smith, Triangle Shirtwaist Factory, urban sprawl

Recently, three of the world's top business thinkers-Harvard's Robert Simons, McGill's Henry Mintzberg, and Oxford's Kunal Basu-joined forces to pen a manifesto for the corporation. "Capitalism is facing a crisis," they warned. Scandals on Wall Street are "merely the tip of the black iceberg," beneath which lies "a culture that is increasingly defined by selfishness" and that threatens to destroy business, "the very thing we cherish." CEOs, they say, "have learned to repeat almost mindlessly," like a mantra, that "corporations exist to maximize shareholder value"; they are trained to believe selfinterest is "the first law of business." And the notion that "a rising tide lifts all boats" is believed by businesspeople to "rationalize what otherwise looks like self-serving behavior," despite its profound implausibility (the facts belie the concept, according to the professors, who point out that "at the height of a decade-long economic boom, one in six American children was officially poor and 26% of the workforce was subsisting on poverty-level wages . . .

 

pages: 218 words: 44,364

The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations by Ori Brafman, Rod A. Beckstrom

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Atahualpa, barriers to entry, Burning Man, disintermediation, experimental economics, Firefox, Francisco Pizarro, jimmy wales, Kibera, Lao Tzu, Network effects, pez dispenser, shareholder value, Silicon Valley, Skype, The Wisdom of Crowds, union organizing

The Catalyst Versus the CEO While both are leader types, catalysts and CEOs draw upon very different tools. A CEO is The Boss. He's in charge, and he occupies the top of the hierarchy. A catalyst interacts with people as a peer. He comes across as your friend. Because CEOs are at the top of the pyramid, they lead by command-and-control. Catalysts, on the other hand, depend on trust. CEOs must be rational; their job is to create shareholder value. Catalysts depend on emotional intelligence; their job is to create personal relationships. CEOs are powerful and directive; they're at the helm. Catalysts are inspirational and collaborative; they talk about ideology and urge people to work together to make the ideology a reality. Having power puts CEOs in the limelight. Catalysts avoid attention and tend to work behind the scenes. CEOs create order and structure; catalysts thrive on ambiguity and apparent chaos.

 

Global Financial Crisis by Noah Berlatsky

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accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

There is now a danger of premature reprivatisation, which would leave the taxpayer with a vast toxic dump of losses and a poor price for the share sale. There are already rumours that Northern Rock is being lined up for a rapid sale. If banks are to return to “normal” commercial operation under private ownership, the issue arises of how they should be regulated. The Cruickshank report on banking, commissioned by Gordon Brown a decade ago, posed the central question: why should banks be allowed to pursue the maximisation of shareholder value—and management bonuses— when they are underwritten by the taxpayer? This question has never been answered properly. Banks should either surrender their protection and compete like other firms, or be protected and have their profit regulated like utilities. In the wake of a banking crisis, the logic is even starker. In the past few weeks we have seen leading executives at Barclays awarding themselves millions while the bank ultimately remains dependent on government guarantees, despite its precarious independence.

 

The Art of Profitability by Adrian Slywotzky

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business process, Indoor air pollution, Isaac Newton, pattern recognition, rolodex, shareholder value

As a frequent speaker on the changing face of business strategy and business design, he has been featured at The World Economic Forum at Davos and at numerous other major conferences. Mr. Slywotzky holds degrees from Harvard College, Harvard Law School, and Harvard Business School. 157 THE ART OF PROFITABILITY About Mercer Management Consulting As one of the world’s premier corporate strategy firms, Mercer Management Consulting helps leading enterprises achieve sustained shareholder value growth through the development and implementation of innovative business designs. Mercer’s proprietary business design techniques, combined with its specialized industry knowledge and global reach, enable companies to anticipate changes in customer priorities and the competitive environment, and then design their businesses to seize opportunities created by those changes. The firm serves clients from 22 offices in the Americas, Europe, and Asia. 158 THE ART OF PROFITABILITY Beijing Suite 1825B, Tower 2, Bright China Chang An Building 7 Jianguomennei Avenue Beijing 100005 86/ 10 6510 1758 86/ 10 6510 1759 fax Hong Kong 32nd Floor NatWest Tower Times Square One Matheson Street Causeway Bay Hong Kong 852/ 2506 0767 852/ 2506 4478 fax Boston 33 Hayden Avenue Lexington, MA 02421 1/ 781 861 7580 1/ 781 862 3935 fax Houston 1136 North Kirkwood Houston, TX 77043 281 493 6400 281 754 4328 fax Buenos Aires Florida 234 Piso 4 C1005AAF Buenos Aires 54/ 11 4394 6488 54/ 11 4326 7445 fax Lisbon Av.

 

pages: 222 words: 70,559

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis by Stephen Leeb, Donna Leeb

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Buckminster Fuller, diversified portfolio, fixed income, hydrogen economy, income per capita, index fund, mortgage debt, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit motive, reserve currency, rising living standards, Ronald Reagan, shareholder value, Silicon Valley, Vanguard fund, Yom Kippur War, zero-coupon bond

With oil companies no longer pulling out all the stops to increase production, the drillers and service companies will be less in demand. Moreover, there is no long-term scarcity of drilling rigs or drilling services. And even as oil and gas producers, by dint of maximizing their profits, end up with more money to spend, there is no guarantee they will spend it on drilling. Rather, they are equally likely to use it to raise dividends, repurchase shares, or undertake some other means of increasing shareholder value. Still, we wouldn’t completely rule out investing in the service companies. As speculations leveraged to rises in oil prices, they could merit a small place in the energy portion of many portfolios. Altogether there are less than a dozen major players in the oil services arena. The clear standout in the field is Schlumberger, the most profitable and dominant diversified oil service company in the world.

 

pages: 274 words: 75,846

The Filter Bubble: What the Internet Is Hiding From You by Eli Pariser

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A Declaration of the Independence of Cyberspace, A Pattern Language, Amazon Web Services, augmented reality, back-to-the-land, Black Swan, borderless world, Build a better mousetrap, Cass Sunstein, citizen journalism, cloud computing, cognitive dissonance, crowdsourcing, Danny Hillis, data acquisition, disintermediation, don't be evil, Filter Bubble, Flash crash, fundamental attribution error, global village, Haight Ashbury, Internet of things, Isaac Newton, Jaron Lanier, Jeff Bezos, jimmy wales, Kevin Kelly, knowledge worker, Mark Zuckerberg, Marshall McLuhan, megacity, Netflix Prize, new economy, PageRank, paypal mafia, Peter Thiel, recommendation engine, RFID, sentiment analysis, shareholder value, Silicon Valley, Silicon Valley startup, social graph, social software, social web, speech recognition, Startup school, statistical model, stem cell, Steve Jobs, Steven Levy, Stewart Brand, technoutopianism, the scientific method, urban planning, Whole Earth Catalog, WikiLeaks, Y Combinator

And it’s not infrequently the case that engineers who are deeply mistrustful of power in the hands of others see themselves as supreme rationalists impervious to its effects. It may be that this is too much power to entrust to any small, homogeneous group of individuals. Media moguls who get their start with a fierce commitment to the truth become the confidants of presidents and lose their edge; businesses begun as social ventures become preoccupied with delivering shareholder value. In any case, one consequence of the current system is that we can end up placing a great deal of power in the hands of people who can have some pretty far-out, not entirely well-developed political ideas. Take Peter Thiel, one of Zuckerberg’s early investors and mentors. Thiel has penthouse apartments in San Francisco and New York and a silver gullwing McLaren, the fastest car in the world.

 

pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, moral hazard, mortgage debt, mortgage tax deduction, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra

Lee’s greatness was riding out to greet the shattered divisions returning from Pickett’s Charge with the simple message: “It is all my fault.” What banker has said as much? Of course, no politician has either, but that is irrelevant. The legitimacy of banking is what is at issue. So, what was wrong with the old banking model that needs to be confessed to as a blunder? The moment when banking or finance as a whole lost legitimacy was when the object of management became maximizing shareholder value as crudely measured by stock price. Since stock price is closely linked to return on equity—how much money a company earns on invested capital—this is an invitation to minimize capital and manipulate earnings through financial engineering. Leverage—that is, working the business with borrowed money—was always considered a grave fault in would-be borrowers by an older generation of bankers. It vastly increases the odds that some unforeseen shock will render a company unable to pay its bills.

 

pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

The list of heavy economic thinkers who denied that there was a bubble in the real-estate market, for example, is long and shiny with glittering names, every prestigious one of them convinced that prices were being driven upward by fundamentals, as theory says such prices almost always are.11 More disastrous by far, though, was the economists’ push to roll back regulations against fraud in financial markets, on the smug belief that financiers were so keenly rational and so zealous to protect shareholder value that they simply would not allow fraud to happen. That fraud, in fact, happened in all sorts of catastrophic ways and at many different levels made no difference; theory canceled it all out.12 Abstract reasoning like this is not solely the province of advanced thinkers; another place where you find it is, of course, the Glenn Beck empire. Parsing a recent performance by his former fave British rock band Muse on his radio show in February 2011, the host declared that he had changed his mind about the group, that for all their rebel lyrics they didn’t get what the conservative revival was about after all.

 

pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

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affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial robot, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor

Human capital metrics involve the numerical measurement of individual performance through software programs that are used to assess individual, team, or organizational performance. Writing for CFO Magazine, Craig Schneider observed how chief financial offices were behind attempts to measure the value added of the workforce because established HR measures, such as head count, turnover, or the cost of compensation and benefits, “no longer cut it in this new world of accountability. They don’t go far enough to create shareholder value and align people decisions with corporate objectives.”38 The implications for employees were highlighted in our discussions with a senior manager working for an international bank in India. The bank had developed “staff league tables” to measure both hard performance, such as meeting sales targets, how many times they had visited customers, and so on, and soft performance, such as relationship management or customer satisfaction.

 

pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John von Neumann, Joseph Schumpeter, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, naked short selling, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Classical model – a microeconomic-based approach to economic decisionmaking that assumes that all actors are rational and maximize their selfinterest, and is driven by the principle that prices adjust to ensure supply is equal to demand. Collateralized debt obligations – investment-grade securities backed by a package of loans, mortgages, bonds, or other debt obligations. 188 Glossary 189 Consumption CAPM – an extension of the CAPM that includes future consumption preferences. Corporate finance – the study of financial decisions made by corporations to maximize shareholder value. Correlation – the statistical relationship between two variables, typically measured by demonstrating that the movement of one variable is associated with movement of the other. Covariance – a measure of the degree to which returns on two risky assets are correlated in their movement. Cowles Commission – a research institute founded by Alfred Cowles to stimulate new theories in the decision sciences that can help explain financial markets.

 

pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, collapse of Lehman Brothers, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, mortgage debt, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional

But even he continued to believe that an impaired ability of banks to lend was the main reason for the Great Recession. As we have demonstrated in this book, the facts say otherwise. When a financial crisis erupts, lawmakers and regulators must address problems in the banking system. They must work to prevent runs and preserve liquidity. But policy makers have gone much further, behaving as if the preservation of bank creditor and shareholder value is the only policy goal. The bank-lending view has become so powerful that efforts to help home owners are immediately seen in an unfavorable light. This is unacceptable. The dramatic loss in wealth of indebted home owners is the key driver of severe recessions. Saving the banks won’t save the economy. Instead, bolstering the economy by attacking the levered-losses problem directly would save the banks.

 

pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, moral hazard, mortgage debt, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

And remember that other factors contributed to the financial crisis that brought on the depression besides low interest rates: aggressive marketing of mortgages, a widespread appetite for risk, a highly competitive, largely deregulated finance industry, and debt securitization. Businessmen and individuals would, it is true, have been more cautious had there been no prospect of government bailouts (that is the moralhazard issue). Although bailouts do not save all firms, all careers, or all shareholder values, firms that are saved by a bailout retain employees who would have lost their jobs had the firm not been saved, and equity values are preserved that would disappear in bankruptcy. Still, a bailout is a traumatic experience. Even holders of secure debt are often badly hurt, because the value of their collateral falls. But overriding moral-hazard concerns is the fact that depressions would be significantly deeper and last significantly longer were government unwilling to take aggressive steps to counter them with monetary and fiscal measures.

 

pages: 302 words: 73,581

Platform Scale: How an Emerging Business Model Helps Startups Build Large Empires With Minimum Investment by Sangeet Paul Choudary

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3D printing, Airbnb, Amazon Web Services, barriers to entry, bitcoin, blockchain, business process, Clayton Christensen, collaborative economy, crowdsourcing, cryptocurrency, data acquisition, frictionless, game design, hive mind, Internet of things, invisible hand, Kickstarter, Lean Startup, Lyft, M-Pesa, Mark Zuckerberg, means of production, multi-sided market, Network effects, new economy, Paul Graham, recommendation engine, ride hailing / ride sharing, shareholder value, sharing economy, Silicon Valley, Skype, Snapchat, social graph, social software, software as a service, software is eating the world, Spread Networks laid a new fibre optics cable between New York and Chicago, TaskRabbit, the payments system, too big to fail, transport as a service, two-sided market, Uber and Lyft, Uber for X, Wave and Pay

Network effects make the platform more valuable as more value is created and exchanged by the users of the platform. This, in turn, attracts even more users, scaling the value creation further. Greater value creation attracts greater value consumption, and vice versa. The network effect creates positive feedback that enables systems to scale faster as they grow. These concepts are explored in detail in subsequent chapters in this section. DATA IS THE NEW DOLLAR In the quest to maximize shareholder value, organizations have traditionally been optimized to absorb revenue. Sales professionals are measured and incentivized based on the revenue they help the organization absorb. In the quest to transform into platforms, organizations must shift from a culture of dollar absorption to a culture of data absorption. Business units should be measured not just in terms of dollars absorbed but also in terms of monetizable data absorbed.

 

pages: 1,445 words: 469,426

The Prize: The Epic Quest for Oil, Money & Power by Daniel Yergin

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anti-communist, Ayatollah Khomeini, bank run, Berlin Wall, British Empire, colonial exploitation, Columbine, cuban missile crisis, energy security, European colonialism, Exxon Valdez, financial independence, fudge factor, informal economy, joint-stock company, land reform, megacity, Mikhail Gorbachev, Monroe Doctrine, new economy, North Sea oil, oil rush, oil shale / tar sands, oil shock, postnationalism / post nation state, price stability, RAND corporation, rent-seeking, Ronald Reagan, shareholder value, Thomas Malthus, Yom Kippur War

In such cases, the obvious implication was that a new management might be able to increase the price of the stock and so enhance that noble cause, "shareholders' value," in a way that the old management had failed to do. There was a further twist: It could cost two or three times more to add a barrel of oil by exploration than by buying the assets of an existing operation. To the management of companies, the obvious implication was that it was cheaper to "explore for oil on the floor of the New York Stock Exchange"—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico. Here, again, shareholders' value was a driving force. Many companies had taken the huge cash flows that poured out of the two oil shocks and put them right back into exploration in the United States, seeking secure alternatives to OPEC.

That, of course, could have happened to any of the major oil companies in the feverish climate that followed the oil shocks of the 1970s. But Gulf paid the ultimate price.[10] Shareholders' Value Pickens was not yet through. In rapid fire, he made bids for both Phillips, in Bartlesville, Oklahoma, and Unocal, in Los Angeles. On Phillips, he was trailed by an aggressive Wall Street financier, Carl Icahn, who had already bagged Trans World Airlines. Both companies, however, successfully fought off the takeover attempts through the courts and by assuming a great deal of debt, which enabled them to buy back stock at a much higher price than had been the case before the attacks, thus increasing the payout to shareholders. In both cases, however, Mesa made significant profits. Yet the clamor of "shareholders' value" seemed to be losing its populist appeal. After Unocal emerged intact from the assault, Fred Hartley, the company's chairman, received a call from Armand Hammer of Occidental, who told him that he deserved a Nobel Prize for his valor.

Boone Pickens, who, more than anyone else, detonated the explosions that remade the corporate landscape of oil, obliterating in the process some of the best-known landmarks. Boone Pickens became a celebrity of sorts, expert at turning aside reporters with a dry laugh when they solemnly asked if he were the "real life" J. R. Ewing of the Dallas television series. In the financial community, Pickens was widely applauded among investors; he made things happen, he enhanced shareholders' value. In the oil industry, however, while he was admired by some, he was loathed by others. Placing himself strategically at the junction of the oil industry and Wall Street, he said that he was pushing the oil industry back to basics, fighting its self-indulgent waste, saving it from its own excesses and illusions and arrogance, and serving the often-ignored interests of the heretofore-disenfranchised shareholders.

 

pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

He found that the shareholders of the acquiring companies usually lost value. “It is more likely than not that any given acquisition will fail,” Sirower concluded, based on his own research and that of others in the 1980s and 1990s. While the shareholders of the target companies consistently gained in the acquisitions from the premiums paid over the prevailing stock prices, these gains were not adequate to offset the consistent losses in shareholder value of the acquiring firms. BusinessWeek later did a follow-up study in the early 2000s, confirming that stockholders of acquiring firms fared worse a year later on most deals. “So eager were they to snare a deal,” wrote the magazine, “that the premium they paid gobbled up the merger’s whole potential economic gain from the get-go.” It would become the first of the great speculative bubbles of the age of greed.

Peters’s extraordinary popularity, it eventually turned out, was mostly a distraction—and for many, Welch among them, a pretense. Welch was named CEO near the bottom of a long bear market and retired near the top of the longest bull market in history. GE’s profits rose ten times over these years to $13 billion in profits on $130 billion in sales. But its stock price rose by thirty times. When Welch took over GE in 1980, it was the ninth most profitable company in the nation. Now it was first, second, or third. Shareholder value reached $500 billion, more than any other company in America. The stock price was Welch’s personal measure of achievement, though he later denied it. The boom of the late 1990s on balance sent the wrong message to American managers: cut costs rather than innovate. Despite its appeal, In Search of Excellence had little true staying power. —— Welch was born in 1935 in Peabody, Massachusetts, and was brought up in the pretty coastline town of Salem, where his parents moved when he was nine.

 

pages: 677 words: 206,548

Future Crimes: Everything Is Connected, Everyone Is Vulnerable and What We Can Do About It by Marc Goodman

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23andMe, 3D printing, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, airport security, Albert Einstein, algorithmic trading, artificial general intelligence, augmented reality, autonomous vehicles, Baxter: Rethink Robotics, Bill Joy: nanobots, bitcoin, Black Swan, blockchain, borderless world, Brian Krebs, business process, butterfly effect, call centre, Chelsea Manning, cloud computing, cognitive dissonance, computer vision, connected car, corporate governance, crowdsourcing, cryptocurrency, data acquisition, data is the new oil, Dean Kamen, disintermediation, don't be evil, double helix, Downton Abbey, Edward Snowden, Elon Musk, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, future of work, game design, Google Chrome, Google Earth, Google Glasses, Gordon Gekko, high net worth, High speed trading, hive mind, Howard Rheingold, hypertext link, illegal immigration, impulse control, industrial robot, Internet of things, Jaron Lanier, Jeff Bezos, job automation, John Harrison: Longitude, Jony Ive, Julian Assange, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kuwabatake Sanjuro: assassination market, Law of Accelerating Returns, Lean Startup, license plate recognition, litecoin, M-Pesa, Mark Zuckerberg, Marshall McLuhan, Menlo Park, mobile money, more computing power than Apollo, move fast and break things, Nate Silver, national security letter, natural language processing, obamacare, Occupy movement, Oculus Rift, offshore financial centre, optical character recognition, pattern recognition, personalized medicine, Peter H. Diamandis: Planetary Resources, Peter Thiel, pre–internet, RAND corporation, ransomware, Ray Kurzweil, refrigerator car, RFID, ride hailing / ride sharing, Rodney Brooks, Satoshi Nakamoto, Second Machine Age, security theater, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, smart meter, Snapchat, social graph, software as a service, speech recognition, stealth mode startup, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, Stuxnet, supply-chain management, technological singularity, telepresence, telepresence robot, Tesla Model S, The Wisdom of Crowds, Tim Cook: Apple, trade route, uranium enrichment, Wall-E, Watson beat the top human players on Jeopardy!, Wave and Pay, We are Anonymous. We are Legion, web application, WikiLeaks, Y Combinator, zero day

Surprisingly, the org chart of Crime, Inc. would look remarkably familiar to anybody in the traditional corporate world. It’s part Peter Drucker mixed with the latest cutting-edge business practices taught at Wharton or Harvard Business School. While there are elements of the digital underground that are not purely motivated by profit, such as hacktivists, Crime, Inc. is first and foremost about the money—shareholder value, if you will. These criminal enterprises go to great lengths to ensure their sustainability and as such are almost exclusively located in jurisdictional safe havens, places with weak governments, unstable political regimes, and police forces willing to look the other way, for a fee of course. Within these criminal syndicates, there are divisions of labor, supply chain management, department heads, outside consultants, and team deliverables.

CARL SAGAN Breaking: Two Explosions in the White House and Barack Obama Is Injured,” reported the Associated Press on its official Twitter news feed at 1:07 p.m. on April 23, 2013. In an instant, the AP’s two million followers had retweeted the news thousands of times, and the world went into panic mode. On Wall Street, the reaction was both swift and staggering: the Dow Jones Industrial Average and the S&P 500 plummeted. Within three minutes, the AP’s tweet had wiped out $136 billion in shareholder value. Thereafter, the tweets flew fast and furious. At 1:13 p.m., the AP confirmed that the explosion-reporting tweet was bogus. At 1:16 p.m., the White House press secretary, Jay Carney, was forced to comment on live TV: “I can say that the President is fine, I was just with him.” Finally at 1:17 p.m., the Syrian Electronic Army (SEA) admitted it had hacked the Associated Press. Within a matter of nine minutes, the SEA was able to rock some of the world’s most powerful institutions, from Wall Street to the White House, with one wayward tweet.

 

pages: 602 words: 177,874

Thank You for Being Late: An Optimist's Guide to Thriving in the Age of Accelerations by Thomas L. Friedman

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3D printing, additive manufacturing, affirmative action, Airbnb, AltaVista, Amazon Web Services, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Berlin Wall, Bernie Sanders, bitcoin, blockchain, business process, call centre, centre right, Clayton Christensen, clean water, cloud computing, corporate social responsibility, crowdsourcing, David Brooks, demand response, demographic dividend, demographic transition, Deng Xiaoping, Donald Trump, Erik Brynjolfsson, failed state, Fall of the Berlin Wall, Ferguson, Missouri, first square of the chessboard / second half of the chessboard, Flash crash, game design, gig economy, global supply chain, illegal immigration, immigration reform, income inequality, indoor plumbing, Internet of things, invention of the steam engine, inventory management, Jeff Bezos, job automation, John von Neumann, Khan Academy, Kickstarter, knowledge economy, knowledge worker, land tenure, linear programming, low skilled workers, Lyft, Mark Zuckerberg, Maui Hawaii, Menlo Park, Mikhail Gorbachev, mutually assured destruction, pattern recognition, planetary scale, pull request, Ralph Waldo Emerson, ransomware, Ray Kurzweil, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Reagan, Second Machine Age, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, smart cities, South China Sea, Steve Jobs, TaskRabbit, Thomas L Friedman, transaction costs, Transnistria, urban decay, urban planning, Watson beat the top human players on Jeopardy!, WikiLeaks, women in the workforce, Y2K, Yogi Berra

So we hire thirty thousand [employees] off the street each year. We fill another thirty thousand jobs through rotations and promotions. It costs about two thousand dollars just to hire someone, so our preference always is to use our internal employees. It is more cost-effective and will generate more employee engagement and productivity, which means employees will go the extra mile so customers will be served better and shareholder value will increase. The companies with the most highly engaged workforces earn three times those with less. But this has meant placing a lot more lifelong learning demands on a lot more employees. Most employees “embrace what we’re trying to do,” said Blase. “They say, ‘Just give me the tools, point me in the right direction, help me make [the transition] seamless, and make it cost-effective and make it mobile and make it Web based, so I can do it on my own time, and make it flexible and make the training in a format that I can learn quickly and effectively.’”

A lot is teaching people to climb poles, install services, and run retail stores, but now a lot more is in data science, software-defined networks, Web development, introduction to programming, machine learning, and the Internet of Things. And if you want to take a general STEM [science, technology, engineering, math] course that is not part of our program, we will pay for it, too. If you want to learn, we’re all in, because, again, it leads to more engaged employees; that equals better customer service, more loyal customers, and more shareholder value. We did not have anything like this when I was growing up in the company. These supports are for jobs paying sixty thousand to ninety thousand dollars a year. The company registers all certificates and degrees earned by employees in their company profiles and can easily search them through big data tools. And if you show that you are motivated to get these advanced degrees and certificates, said Blase, “we will give you first crack when a job opens.

 

pages: 554 words: 168,114

Oil: Money, Politics, and Power in the 21st Century by Tom Bower

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Ayatollah Khomeini, banking crisis, bonus culture, corporate governance, credit crunch, energy security, Exxon Valdez, falling living standards, fear of failure, forensic accounting, index fund, interest rate swap, kremlinology, LNG terminal, Long Term Capital Management, margin call, Mikhail Gorbachev, millennium bug, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, passive investing, peak oil, Piper Alpha, price mechanism, price stability, Ronald Reagan, shareholder value, short selling, Silicon Valley, sovereign wealth fund, transaction costs, transfer pricing, éminence grise

The easy oil, the easy cost savings, they’re done.” Over the previous seven years, Mobil had fired 33 percent of its workforce and sold billions of dollars’ worth of assets. By mid-1998 the downturn had become longer and more entrenched than Noto had anticipated. “Now we’re getting down to the muscle and not fat,” he said. Despite following John Browne’s example of cutting costs and generating shareholder value, the reasons for a merger had not changed. “Ours is a great business,” Noto conceded, “so long as you’re number one or two… The status quo just didn’t work.” Mobil, he decided, was too small, and while the oil price was low, the company, according to an assistant, was “sliding south.” Not long before, Noto had damned those who left the company as “traitors.” In the new circumstances, that was forgotten.

BP was locked in. Over the weekend, news about the deal leaked into the media, and negotiations were accelerated. Browne was untroubled. The public announcement of the bid on April 4 raised Browne’s profile into the stratosphere. He accepted the invitation to stand in the spotlight. By any measure, he was leading a global juggernaut ranking alongside Silicon Valley’s giants. “Its emphasis on growth and shareholder value,” commented Philip Verleger, “has paid enormous benefits to the BP shareholders.” BP’s flexibility and lack of bureaucracy, added Verleger, outshone its competitors. Unmentioned in Browne’s public pronouncements was ExxonMobil, which was still substantially ahead of BP at $243 billion. Hailing the creation of “the largest oil output of any non-state company,” Browne spoke about “a compelling strategic and geographic fit of quality assets” and “the immense potential it offers for future growth.

 

pages: 406 words: 88,820

Television disrupted: the transition from network to networked TV by Shelly Palmer

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barriers to entry, call centre, disintermediation, en.wikipedia.org, hypertext link, interchangeable parts, invention of movable type, James Watt: steam engine, linear programming, market design, pattern recognition, recommendation engine, Saturday Night Live, shareholder value, Skype, spectrum auction, Steve Jobs, subscription business, Telecommunications Act of 1996, Vickrey auction, yield management

But we’ll never know how different the world might have been had the recorded music industry been willing to embrace the technology. It should be noted that, when queried, most seasoned recording industry executives will tell you that it is not their job to move the industry forward or lead the technological revolution. Their jobs are to make a profit each quarter and, in the case of publicly traded companies, to increase shareholder value to the highest possible extent. If it were possible to take advantage of any new technology and accomplish their primary objec-tives, they would be happy to do so. This is just another stunning example of business rules and strategies lagging behind technological innovation. Copyright © 2006, Shelly Palmer. All rights reserved. 5-Television.Chap Five v3.qxd 3/20/06 7:22 AM Page 66 66 C H A P T E R 5 Emerging Networks MP3 Files and Compression The digital audio files that captured the imagination of the primordial file sharers were medium to low fidelity Motion Pictures Expert Group Audio Layer 3 files, or MP3 for short.

 

pages: 336 words: 90,749

How to Fix Copyright by William Patry

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A Declaration of the Independence of Cyberspace, barriers to entry, big-box store, borderless world, business intelligence, citizen journalism, cloud computing, crowdsourcing, death of newspapers, en.wikipedia.org, facts on the ground, Frederick Winslow Taylor, George Akerlof, Gordon Gekko, haute cuisine, informal economy, invisible hand, Joseph Schumpeter, Kickstarter, knowledge economy, lone genius, means of production, new economy, road to serfdom, Ronald Coase, Ronald Reagan, semantic web, shareholder value, Silicon Valley, The Chicago School, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, web application, winner-take-all economy

There is no reason to believe that extending copyright will induce corporate copyright owners to spend more money on preservation than would the vast number of entrepreneurs who would have access to films but for their failure to go into the public domain.128 The decision of studios whether to invest in any film is based on a perceived ability to turn a profit from that particular movie. The same is true of any other copyrighted work. The only obligation of the media corporations that dominate the ownership of copyrights is to their shareholders, and that obligation is to maximize shareholder value. If a better return on investment can be made on real estate, that is where the money will go. If the money is better spent on the latest blockbuster rather than restoring a movie from the 1940s with no chance of another theatrical release, that’s where the money will go, and understandably so. Here is another example. The failure of corporate copyright owners to reissue historically important works despite the extension of the duration of copyright for twenty more years has been extensively studied in the recorded music field.

 

pages: 471 words: 109,267

The Verdict: Did Labour Change Britain? by Polly Toynbee, David Walker

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banking crisis, Big bang: deregulation of the City of London, call centre, central bank independence, congestion charging, Corn Laws, Credit Default Swap, decarbonisation, deglobalization, deindustrialization, Etonian, failed state, first-past-the-post, Frank Gehry, gender pay gap, Gini coefficient, high net worth, hiring and firing, illegal immigration, income inequality, knowledge economy, labour market flexibility, market bubble, millennium bug, North Sea oil, Northern Rock, offshore financial centre, pension reform, Plutocrats, plutocrats, Ponzi scheme, profit maximization, purchasing power parity, shareholder value, Skype, smart meter, stem cell, The Spirit Level, too big to fail, University of East Anglia, working-age population, Y2K

Even though real GDP per capita grew faster in the UK than in France or Germany, GDP for each hour worked showed the same gap with France as a generation earlier, in 1979. An old question in UK economic history was one Labour never really answered. Problems of growth and productivity stemmed from the way companies and their managers performed, but what could government do from the outside to improve them? When, after the crash, the dogmas of ‘shareholder value’ crumbled, a Labour view – any view – might have been a reference point in debate. * Labour did both deregulation and intervention, which seemed to reflect business’s own lack of coherence. Typical was Philip Bowman, chief executive of Smiths Group, who in one breath bemoaned ‘red tape’ and excess tax and in the next demanded support for business and, by the way, more state-funded research and development (Financial Times, 25 March 2010).

 

pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyout