shareholder value

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pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

Secondly, neoliberalism was sweeping the world by the 1980s, and with it the idea that the ruthless pursuit of profit was the only responsibility of any corporation.5 This translated into a simple imperative for corporate executives: maximise shareholder value.6 The valorisation of profit was cemented as managers’ pay packages were linked to share prices, ensuring that they would faithfully pursue the interests of their shareholders. As neoliberals gained control of many political parties, states actively began to encourage such behaviour. The ideology of shareholder value was institutionalised in a corporate code that reinforces the idea that the function of a business is to maximise its profits, consequences be damned. The rise of the institutional investor and shareholder value ideology have had a lasting impact on corporate power in both the US and the UK.7 Most corporations are now structured around the interests of shareholders, with workers’ interests coming last, if they are even considered at all.8 As this process has developed, a battle has emerged between certain types of shareholders over others.

These pressures have been passed on to corporations via the stock market: with equities representing a significant chunk of the assets held by money managers, the pressure on corporations to meet shareholder needs for immediate returns increased.33 In some cases, rather than being responsible to a board of directors and a few disorganised shareholders, corporations have been held to ransom by “activist investors” demanding that their capital is used in the most efficient way possible. This change in corporate governance has also been reinforced and embedded by the emergence of a new ideology: shareholder value. Together, the increasing power of investors and the emergence of an ideology to support this power has led to the financialisation of the non-financial corporation: businesses are increasingly being used as piggy banks for rich shareholders. This, according to the CEO of General Electric, makes shareholder value “the dumbest idea in the world”34. But like many dumb ideas that enrich the powerful, shareholder value took off in the 1980s — and nowhere more so than in the City of London. Corporate Raiders, Hostile Takeovers, and Activist Investors Lord Hanson — aka “Lord Moneybags” — is famous for many things.35 He was engaged to Audrey Hepburn, had a fling with Joan Collins, and also happens to be one of the UK’s most notorious corporate raiders.

Managers had to be made to act like business owners — ruthlessly pursuing profit at every turn. Adherence to the flawed ideology of shareholder value has created a set of deep-seated problems with British capitalism.40 As you would expect, the ideology of “shareholder value” encouraged companies to distribute their profits to shareholders rather than distributing them internally or using them for investment, which curtails long-term profitability to facilitate a short-term boost in the share price. Failing to retain and properly remunerate workers erodes trust between workers and their employers, which can negatively impact productivity. William Lazonick argued that the rise of shareholder value ideology has led to a transformation in the philosophy of corporate governance — the way in which corporations are run — from “retain and invest” to “downsize and distribute”.


The Art of Scalability: Scalable Web Architecture, Processes, and Organizations for the Modern Enterprise by Martin L. Abbott, Michael T. Fisher

always be closing, anti-pattern, barriers to entry, Bernie Madoff, business climate, business continuity plan, business intelligence, business process, call centre, cloud computing, combinatorial explosion, commoditize, Computer Numeric Control, conceptual framework, database schema, discounted cash flows, en.wikipedia.org, fault tolerance, finite state, friendly fire, hiring and firing, Infrastructure as a Service, inventory management, new economy, packet switching, performance metric, platform as a service, Ponzi scheme, RFC: Request For Comment, risk tolerance, Rubik’s Cube, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, six sigma, software as a service, the scientific method, transaction costs, Vilfredo Pareto, web application, Y2K

But all you need to do is reflect on your career and identify the boss to whom you had the greatest loyalty and for whom you would do nearly anything; that boss most likely put the shareholders first and the team always. Be the type of person who thinks first about how to create shareholder value rather than personal value and you will succeed! 71 72 C HAPTER 4 L EADERSHIP 101 Mission First, People Always As young leaders serving in the Army, we were introduced to an important concept in both leadership and management: Leaders and managers accomplish their missions through their people. Neither getting the job done at all cost nor caring about your people makes a great leader; great leaders know how to do both even in light of their apparent contradictions. Broadly speaking, as public company executives, managers, or individual contributors, “Getting our jobs done” means maximizing shareholder value. We’ll discuss maximizing shareholder value in the section on vision and mission. Effective leaders and managers get the mission accomplished—great leaders and managers do so by creating a culture and environment in which people feel appreciated and respected and wherein performance related feedback is honest and timely.

Either way, the bottom line is affected beneficially, profits go up, and shareholders are willing to pay more for equity. The increase in equity price creates shareholder value. Operations teams are responsible for ensuring that systems are available when they should be available in order to keep the company from experiencing lost opportunity with their systems. Doing that well also contributes to shareholder value by 85 86 C HAPTER 4 L EADERSHIP 101 maximizing productivity or revenue, thereby increasing the bottom line either through increasing the top line or reducing cost. Again, increasing the bottom line (net income or profits) increases the price shareholders would be willing to pay and increases shareholder value. Quality assurance teams help reduce lost opportunity associated with the deployment of a product and the cost of developing that product.

. • Leadership should be a selfless endeavor. • Mission First, People Always. Get the job done on time, but ensure you are doing it while taking care of your people. • Be morally straight always. What you allow you teach and what you teach becomes your standard. • Align everything you do with shareholder value. Don’t do things that don’t create shareholder value. • Vision is a vivid description of an ideal future. The components of vision are q Vivid description of an ideal future q Important to shareholder value creation 87 88 C HAPTER 4 L EADERSHIP 101 q Measurable q Inspirational q Incorporate elements of your beliefs q Mostly static, but modifiable as the need presents itself q Easily remembered • Mission is the general path or actions that will get us to our vision. The components of mission are q Descriptive of the present state and actions q A sense of purpose q Measurable q General direction or path toward the vision • Goals are the guideposts to your vision and are consistent with the path of your mission.


pages: 237 words: 50,758

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

Andrew Wiles, Asian financial crisis, Berlin Wall, bonus culture, British Empire, business process, Cass Sunstein, computer age, corporate raider, 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, lateral thinking, Long Term Capital Management, Louis Pasteur, market fundamentalism, Myron Scholes, Nash equilibrium, pattern recognition, Paul Samuelson, purchasing power parity, RAND corporation, regulatory arbitrage, shareholder value, Simon Singh, Steve Jobs, Thales of Miletus, 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: 330 words: 99,044

Reimagining Capitalism in a World on Fire by Rebecca Henderson

Airbnb, asset allocation, Berlin Wall, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, collaborative economy, collective bargaining, commoditize, corporate governance, corporate social responsibility, crony capitalism, dark matter, decarbonisation, disruptive innovation, double entry bookkeeping, Elon Musk, Erik Brynjolfsson, Exxon Valdez, Fall of the Berlin Wall, family office, fixed income, George Akerlof, Gini coefficient, global supply chain, greed is good, Hans Rosling, Howard Zinn, Hyman Minsky, income inequality, index fund, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, Kickstarter, Lyft, Mark Zuckerberg, means of production, meta analysis, meta-analysis, microcredit, mittelstand, Mont Pelerin Society, Nelson Mandela, passive investing, Paul Samuelson, Philip Mirowski, profit maximization, race to the bottom, ride hailing / ride sharing, Ronald Reagan, Rosa Parks, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, sovereign wealth fund, Steven Pinker, stocks for the long run, Tim Cook: Apple, total factor productivity, Toyota Production System, uber lyft, urban planning, Washington Consensus, working-age population, Zipcar

One hundred and eighty-one CEOs committed to lead their companies for “the benefit of all stakeholders: customers, employees, suppliers, communities, and shareholders.”13 The Council of Institutional Investors (CII)—a membership organization of asset owners or issuers that includes more than 135 public pension and other funds with more than $4 trillion in combined assets under management—was not amused, responding with a statement that said, in part: CII believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners. Accountability to everyone means accountability to no one. BRT has articulated its new commitment to stakeholder governance… while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group.14 One of the world’s largest financial managers insists that “the world needs your leadership,” and some of the world’s most powerful CEOs publicly commit to “stakeholder management,” while many businesspeople—like my (hugely successful) CEO friend and many large investors—think they are asking for the impossible.

Moreover, embracing a pro-social purpose beyond profit maximization and taking responsibility for the health of the natural and social systems on which we all rely not only makes good business sense but is also morally required by the same commitments to freedom and prosperity that drove our original embrace of shareholder value. A mere decade ago the idea that business could help save the world seemed completely crazy. Now it’s not only plausible but also absolutely necessary. I’m not talking about some distant utopia. It’s possible to see the elements of a reimagined capitalism right now, and to see how these elements could add up to profound change—change that would not only preserve capitalism but also make the entire world better off. Indeed this book is an attempt to persuade you to give your life to the attempt. How We Got Here A central cause of the problems we face is the deeply held belief that a firm’s only duty is to maximize “shareholder value.” Milton Friedman, perhaps the most influential intellectual force in popularizing this idea, once stated that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.”

Since December 2015, when the Paris Climate Agreement was signed, for example, the world’s fossil fuel companies have spent more than a billion dollars lobbying against controls on greenhouse gas (GHG) emissions.21 Lobbying in favor of heating up the planet may have maximized shareholder value in the short term, but in the long run, was it a good idea? Taken literally, a single-minded focus on profit maximization would seem to require that firms not only jack up drug prices but also fish out the oceans, destabilize the climate, fight against anything that might raise labor costs—including public funding of education and health care, and (my personal favorite) attempt to rig the political process in their own favor. In the words of the cartoon: “Yes, the planet got destroyed, but for a beautiful moment in time we created a lot of value for shareholders.” Tom Toro Business was not always wired this way. Our obsession with shareholder value is relatively recent. Edwin Gay, the first dean of the Harvard Business School, suggested that the school’s purpose was to educate leaders who would “make a decent profit, decently,” and as late as 1981, the Business Roundtable issued a statement that said, in part: “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

The result was a body of theory that argued that the only way for companies to be well run was if they maximized their ‘shareholder value'. In this way, investors would indirectly keep company managers accountable. In the decades that followed, an entire intellectual apparatus was created around ‘maximizing shareholder value', with new developments in law, economics and business studies. It became the dominant perspective of leading business schools and economic departments. The overriding goal of the corporation became that of maximizing shareholder value, as captured in the corporation's share price. However, far from being a lodestar for corporate management, maximizing shareholder value turned into a catalyst for a set of mutually reinforcing trends, which played up short-termism while downplaying the long-term view and a broader interpretation of whom the corporation should benefit.

Finance: A Colossus is Born Banks and Financial Markets Become Allies The Banking Problem Deregulation and the Seeds of the Crash The Lords of (Money) Creation Finance and the ‘Real' Economy From Claims on Profit to Claims on Claims A Debt in the Family 5. The Rise of Casino Capitalism Prometheus (with a Pilot's Licence) Unbound New Actors in the Economy How Finance Extracts Value 6. Financialization of the Real Economy The Buy-back Blowback Maximizing Shareholder Value The Retreat of ‘Patient' Capital Short-Termism and Unproductive Investment Financialization and Inequality From Maximizing Shareholder Value to Stakeholder Value 7. Extracting Value through the Innovation Economy Stories about Value Creation Where Does Innovation Come From? Financing Innovation Patented Value Extraction Unproductive Entrepreneurship Pricing Pharmaceuticals Network Effects and First-mover Advantages Creating and Extracting Digital Value Sharing Risks and Rewards 8.

The main way they do this is by using cash reserves to buy back shares from investors, arguing that this is to maximize shareholder ‘value' (the income earned by shareholders in the company, based on the valuation of the company's stock price). But it is no accident that among the primary beneficiaries of share buy-backs are managers with generous share option schemes as part of their remuneration packages - the same managers who implement the share buy-back programmes. In 2012, for example, Apple announced a share buy-back programme of up to a staggering $100 billion, partly to ward off ‘activist' shareholders demanding that the company return cash to them to ‘unlock shareholder value'.7 Rather than reinvest in the business, Apple preferred to transfer cash to shareholders. The alchemy of the takers versus the makers that Big Bill Haywood referred to back in the 1920s continues today.


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

Berlin Wall, Buckminster Fuller, business process, carbon footprint, collective bargaining, corporate governance, corporate social responsibility, creative destruction, crony capitalism, cross-subsidies, en.wikipedia.org, Everything should be made as simple as possible, Fall of the Berlin Wall, fear of failure, Flynn Effect, income per capita, invisible hand, Jeff Bezos, job satisfaction, lone genius, Mahatma Gandhi, microcredit, Nelson Mandela, Occupy movement, profit maximization, Ralph Waldo Emerson, shareholder value, six sigma, social intelligence, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Steven Pinker, The Fortune at the Bottom of the Pyramid, The Wealth of Nations by Adam Smith, too big to fail, union organizing, wealth creators, women in the workforce, zero-sum game

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: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, plutocrats, Plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

At the same time, pay-for-performance in executive suites has collapsed, as noted by columnist Gideon Rachman of the Financial Times: “… a link between virtuous effort and just reward has been effectively destroyed by the spectacle of bankers driving their institutions into bankruptcy while being rewarded with million-pound bonuses and munificent pensions.”3 Worse, as noted a moment ago, shareholder capitalism incentivizes a set of lushly remunerative behaviors by executives quite destructive to broader American economic progress. Shareholder capitalism promotes management over shareholders, management over the firm, and the firm over employees, families, and society. Dismayed by Milton Friedman’s harmful vision, criticism of shareholder capitalism has become sharp, exemplified by Cornell law professor Lynn A. Stout, author of The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public: “In the quest to ‘unlock shareholder value,’ they sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, outmoded, and unsafe equipment; shower CEOs with stock options and expensive pay packages to ‘incentivize’ them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency; and lobby regulators and Congress to change the law so they can chase short-term profits speculating in high-risk financial derivatives.”4 Little wonder American productivity growth is so weak.

CHAPTER 3 1 As quoted by Ralph Atkins and Matt Steinglass, “Employment: A fix that functions,” Financial Times, August 3, 2011. 2 Jess Bailey, Joe Coward, and Matthew Whittaker, “Painful Separation: An international study of the weakening relationship between economic growth and the pay of ordinary workers,” Resolution Foundation, Commission on Living Standards, October 2011, 19. 3 Gideon Rachman, “The end of the Thatcher era,” Financial Times, April 27, 2009. 4 Lynn A. Stout, “The Shareholder Value Myth,” The Harvard Law School Forum on Corporate Governance and Financial Regulation (blog), June 26, 2012, http://blogs.law.harvard.edu/corpgov/2012/06/26/the-shareholder-value-myth/. 5 Jonsson, “America’s ‘other’ auto industry.” See also: “AP, “New contract with UAW only minimally increases GM fixed costs,” Washington Post, September 19, 2011. Additional news reports on auto industry wages can be found at: Editorial, “Saving Germany’s Auto Industry,” BusinessWeek International, November 1, 2004; Jonathan Cohn, “Debunking the Myth of the $70-per-hour Autoworker,” New Republic, November 21, 2008; and Daniel Schäfer, “Daimler pledges to preserve 37,000 jobs,” Financial Times, December 10, 2009. 6 Costs in Germany plants ranging from $55 to $60 per hour including benefits vary with exchange rates, but routinely exceed US wages by as much as $20 per hour.

Stewart, “Rewarding CEOs Who Fail,” New York Times, Oct. 1, 2011. 34 Ian Verrender, “Corporate Ranks Start to Divide on Bonuses,” Sydney Morning Herald, Aug. 9, 2012. 35 John Gillespie and David Zweig, Money for Nothing, 35. 36 John Kay, “Powerful Interests Are Trying to Control the Market,” Financial Times, Nov. 10, 2009. 37 Richard Lambert, “Blueprint to Put Bosses’ Pay in Order,” Financial Times, Nov. 4, 2011. 38 Ian Verrender, “Running to Save Their Executive Bacon—Alas, It May Be Too Late,” Sydney Morning Herald, Oct. 15, 2011. 39 Gretchen Morgenson, “Enriching a Few at the Expense of the Many.” 40 Kate Burgess, “More Calls for Reform of Executives’ Pay,” Financial Times, Nov. 27, 2011. 41 Ian Verrender, “Running to Save Their Executive Bacon—Alas, It May Be Too Late.” 42 Ekkehard Wenger (University of Würzburg finance professor) and Leonhard Knoll, as quoted by James Wilson and Chris Hughes, “Pull Back from the US, Deutsche Urged,” Financial Times, April 8, 2008, http://www.ft.com/intl/cms/s/0/effdda98-0592-11dd-a9e0-0000779fd2ac.html#axzz24CFwaGsQ. 43 Robert Reich, Supercapitalism, 108. 44 Martin Wolf, “Why Today’s Hedge Fund Industry May Not Survive,” Financial Times, March 18, 2008. http://www.ft.com/intl/cms/s/0/c8941ad4-f503-11dc-a21b-000077b07658.html#axzz24CFwaGsQ. 45 “Shareholder Values,” Editorial, Financial Times, April 19, 2011. 46 Robert R.Trumble and Angela N. DeLowell, “Connecting CEO Performance to Corporate Performance: Examining Intangible Metrics of Shareholder Value,” Journal of Compensation and Benefits, November/December 2001. 47 Alex Edmans and Xavier Gabaix, “What’s Right, What’s Wrong and What’s Fixable,” Pathways, Stanford Center for Poverty and Inequality, Summer 2010. 48 Jessica Silver-Greenberg and Alexis Leonsis, “How Much Is a CEO Worth?,” Bloomberg Businessweek, April 26, 2010. 49 Michael C.


pages: 223 words: 10,010

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

"Robert Solow", 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 cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, 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, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, 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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

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: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

accounting loophole / creative accounting, Albert Einstein, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, Boris Johnson, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, 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, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, Kickstarter, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, plutocrats, Plutocrats, popular capitalism, 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, wealth creators, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

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: 460 words: 131,579

Masters of Management: How the Business Gurus and Their Ideas Have Changed the World—for Better and for Worse by Adrian Wooldridge

affirmative action, barriers to entry, Black Swan, blood diamonds, borderless world, business climate, business cycle, business intelligence, business process, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collaborative consumption, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate social responsibility, creative destruction, credit crunch, crowdsourcing, David Brooks, David Ricardo: comparative advantage, disintermediation, disruptive innovation, don't be evil, Donald Trump, Edward Glaeser, Exxon Valdez, financial deregulation, Frederick Winslow Taylor, future of work, George Gilder, global supply chain, industrial cluster, intangible asset, job satisfaction, job-hopping, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kickstarter, knowledge economy, knowledge worker, lake wobegon effect, Long Term Capital Management, low skilled workers, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, Naomi Klein, Netflix Prize, Network effects, new economy, Nick Leeson, Norman Macrae, patent troll, Ponzi scheme, popular capitalism, post-industrial society, profit motive, purchasing power parity, Ralph Nader, recommendation engine, Richard Florida, Richard Thaler, risk tolerance, Ronald Reagan, science of happiness, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Steven Levy, supply-chain management, technoutopianism, The Wealth of Nations by Adam Smith, Thomas Davenport, Tony Hsieh, too big to fail, wealth creators, women in the workforce, young professional, Zipcar

That said, there is a vital difference between focusing on shareholder value in the short term and focusing on it in the longer term. Bosses may wreak carnage if their remuneration is linked to quarterly earnings. But will they wreak the same carnage if their remuneration is tied to more long-term measures? Bosses may be rewarded for being in the right place at the right time if their rewards are linked to six monthly shifts in the market, but they are unlikely to be so well remunerated if they are forced to take a more long-term stake in their companies. Many of the critics of the shareholder-value model of capitalism are, in fact, quarrelling with short-termism rather than with shareholder value as such. Martin argues that focusing on customer satisfaction is the best way to boost long-term shareholder value. Nayar makes the same case for putting employees first.

The Japanese opened the first front by inundating Western markets with better, cheaper, more reliable goods through “lean” production based on teamwork, which avoided both the alienation and the waste of Sloan’s system. Michael Milken, the junk bond king, and Michael Jensen, the leading theoretician of shareholder value, opened the second front, demonstrating that Sloanism had allowed many American firms to be hijacked by managers more interested in their pay and perks than in shareholder value. Steve Jobs and other Silicon Valley entrepreneurs opened the third front, demonstrating that you can succeed in business without growing a giant bureaucracy. The reengineers opened the final front, ripping apart all the old Sloanist functional departments such as “marketing,” “production,” and “research” and pushing workers into cross-functional teams, forcing them to use computers to bridge the gaps.

In the first view, boards are in the business of balancing a wide range of interest groups. In the second, they are responsible for boosting shareholder value. In 1980–2000, the forces of shareholder capitalism were on the march. Michael Jensen and William Meckling formulated the theoretical case for shareholder capitalism in their 1976 article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,”1 the most widely cited article about business ever. Jack Welch demonstrated the merits of the shareholder-focused approach during his long tenure as head of GE. The relative performance of America (with its cult of the shareholder) compared with continental Europe (with its emphasis on stakeholders) suggested that shareholder value provided the key to “creative destruction” and long-term economic growth. Even during the boom years, some important management theorists were skeptical.


pages: 287 words: 44,739

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

business cycle, correlation coefficient, discounted cash flows, double entry bookkeeping, G4S, intangible asset, 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: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

Ian Clark has developed the argument further by stressing the advantages of financialization for private equity holders.67 These arguments have drawn on the voluminous literature on ‘shareholder value’ and corporate governance, which has been a permanent subtext in the financialization debates, as is clear from the survey above. The issue of corporate governance and control is of long standing in economic theory, and will be considered in chapters 6 and 7 in connection with capital markets, shareholding and income distribution. Influential in the financialization literature has been the work of William Lazonick and Mary O’Sullivan arguing that the ideology of ‘shareholder value’ has led to company ‘downsizing’ and thus to problematic investment outcomes among US corporations. The financialization of US corporations in particular has also been examined empirically by others seeking to show that shareholder value has contributed to deficient investment.68 This literature has affinities with the ‘varieties of capitalism’ approach, briefly discussed on this page.

An important contribution in this field has been made by Masahiko Aoki who has stressed the nature of information flows in horizontally structured Japanese enterprises compared to vertically structured US enterprises, further associating the differences with the frequently superior performance of Japanese enterprises.69 Suffice it to note, at this point, that the institutional and organizational structure of capitalist enterprises, important as it is for explaining performance, is not an appropriate criterion for defining financialization. Shareholder value might contribute to explaining differences in behaviour among US and Japanese enterprises, but financialization has to do with systematic access to funds and acquisition of financial assets, both of which are more fundamental processes than shareholder value. From this perspective, and as is shown in subsequent chapters, Japanese enterprises are also financializing, even if differently from US enterprises. An approach that draws on classical Marxism The approach to financialization in this book draws heavily on the theories reviewed in the previous sections, but its analytical backbone derives from work on Marxist theory of finance that has been developed since the early 1980s.70 It also draws on the characteristic features of the crisis of 2007, a systemic upheaval that has cast light on the path of social and economic development of contemporary capitalism.71 The crisis is a product of financialized capitalism, the culmination of contradictory tendencies that have unfolded for more than three decades, as is shown in Chapter 9.

Aalbers, ‘The Financialization of Home and the Mortgage Market Crisis’, Competition and Change 12:2, 2008; Andrew Leyshon and Nigel Thrift, ‘The Capitalization of Almost Everything: The Future of Finance and Capitalism’, Theory, Culture and Society 24, 2009. 66 See, selectively, Julie Froud et al., ‘Shareholder Value and Financialization: Consultancy Promises, Management Moves’, Economy and Society 29, 2000; Julie Froud et al., Financialization and Strategy: Narrative and Numbers, London: Routledge, 2006; Ismail Erturk et al. (eds), Financialization at Work, London: Routledge, 2008; Mike Savage and Karel Williams (eds), Remembering Elites, London: John Wiley and Sons, 2008. 67 Paul Thompson, ‘Disconnected Capitalism’, Work, Employment and Society 17, 2003, pp. 359–78; and Ian Clark, ‘Owners and Managers: Disconnecting Managerial Capitalism?’, Work, Employment and Society 23: 2009, pp. 775–86. 68 William Lazonick and Mary O’Sullivan, ‘Maximizing Shareholder Value: A New Ideology for Corporate Governance’, Economy and Society 29:1, 2000.


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The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Andy Kessler, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, financial deregulation, financial innovation, fixed income, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, Long Term Capital Management, Martin Wolf, new economy, Nick Leeson, offshore financial centre, pensions crisis, regulatory arbitrage, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

Many industries – airlines, trucking, utilities, energy, banking, telecommunications in the Telecommunications Act of 1996 – were transformed as governments stood back and exposed them to market forces.13 In parallel, following the work of Professor Alfred Rappaport at the North Western University Business School, creating ‘shareholder value’ was elevated above other goals for management. The movement was given added bite by the increasing use of share options to incentivize top executives and they turned to the investment banks to help them grow earnings per share through financial engineering and mergers and acquisitions.14 The combination of a strong economy, deregulation and shareholder value created a mountain of corporate finance work for the investment banks as companies merged, demerged and refinanced themselves. Now capital was needed to meet the requirement for corporate finance and a new source unexpectedly appeared in 1980 with amendment 401K of the US tax code.

The American Way Modern free market economics and shareholder value are American ideas that have swept aside competing creeds. It helped that the alternatives crumbled. In Continental Europe, Rhineland model debt-based companies struggled with Germany’s economic problems and France’s national champions do not look like real champions at all. The Japanese way that inspired the thought ‘If Japan can, why can’t we?’12 in the eighties now serves only to prove that managing a team is not the same as managing a business, let alone the whole economy. The British system of equity finance – soft edged and paternal – was discredited in the complacency that shrouded industry after the Second World War. What took over was the American way involving relentless pursuit of shareholder value to the exclusion of all other objectives.

The amount of money invested in 401K plans quadrupled to nearly $400 billion in the 1980s and then quintupled in the 1990s to almost $2 trillion, helping to drive up share prices through sheer weight of money, giving millions of people an interest in the stock market and providing business with a new pool of capital to tap.15 By the middle of the 1980s Wall Street was at the centre of the economic action, serving, on the one hand, the needs of investors with capital to invest and, on the other, companies hell-bent on a dash for shareholder value. As the bull market built in the early 1980s, people on Wall Street began to make serious money. Big deals generated big bonuses. Wall Street became ‘Disneyland for adults’, in the words of one corporate finance executive eagerly anticipating a $9 million bonus in 1986. But Wall Street’s newfound fame turned sour for a few years in the late 1980s and early 1990s. The huge rewards led to conspicuous consumption, flash spending and growing media interest in life on Wall Street.


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King Icahn: The Biography of a Renegade Capitalist by Mark Stevens

corporate governance, corporate raider, Donald Trump, Gordon Gekko, Irwin Jacobs, laissez-faire capitalism, old-boy network, Ponzi scheme, profit motive, shareholder value, yellow journalism

What’s more, as the corporate giants had grown ever larger, and further removed from their shareholders, the CEOs began to regard themselves as the “owners” of their companies, placing their interests (power, position, and money) before those of the stockholders (who sought maximum return on their investments). Because corporate management was inclined to repel takeover attempts regardless of the positive impact they might have on shareholder values, Icahn was betting that the barons of the executive suites would prove to be his reluctant allies. Threaten their privileged lifestyles and they would use the shareholders’ money to buy him off, either by paying greenmail (which is a premium for a raider’s shares over the current market value) or by finding white knights to acquire their companies by making above-market price bids for the outstanding stock.

He would make his mark, and his fortune, by controlling “the destinies of companies”—a feat he would accomplish not with brute force or financial might (neither of which he possessed at the time), but instead by putting a new spin on a time-tested Wall Street battle tactic, the proxy contest. For years, proxy battles had been waged by corporate gadflies and assorted power brokers seeking to enlist the support of shareholders to oust incumbent management and replace them in the executive suite. These battles resembled political contests, with both sides claiming they were better suited to run the companies profitably, and in turn to meet the universal litmus test of increasing shareholder value. Icahn recognized that while a proxy contest could be used to gain control of a company (and ultimately to build it into a more profitable enterprise), much faster profits could be earned by simply appearing to seek control. By acquiring big stakes in companies whose asset values substantially exceeded their share prices and then launching proxy battles, Icahn would be calling attention to the gap between market and inherent values.

Ever since Icahn began to reach out to control corporate destinies, he pictured himself a positive force shaking up an entrenched and close-minded management. The Tappan company’s knee-jerk rejection of his bid to join the board gave credence to this. Why not add a smart, savvy financial man to the ranks of the company’s directors? With Icahn’s knowledge of Wall Street and his ability to serve as a catalyst for raising shareholder value, wouldn’t his counsel benefit Tappan? Instead, management viewed him as a threat. In boosting the company’s performance for its shareholders, Icahn might well tamper with the status quo, perhaps arranging a merger or buyout that, for one reason or another, failed to win management’s support. In corporate America, that was, and is, considered unacceptable. Much as they deny it, CEOs and their boards of directors come to view the companies they run as their own.


pages: 827 words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business cycle, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, disruptive innovation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, global pandemic, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, plutocrats, Plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sam Altman, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

Rockefeller—said the following: “The job of management is to maintain an equitable and working balance among the claims of the various directly affected interest groups . . . stockholder, employees, customers, and the public at large.”17 During the Michael Jensen era, everyone forgot about that. But then we sort of remembered it again. Even shareholder-friendly Jack Welch, the longtime CEO of General Electric, eventually came around. In March 2009, he told the Financial Times, “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. Managers and investors should not set share price increases as their overarching goal. . . . Short-term profits should be allied with an increase in the long-term value of a company.”18 Maybe, just maybe, we’re not all whores. Here’s the problem with agency theory: By reducing everything to a single measure—the price of a stock—executive motivations become skewed, and long-term considerations were jettisoned for short-term boosts to the bottom line.

See also specific people “Corporate Malfeasance and the Myth of Shareholder Value” (Dobbin and Zorn), 462–63 “Corporate Power in the 21st Century” (Davis), 369 Corporate Strategy (Ansoff), 257–58 Corporation, The (Bakan), 362, 505 corporations, 8, 10, 14, 31, 95, 131, 182–87, 422; anthropomorphic fallacy and, 418; Balanced Scorecard and, 442–52; boards, constitution of, 388; cash hoarding, 349, 367; Citizens United decision and, 492; corporate elite, 313, 387–88; DCF adopted by, 118–19; disturbing trends, 285; diversification, 193; downsizing, 212, 301, 368, 371, 387, 431; Drucker and, 243; environmental issues, 7; federal regulation, 184, 200, 357, 358, 367; HBS and, 8, 9, 62, 105–7, 142, 153–55, 190, 336, 460, 530; HBS’s executive education and, 147–49, 151–52, 197–98; Hollywood portrayals, 183–84, 186; hostile takeovers and leveraged buyouts, 362, 367, 369, 370–71, 380, 430, 463; income inequality and, 56, 165–66, 463, 539, 544; inversions and tax avoidance, 529; investors as custodians, 366–67, 387, 388 (see also shareholder value); job turnover, 291, 383; under Kennedy, 28; labor unions and, 161; layoffs, 387, 492–93; Levitt’s redefining of identity, 261–62; MBAs in, 289, 290–92, 345, 383; megacorporations, 14, 31, 182–83, 193, 358; mergers and acquisitions, 349, 371; M-form structure, 245, 250, 251–52, 266; morality and, 114, 566; need for managers, 14–15, 132; network of interlocking directorships, 189, 191, 211, 289; Organization Man and, 183–87; as people, 509; percentage of Americans employed by, 144; power elite and, 188–93; power of, 249, 288, 342, 385; price fixing, 285; profit motive and, 10, 367; Progressive containment of, 62; recruiters for, 151, 178, 186–87, 199, 207–8, 209, 460; shareholder value and, 10, 36, 360–64, 369, 418, 442, 462, 469, 491, 550, 567; shares in, 363, 375; short-term thinking, 247, 345, 443, 469, 551; social problems and, 385; social responsibility, 145, 314–15, 360–64, 366, 382, 384–91, 427, 434, 436, 472, 525–29, 560–62; stakeholder model, 6, 367; strategy, 258–61; systems approach, 89, 112–13, 114, 217; theory of the firm and, 366; top-down power, 32; workers’ benefits lost, 462.

In Taylorism, one could argue, lie the seeds of American industry’s eventual comeuppance at the hands of the Germans and the Japanese—that is, the sacrifice of quality at the altar of quantity. Not only that, but by focusing managers exclusively on the goal of efficiency, he was implicitly sanctioning the idea that a company can be judged by a single metric. Today’s even more pernicious version of such: shareholder value. Writes Stewart: “The modern-day CEOs who sacrifice the long-term viability of their corporations for the sake of short-term boosts in their quarterly earnings reports are direct descendants of the pig-iron managers who undermined their work team’s morale in order to achieve temporary productivity targets.”10 Another: He encouraged a dogma of “hardness.” By focusing only on his stopwatches and charts and productivity graphs, Taylor took an excessively analytic approach to management, HBS took it even further, and the entire management consulting industry took it even further than that.


pages: 370 words: 102,823

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

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, 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: 232 words: 71,024

The Decline and Fall of IBM: End of an American Icon? by Robert X. Cringely

AltaVista, Bernie Madoff, business cycle, business process, cloud computing, commoditize, compound rate of return, corporate raider, full employment, if you build it, they will come, immigration reform, interchangeable parts, invention of the telephone, Khan Academy, knowledge worker, low skilled workers, Paul Graham, platform as a service, race to the bottom, remote working, Robert Metcalfe, Robert X Cringely, shareholder value, Silicon Valley, six sigma, software as a service, Steve Jobs, Toyota Production System, Watson beat the top human players on Jeopardy!, web application

Now—what to do with all that power? Palmisano found his windfall in the simple expedient of “maximizing shareholder value.” Lawyers arguing in court present legal theories—their ideas of how the world and the law intersect, and why this should mean their client is right and the other side is wrong. Proof of one legal theory over another comes in the form of a verdict or court decision. As a culture we have many theories about institutions and behaviors that aren’t so clear-cut in their validity tests (no courtroom, no jury) yet we cling to these theories to feel better about the ways we have chosen to live our lives. In American business, especially, one key theory is that the purpose of corporate enterprise is to “maximize shareholder value.” Some take this even further and claim that such maximization is the only reason a corporation exists.

Profits are high—but are they real? Stocks are high—but few investors, managers, or workers are really happy or secure. Maximizing shareholder return is bad policy both for public companies and for our society in general. That’s what Jack Welch told the Financial Times in 2009, once Welch was safely out of the day-to-day earnings grind at General Electric: "On the face of it,” said Welch, “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. Managers and investors should not set share-price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company." Tell that to Sam Palmisano at IBM, who, in 2005, and then again in 2010, set corporate goals for earnings-per-share, which is to say he set a target price for IBM stock based on historical price-to-earnings ratios, as one of his signature goals for the company.

And everyone affected will get some insult of a settlement, like $15 or a 30% off coupon for select IBM merchandise. Matt / April 19, 2012 / 11:22 am Customer systems info has no shareholder value I’ve worked in IBM Services for years and the real sad part is that if you passed this list of customer system questions/requirements to a Sales Rep or an Account lead, they would struggle with the meaning of many of the terms. To actually gather the information would require a small act of Congress, not to mention a multiple-group fire drill. Eventually a report could be produced but it surely wouldn’t be in one day and it most likely wouldn’t be accurate. And all of this is because IBM management wouldn’t view this as an exercise, which provides shareholder value. End of story. Doomed-IBMer April 20, 2012 at 4:12 am Realistically, the Cringely request to evaluate customer systems requirements would take several days, if not weeks, to answer.


pages: 365 words: 88,125

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

"Robert Solow", affirmative action, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

In order to encourage managers to behave in this way, the proportion of their compensation packages that stock options account for needs to be increased, so that they identify more with the interests of the shareholders. The idea was advocated not just by shareholders, but also by many professional managers, most famously by Jack Welch, the long-time chairman of General Electric (GE), who is often credited with coining the term ‘shareholder value’ in a speech in 1981. Soon after Welch’s speech, shareholder value maximization became the zeitgeist of the American corporate world. In the beginning, it seemed to work really well for both the managers and the shareholders. The share of profits in national income, which had shown a downward trend since the 1960s, sharply rose in the mid 1980s and has shown an upward trend since then.3 And the shareholders got a higher share of that profit as dividends, while seeing the value of their shares rise.

In Britain, where similar changes in corporate behaviour were happening, per capita income growth rates fell from 2.4 per cent in the 1960s–70s, when the country was allegedly suffering from the ‘British Disease’, to 1.7 per cent during 1990–2009. So running companies in the interest of the shareholders does not even benefit the economy in the average sense (that is, ignoring the upward income redistribution). This is not all. The worst thing about shareholder value maximization is that it does not even do the company itself much good. The easiest way for a company to maximize profit is to reduce expenditure, as increasing revenues is more difficult – by cutting the wage bill through job cuts and by reducing capital expenditure by minimizing investment. Generating higher profit, however, is only the beginning of shareholder value maximization. The maximum proportion of the profit thus generated needs to be given to the shareholders in the form of higher dividends. Or the company uses part of the profits to buy back its own shares, thereby keeping the share prices up and thus indirectly redistributing even more profits to the shareholders (who can realize higher capital gains should they decide to sell some of their shares).

As a result, professional managers and floating shareholders have found it much more difficult to form the ‘unholy alliance’ in these countries, even though they too prefer the shareholder-value-maximization model, given its obvious benefits to them. Being heavily influenced, if not totally controlled, by longer-term stakeholders, companies in these countries do not as easily sack workers, squeeze suppliers, neglect investment and use profits for dividends and share buybacks as American and British companies do. All this means that in the long run they may be more viable than the American or the British companies. Just think about the way in which General Motors has squandered its absolute dominance of the world car industry and finally gone bankrupt while being on the forefront of shareholder value maximization by constantly downsizing and refraining from investment (see Thing 18).


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

activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, Myron Scholes, negative equity, 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, stocks for the long run, survivorship bias, 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

active measures, Affordable Care Act / Obamacare, barriers to entry, business cycle, business process, buy and hold, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, Kenneth Arrow, 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: 330 words: 59,335

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike

Albert Einstein, Atul Gawande, Berlin Wall, Checklist Manifesto, choice architecture, Claude Shannon: information theory, collapse of Lehman Brothers, compound rate of return, corporate governance, discounted cash flows, diversified portfolio, Donald Trump, Fall of the Berlin Wall, Gordon Gekko, intangible asset, Isaac Newton, Louis Pasteur, Mark Zuckerberg, NetJets, Norman Mailer, oil shock, pattern recognition, Ralph Waldo Emerson, Richard Feynman, shared worldview, shareholder value, six sigma, Steve Jobs, Thomas Kuhn: the structure of scientific revolutions

Larger companies get more attention in the press; the executives of those companies tend to earn higher salaries and are more likely to be asked to join prestigious boards and clubs. As a result, it is very rare to see a company proactively shrink itself. And yet virtually all of these CEOs shrank their share bases significantly through repurchases. Most also shrank their operations through asset sales or spin-offs, and they were not shy about selling (or closing) underperforming divisions. Growth, it turns out, often doesn’t correlate with maximizing shareholder value. This pragmatic focus on cash and an accompanying spirit of proud iconoclasm (with just a hint of asperity) was exemplified by Henry Singleton, in a rare 1979 interview with Forbes magazine: “After we acquired a number of businesses, we reflected on business. Our conclusion was that the key was cash flow. . . . Our attitude toward cash generation and asset management came out of our own thinking.”

A proxy for these returns can be seen in figure 2-1, which shows the approximately eightfold growth in book value at Teledyne’s insurance subsidiaries from 1975 through 1985, when Singleton began the process of dismantling his company. During the period from 1984 to 1996, Singleton shifted his focus from portfolio management to management succession (in 1986, he tapped Roberts to succeed him as CEO, retaining the chairman’s title) and to optimizing shareholder value in the face of stagnating results at Teledyne’s operating divisions. To accomplish these objectives, Singleton resorted to new tactics, again confounding Wall Street. FIGURE 2-1 Teledyne insurance book value ($ in millions)a a. Shows sum of book equity values for Unitrin and Argonaut subsidiaries. Singleton was a pioneer in the use of spin-offs, which he believed would both simplify succession issues at Teledyne (by reducing the company’s complexity) and unlock the full value of the company’s large insurance operations for shareholders.

Buffett has never split Berkshire’s A shares (which now trade at over $120,000 a share). • Significant CEO ownership. Both Singleton and Buffett had significant ownership stakes in their companies (13 percent for Singleton and 30-plus percent for Buffet). They thought like owners because they were owners. • Insurance subsidiaries. Both Singleton and Buffett recognized the potential to invest insurance company “float” to create shareholder value, and for both companies, insurance was the largest and most important business. • The restaurant analogy. Phil Fisher, a famous investor, once compared companies to restaurants—over time through a combination of policies and decisions (analogous to cuisine, prices, and ambiance), they self-select for a certain clientele. By this standard, both Buffett and Singleton intentionally ran highly unusual restaurants that over time attracted like-minded, long-term-oriented customer/shareholders.


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

Branko Milanovic, business cycle, 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, 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: 478 words: 126,416

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

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, buy and hold, 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, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, 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, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, 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, 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: 324 words: 92,805

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

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business cycle, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, disruptive innovation, double helix, factory automation, financial deregulation, financial innovation, fixed income, full employment, game design, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, invisible hand, job automation, John Markoff, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, mass immigration, 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

affirmative action, availability heuristic, Barry Marshall: ulcers, correlation does not imply causation, desegregation, low cost airline, Menlo Park, Pepto Bismol, 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.


Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, business cycle, buy and hold, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, fixed income, intangible asset, joint-stock company, margin call, passive investing, principal–agent problem, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

A group of substantial stockholders with an important stake of their own to protect, acting in the interests of the shareholders generally should “gain a more respectful hearing from the rank and file of stockholders than has hitherto been accorded them in most cases.”68 If they realized their rights as business owners, we would not have before us the insane spectacle of treasuries bloated with cash and their proprietors in a wild scramble to give away their interest on any terms they can get. The research on activism bears out Graham’s thesis. An engaged shareholder can reduce agency costs by concentrating managers on creating shareholder value instead of pursuing other agendas. Any shareholder may do this, but, as Graham suggests, it does require that they realize their power as owners. Activist investors pressure boards to remove underperforming managers, stop value-destroying mergers and acquisitions, disgorge excess cash and optimize the capital structure, or press for a sale of the company, all of which are designed only to improve shareholder value. As a portfolio, companies with the conditions in place for activism offer asymmetric, market-beating returns. Activists exploit these properties by taking large minority stakes in these beaten-down stocks and then agitating for change, expecting a rapid resolution, and thereby a reduction in risk.

Icahn cut straight to the heart of the matter, likening the problem to a caretaker on an estate who refuses to allow the owner to sell the property because the caretaker might lose his job.9 His manifesto proposed to restore shareholders to their lawful position by asserting the rights of ownership. If management wouldn’t heed his exhortations as a shareholder, he would push for control of the board through a proxy contest—a means for shareholders to vote out incumbent management and replace them with new directors. In a proxy contest, competing slates of directors argue why they are better suited to run the company and enhance shareholder value. If he didn’t succeed through the proxy contest, he could launch a tender offer or sell his position back to the company in a practice known as greenmail. A neologism possibly created from the words blackmail and greenback, greenmail is a now-unlawful practice in which the management of a targeted company pays a ransom to a raider by buying back the stock of the raider at a premium to the market price.

The letter opened, “Are you as tired as we are of seeing your investment in Genzyme erode because of management’s continuing track record of avoidable missteps and subpar performance in dealing with manufacturing problems at the company?” The main problem—capitalized in the letter—was that, “SEVERE PROBLEMS IN MANUFACTURING HAVE RESULTED IN A SIGNIFICANT DESTRUCTION OF NEAR-TERM AND LONG-TERM SHAREHOLDER VALUE.” Icahn charged that the board was “asleep at the wheel” and described Termeer as “King of the Company.” The company had “permanently lost revenues and profits to competitors from its ‘cash cow’ genetics disease franchise as a result of both manufacturing mismanagement and poor strategic planning. In addition, the company has lost significant credibility with patients, doctors and regulators, both in the U.S. and in Europe, two of its most critical markets for its life-saving drugs.”


pages: 461 words: 128,421

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

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, 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, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, 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 Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, 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, Vilfredo Pareto, 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: 305 words: 79,303

The Four: How Amazon, Apple, Facebook, and Google Divided and Conquered the World by Scott Galloway

activist fund / activist shareholder / activist investor, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Amazon Web Services, Apple II, autonomous vehicles, barriers to entry, Ben Horowitz, Bernie Sanders, big-box store, Bob Noyce, Brewster Kahle, business intelligence, California gold rush, cloud computing, commoditize, cuban missile crisis, David Brooks, disintermediation, don't be evil, Donald Trump, Elon Musk, follow your passion, future of journalism, future of work, global supply chain, Google Earth, Google Glasses, Google X / Alphabet X, Internet Archive, invisible hand, Jeff Bezos, Jony Ive, Khan Academy, longitudinal study, Lyft, Mark Zuckerberg, meta analysis, meta-analysis, Network effects, new economy, obamacare, Oculus Rift, offshore financial centre, passive income, Peter Thiel, profit motive, race to the bottom, RAND corporation, ride hailing / ride sharing, risk tolerance, Robert Mercer, Robert Shiller, Robert Shiller, Search for Extraterrestrial Intelligence, self-driving car, sentiment analysis, shareholder value, Silicon Valley, Snapchat, software is eating the world, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steve Wozniak, Stewart Brand, supercomputer in your pocket, Tesla Model S, Tim Cook: Apple, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, undersea cable, Whole Earth Catalog, winner-take-all economy, working poor, young professional

Amazon now has all the pieces in place for zero-click ordering—AI, purchase history, warehouses within twenty miles of 45 percent of the U.S. population, millions of SKUs, voice receptors in the wealthiest American households (Alexa), ownership of the largest cloud/big data service, 460 (soon thousands) brick-and-mortar stores, and the world’s most trusted consumer brand. That is why Amazon will be the first $1 trillion market cap company. Now, you may ask: What about Apple and Uber? Since 2008, those two companies have created more shareholder value than any other public or private firm. The key to their success was the iPhone and GPS ordering and tracking—and that’s very different from Amazon’s strategy, right? Wrong. Their secret sauce was much more mundane: breakthrough stores for Apple and reduced friction for Uber. It’s not the GPS tracking illuminating where Javier and his Lincoln MKS are, but your ability to bomb out of the car/store without the friction of paying.

I envisioned creating a consortium of newspaper owners—the Sulzbergers of the Times, the Grahams of the Washington Post, the Newhouses, the Chandlers, Pearson, and Germany’s Axel Springer, among others. This group would represent the highest-quality, most differentiated media content in the Western world. This was our one and only chance to staunch the decline of print journalism and capture (back) billions in shareholder value. It wouldn’t have lasted forever. But for an also-ran search engine like Microsoft’s Bing, it could have provided a potent weapon against Google. Bing at that point had about 13 percent share of search. Exclusive rights to differentiated content via iconic brands, whether from the Times, the Economist, or Der Spiegel, had to be worth a few points of market share. This means of differentiation was worth billions.

Rupert Murdoch had just bought the Wall Street Journal for $5 billion, and the Times was trading at a much lower multiple. In addition, there were other buyers sniffing around. I had heard from two different sources that Michael Bloomberg was also contemplating a bid for the Times. Term limits, it seemed, were about to force him from office, and the Times was the perfect project for a New York billionaire who had taken financial information, brought it into the digital age, and created tens of billions of shareholder value in the process. (We didn’t know at the time that when you are Michael Bloomberg, “term limit” is more of a suggestion than a real limit. Bloomberg went on to strong-arm the city council into a third term.) Finally, if all else failed, the New York Times Company owned a bunch of stuff we should, and would, sell, including: The seventh tallest building in America About.com 17 percent of the Boston Red Sox (wtf?)


pages: 596 words: 163,682

The Third Pillar: How Markets and the State Leave the Community Behind by Raghuram Rajan

activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, airline deregulation, Albert Einstein, Andrei Shleifer, banking crisis, barriers to entry, basic income, battle of ideas, Bernie Sanders, blockchain, borderless world, Bretton Woods, British Empire, Build a better mousetrap, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, computer vision, conceptual framework, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, data acquisition, David Brooks, Deng Xiaoping, desegregation, deskilling, disruptive innovation, Donald Trump, Edward Glaeser, facts on the ground, financial innovation, financial repression, full employment, future of work, global supply chain, high net worth, housing crisis, illegal immigration, income inequality, industrial cluster, intangible asset, invention of the steam engine, invisible hand, Jaron Lanier, job automation, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, labor-force participation, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, means of production, moral hazard, Network effects, new economy, Nicholas Carr, obamacare, Productivity paradox, profit maximization, race to the bottom, Richard Thaler, Robert Bork, Robert Gordon, Ronald Reagan, Sam Peltzman, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South China Sea, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, superstar cities, The Future of Employment, The Wealth of Nations by Adam Smith, trade liberalization, trade route, transaction costs, transfer pricing, Travis Kalanick, Tyler Cowen: Great Stagnation, universal basic income, Upton Sinclair, Walter Mischel, War on Poverty, women in the workforce, working-age population, World Values Survey, Yom Kippur War, zero-sum game

When management commits to fair treatment of its investors, including employees, the expectation of fair treatment is then priced into the dealings they have. When employees join the firm initially, they have alternative choices. If they join a firm where management maximizes shareholder value only, employees know that when forced to choose between investing in employees and enhancing shareholder value, the firm will choose the latter if there is a conflict. Rationally, employees will know they will not see the increment to their wages if that firm had to make the training decision. They will therefore require additional compensation, equal to the prospective foregone increase in wages, to join a firm that does not invest in training relative to one that does. Consequently, the shareholder value maximizing firm saves nothing in wages over time. However, because it foregoes the additional net revenue from the investment in training, it is worse off economically.

Friedman’s dictum had an “invisible hand” aspect to it—by maximizing the value of the only claim to the corporation that was not fixed, management would not just be maximizing shareholder value but also the corporation’s value, and thus the corporation’s contribution to society. Friedman firmly rejected any role for the corporation in helping the state do its job, for example, in containing inflation, or in undertaking charitable activities, especially if it impinged on its profitability. Friedman’s views had enormous influence, both in academia and outside. The notion that corporate social responsibility began and ended with the corporation maximizing shareholder value was very clear and was consistent with the growing ethic of individualism. Instead of being a sin, avarice was now a duty, in part because it could be spelled out clearly to firm management.

To the extent that the renegotiation breeched employee trust, we may all have been the losers—it may have transformed airline workers from being customer-friendly and willing to go the extra mile for the airline to being suspicious of management, unhappy, transactional, and working only by the book. Even seen from the best interests of the corporation, let alone society, shareholder value maximization may be inappropriate in some circumstances. In a sense, the principle of maximizing shareholder value strips transactions of their corporate and social context. This is a good starting point for deciding whether a transaction is worth doing, and is particularly useful when custom and tradition obscure underlying economic rationales. However, transactions do take place in the real world with all its incompleteness and uncertainties.


pages: 385 words: 133,839

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

carbon footprint, clean water, collective bargaining, corporate social responsibility, Exxon Valdez, Gordon Gekko, Internet Archive, laissez-faire capitalism, market design, MITM: man-in-the-middle, Naomi Klein, Nelson Mandela, 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: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, break the buck, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, quantitative easing, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, wikimedia commons, yield curve

In 1984 Midland revolutionized retail banking by waiving bank charges for customers who stayed in credit. Customers flocked to Midland and by the end of the year all banks had to follow suit. The ‘shareholder value’ revolution – companies should be run in the interests of shareholders rather than other stakeholders – was in full swing and was being modelled most famously by ‘Neutron Jack’ Welch, chairman of GE.4 Encouraged by reward schemes that paid out if share price targets were reached and by professional fund managers who were themselves measured on the quarterly performance of their share portfolios, executives sought to emulate Welch, sometimes sacrificing longer-term shareholder value in the interests of immediate profits. This was dangerous in every industry but especially so in banking. Banks could boost short-term profits by lending to less creditworthy borrowers but this left them vulnerable to defaults whenever the economy turned down.

With Quinton determined to catch up, Barclays’ exposure to property, construction and housing more than doubled in 1987 and 1988.7 Some of the money Barclays lent came from shareholders in a deeply unpopular rights issue in March 1988 and they were getting restless. In the last quarter of the twentieth century, financial institutions managing pension funds and pooled savings replaced private individuals as the main owners of stock market listed companies. These asset managers – sometimes called ‘fund managers’ or simply ‘institutions’ – were well organized and, empowered by the theory of shareholder value, expected to be listened to. Many were sceptical about what they saw as Barclays’ ill-timed dash for growth, a perception exacerbated by Quinton’s slogan of ‘Number 1 by ’91’, a reference to his determination to overtake National Westminster. ‘In the poo by ’92’, replied the cynics. There was nearly a shareholders’ revolt against the rights issue, but in the end the big institutions decided that it would be more damaging to their investments to cancel the issue than to proceed with it.

By the time he left, BMO had a strong position in everything it did: retail, commercial and investment banking and private banking for high net worth individuals. It made over half of its earnings outside Canada and was indeed a mini-version of everything that Barclays wanted to be. Could Barrett do it again on a bigger stage? The country boy who had started by carrying cheques around the City in 1962 was now a thoroughly modern chief executive. The Irish lilt had been overlain by a Canadian accent, as he discussed shareholder value, economic profit (profits adjusted for the cost of capital) and other fashionable business concepts. Middleton’s Nominations Committee – himself, Arculus, Jarvis, Mobbs and Hilary Cropper – could not make him out. He spoke a lot of good sense but was very laid back and smoked throughout the interviews at Spencer Stuart’s no smoking offices. He took his time to answer a question, first tapping a cigarette out of the packet, lighting up and drawing deeply before replying through the faint blue haze.


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

4chan, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, blockchain, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, corporate governance, corporate raider, creative destruction, crowdsourcing, Danny Hillis, data acquisition, deskilling, DevOps, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, full employment, future of work, George Akerlof, gig economy, glass ceiling, Google Glasses, Gordon Gekko, gravity well, greed is good, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, move fast and break things, Network effects, new economy, Nicholas Carr, obamacare, Oculus Rift, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, strong AI, TaskRabbit, telepresence, the built environment, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

Kickstarter’s founders told their venture capital investors from the start that they have no plan to exit, and have instead put in place a mechanism for making regular cash distributions to their shareholders, just like Basecamp and the indie.vc companies. An aside: I’ve always had mixed feelings about public benefit corporations and their lighter-weight cousins, benefit corporations, or B corps, which certify to their investors that they do take factors other than shareholder value into account, but are not legally required to do so. I love the idea of public benefit, but I hate to accept the idea that a regular corporation is legally obliged to ignore it. Law professor Lynn Stout’s book The Shareholder Value Myth makes what appears to be a compelling case that shareholder value primacy has no legal basis, but Leo Strine, the chief justice of the Delaware Supreme Court, argues otherwise. And given that most US corporations are registered under Delaware law, Strine’s views carry more legal weight. Frankly, though, if there is legal precedent for the corporate obligation to disregard the interests of all but shareholders, I’d like to see it challenged and overturned.

Even handicapped by the shareholder value theory, the world is better off because of the dynamism of a capitalist economy, but how much better could we have done had we taken a different path? I don’t think anyone but the looters believes that making money for shareholders is the ultimate end of economic activity. But many economists and corporate leaders are confused about the role it plays in helping us achieve that end. Milton Friedman, Meckling and Jensen, and Jack Welch were well-meaning. All believed that aligning the interests of corporate management with shareholders would actually produce the greatest good for society as well as for business. But they were wrong. They were following a bad map. By 2009 Welch had changed his mind, calling the shareholder value hypothesis “a dumb idea.”

You can see how the struggle between people and profit played out in a 2016 New York Times account of the closing of Carrier’s Indianapolis factory and the planned transfer of its 1,400 jobs to Mexican workers making about as much per day as its Indianapolis workers make per hour. Trump made much of this incident during his campaign, pointing to labor outsourcing as the root of the problem. But why do companies seek ever-cheaper labor? Carrier’s parent company, United Technologies, explained that “the cuts are painful but are necessary for the long term competitive nature of the business and shareholder value creation.” United Technologies Chief Financial Officer Akhil Johri gave the game away with his final words: “. . . and shareholder value creation.” The article went on to explain: Wall Street is looking for United Technologies to post a 17 percent increase in earnings per share over the next two years, even though sales are expected to rise only 8 percent. Bridging that gap means cutting costs wherever savings can be found, as Mr. McDonough [president of United Technologies’ climate, controls, and security division] suggested at the meeting with analysts.


pages: 353 words: 81,436

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

activist fund / activist shareholder / activist investor, banking crisis, basic income, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, fixed income, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, means of production, moral hazard, Myron Scholes, 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: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, transfer pricing, wealth creators, white picket fence, women in the workforce, zero-sum game

They are paid to help these clients – large banks and multinationals, hedge funds, private equity firms and so on – to avoid tax, disclosure, laws and rules, so it is all but inevitable that they have developed an anti-state, anti-tax, anti-regulation corporate culture and the obsession with shareholder value that I described in the last chapter. As a result, they comprise an interest group which incubates and accelerates a financialising London-centric shared world view. The Blob is not centrally organised, but given its members’ common affinities, standard duties to increase shareholder value to clients, and deep penetration of government offices, it is almost a political actor in its own right. The advisory, consulting and accounting firms that populate the Blob have become what Professor Adam Leaver of Sheffield University calls ‘super-spreaders’ of finance fever across the private sector, as public listed companies increasingly learn the extractive techniques pioneered by private equity, with towering stacks of companies plugged into tax havens using clever mixes of debt and equity to suck income out of subsidiaries while keeping the risks inside those same subsidiaries, so resting on other people’s shoulders.

Second, he said, these firms should borrow heavily, because the ‘discipline of debt’ would make the owner-managers focus even more intensely on profits. Third, if you tied pay to performance, that would make those already laser-focused executives work even harder and focus even more fiercely on generating those profits. The general idea, explains Peter Morris, a veteran banker and commentator on private equity, was ‘capitalism on steroids’.5 Jensen’s ideas rest on the concept of shareholder value or, to be more accurate, shareholder primacy. This was a radical departure from previous eras, when corporations were run with many goals in mind. Peter Drucker’s classic 1946 study, The Concept of the Corporation, argued that big business was ‘America’s representative social institution … its social function as a community is as important as its economic function as an efficient producer’.

Theresa Whitmarsh, executive director of the Washington State Investment Board, remembers a private equity official telling her that women simply aren’t cut out for their kind of deal making because private equity is ‘a blood sport’.21 All this is troubling enough. But the most tragic part of this sorry tale is still to come. Many people are dimly aware of the predatory nature of private equity and hedge funds, but reconcile themselves to it with the idea that if there are losers having wealth taken out of their pockets, this is balanced by winners elsewhere. This is the old Chicago School myth of shareholder value, the quasi-religious belief held by many in the financial markets that if you focus on profits and profits alone, it all washes out in the end and everyone is happy. There are other justifications too. With home care, the problem isn’t just the presence of wealth extractors perched atop the system, but also the fact that there isn’t enough money in the system in the first place as a result of savage cuts to council budgets.


pages: 164 words: 57,068

The Second Curve: Thoughts on Reinventing Society by Charles Handy

"Robert Solow", Airbnb, basic income, Bernie Madoff, bitcoin, bonus culture, British Empire, call centre, Clayton Christensen, corporate governance, delayed gratification, Diane Coyle, disruptive innovation, Edward Snowden, falling living standards, future of work, G4S, greed is good, informal economy, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kickstarter, Kodak vs Instagram, late capitalism, mass immigration, megacity, mittelstand, Occupy movement, payday loans, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, Ronald Coase, shareholder value, sharing economy, Skype, Social Responsibility of Business Is to Increase Its Profits, Stanford marshmallow experiment, Steve Jobs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Veblen good, Walter Mischel

It was a widespread misinterpretation of company law that gave rise to the elevation of shareholder value as the prime purpose of the company, to short-term thinking and the splurge of bonuses tied to share performance. As Jack Welch, the famed CEO of GE, was to remark, although only after he had left the firm, ‘shareholder value is the dumbest idea in the world’. It may be a dumb idea but it was pervasive. In 1998 I was asked to meet with the committee that were updating the British Companies Act. I made them aware of what I felt was the true purpose of a company but they told me that they were under instructions from the Treasury to ensure that the shareholder must remain the central focus. Eventually they added the word ‘enlightened’ before ‘shareholder value’ and included a clause stating that the interests of other stakeholders must be recognised.

They advocated that directors and managers should align themselves with the shareholders, rewarding themselves as if they were shareholders with shares, stock options and bonuses tied to the performance of the shares. All this, incidentally, while still luxuriating in the security of their basic salaries. Naturally this focused managerial efforts on the immediate and shorter-term results, often at the expense of longer-term investments. To make matters worse, the business schools, which were just starting to proliferate around the world at that time, picked up the idea of shareholder value as the point of business and over the next 30 years disgorged a generation of bright and ambitious young people into corporations with this idea in their heads. In 1971 I invited Jim Slater to speak to the students at the London Business School. Slater, as part of Slater Walker, was the uncrowned king of the emerging private equity industry. ‘I am,’ he said, ‘the only businessman in Britain who does not make or do things for money.

Is it not time to return to the idea of a business as a responsible community that pays due heed to all its constituents, one whose core purpose must be to seek immortality through continuous self-improvement and investment? I have concentrated on America, where corporate capitalism has been most developed, but the same trend is discernible in other economies. Continental Europe is protected to a degree by its more rigorous governance structures and its greater reliance on the banks as the longer-term financiers, but even here the temptations and pressures of the shareholder value model can be felt. We have got the idea of a company the wrong way round. It is not a creation of shareholders, creditors and directors but an association of all those working in and with it. It is a community, a collection of people working together for a common purpose. It is strange that the one area of human life which is so important to our well-being, that of business, still legally treats its people as instruments of a money-making property.


pages: 244 words: 76,192

Execution: The Discipline of Getting Things Done by Larry Bossidy

Albert Einstein, business process, complexity theory, Iridium satellite, Long Term Capital Management, NetJets, old-boy network, 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: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

asset allocation, buy and hold, collateralized debt obligation, commoditize, 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, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Ponzi scheme, post-work, 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, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam, zero-sum game

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: 400 words: 124,678

The Investment Checklist: The Art of In-Depth Research by Michael Shearn

Asian financial crisis, barriers to entry, business cycle, call centre, Clayton Christensen, collective bargaining, commoditize, compound rate of return, Credit Default Swap, estate planning, intangible asset, Jeff Bezos, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, supply-chain management, technology bubble, time value of money, transaction costs, urban planning, women in the workforce, young professional

By investing in proven and competent management teams, you will rarely be disappointed. This will help you maintain an opportunistic attitude. Now let’s take a look at questions that will help you determine if the management team is competent. 39. Does the CEO manage the business to benefit all stakeholders? If you were to ask investors whether shareholder value is more important than customer service at a business, most would answer that it is. What they fail to consider is that shareholder value is a byproduct of a business that keeps its customers happy. In fact, many of the best-performing stocks over the long term are the ones that balance the interests of all stakeholder groups, including customers, employees, suppliers, and other business partners. These businesses are managed by CEOs who have a purpose greater than solely generating profits for their shareholders.

Be Wary of Managers Who Hold Stock Options One of the most common ways that management is compensated is through stock options, which give the owner the right to buy shares at a specific stock price. They represent a potential payoff to the manager with no risk: The downside is zero (if the stock price doesn’t increase, there’s no payout to the managers, and if the stock price does increase, then they benefit). Investors believe that giving stock option grants to managers will motivate them to create shareholder value, because it gives them an ownership interest in the business. The problem is that stock options often reward managers for things that they are not responsible for, such as broad economic gains or industry growth. As one investor said: “The argument that someone is worth tens of millions of dollars in compensation per year because his or her company’s market value went up many times is so ludicrous that I’ve always been amazed anyone can espouse it as fair with a straight face.”

It is easier to focus on one constituency, such as stockholders, rather than many. John Mackey, co-founder and CEO of Whole Foods Market, has coined the term conscious capitalism to describe businesses designed to benefit all of their stakeholders, such as customers, employees, investors, and suppliers. Instead of subscribing to the theory that the only purpose of a business is to maximize profits, conscious capitalism proponents believe that increases in shareholder value are the by-product of helping customers, employees, and vendors reach their highest potential. Mackey compares profits to happiness to illustrate his point. Just trying to be happy doesn’t usually work. Instead, we’re happy due to a host of other reasons: a strong sense of purpose, meaningful work, good friends and good health, loving relationships, and the chance to learn, grow, and help others.


pages: 154 words: 47,880

The System: Who Rigged It, How We Fix It by Robert B. Reich

affirmative action, Affordable Care Act / Obamacare, Bernie Madoff, Bernie Sanders, business cycle, clean water, collective bargaining, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, crony capitalism, cryptocurrency, Donald Trump, ending welfare as we know it, financial deregulation, Gordon Gekko, immigration reform, income inequality, Jeff Bezos, job automation, London Whale, Long Term Capital Management, market fundamentalism, mass incarceration, mortgage debt, Occupy movement, Ponzi scheme, race to the bottom, Robert Bork, Ronald Reagan, shareholder value, too big to fail, trickle-down economics, union organizing, women in the workforce, working poor, zero-sum game

In the 1980s and 1990s, almost a quarter of all public corporations in the United States were at one time the target of an attempted hostile takeover opposed by a firm’s management. Another quarter received takeover bids supported by management. Few conditions change minds more profoundly than the imminent possibility of being sacked. Hence, across America, CEOs who were now threatened by being replaced by CEOs who would maximize shareholder value began to view their responsibilities differently: They would maximize shareholder value even more. The corporate statesmen of previous decades became the corporate butchers of the 1980s and 1990s, whose nearly exclusive focus was—in the meat-ax parlance that became fashionable—to “cut out the fat,” “cut to the bone,” and make their companies “lean and mean.” By 1997 the Business Roundtable reversed the position it had taken in 1981.

Welch encouraged his senior managers to replace 10 percent of their subordinates every year in order to keep GE competitive. As GE opened facilities abroad, staffed by foreign workers costing a small fraction of what GE had paid its American employees, the corporation all but abandoned upstate New York. CEOs have become so obsessed by shareholder value that Robert Goizueta, CEO of Coca-Cola, proclaimed in 1988 that he “wrestle[d] with how to build shareholder value from the time I get up in the morning to the time I go to bed. I even think about it when I am shaving.” Goizueta’s obsession starkly differed from the views of his predecessors, such as Coca-Cola’s former president William Robinson, who in 1959 told an audience at Fordham Law School that executives should not put stockholders first.

Rather than announce token jobs programs, spreading some money around poor cities, lobbying for lower corporate taxes and fewer regulations whose benefits don’t trickle down, and putting out nice statements about corporate responsibility, these top CEOs could seek to increase the economic and political power of all Americans—giving them a greater voice at their workplace, in their communities, and in Washington, so they won’t need corporate philanthropy. Nothing is stopping them except their own parched, self-serving notion of leadership as maximizing profits and shareholder value. Yet as heads of institutions with the greatest influence over American politics, don’t they also have a duty to the common good? They should be using their unrivaled influence to push for a society where no corporation or set of people can ever again become as rich and powerful as they are. After all, what does leadership really mean? What’s the value of all the reassuring public statements by Dimon and the Business Roundtable?


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

addicted to oil, asset allocation, backtesting, Black-Scholes formula, Bretton Woods, business cycle, buy and hold, 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, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, 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, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, 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, stocks for the long run, survivorship bias, 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: 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

airport security, Albert Einstein, Bob Geldof, BRICs, carbon footprint, clean water, cleantech, Climategate, commoditize, corporate social responsibility, creative destruction, decarbonisation, energy security, Exxon Valdez, failed state, fear of failure, income inequality, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, market fundamentalism, mass immigration, Naomi Klein, Nelson Mandela, 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?


pages: 193 words: 11,060

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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, 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, zero-sum game

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: 233 words: 67,596

Competing on Analytics: The New Science of Winning by Thomas H. Davenport, Jeanne G. Harris

always be closing, big data - Walmart - Pop Tarts, business intelligence, business process, call centre, commoditize, data acquisition, digital map, en.wikipedia.org, global supply chain, high net worth, if you build it, they will come, intangible asset, inventory management, iterative process, Jeff Bezos, job satisfaction, knapsack problem, late fees, linear programming, Moneyball by Michael Lewis explains big data, Netflix Prize, new economy, performance metric, personalized medicine, quantitative hedge fund, quantitative trading / quantitative finance, recommendation engine, RFID, search inside the book, shareholder value, six sigma, statistical model, supply-chain management, text mining, the scientific method, traveling salesman, yield management

We believe that a management team that manages all its sources of value—tangible and intangible, current and future—has a significant advantage over those who do not. Some companies are working to develop a holistic understanding of both financial and nonfinancial value drivers. A few companies at the frontier are seeking to manage both their current and future shareholder value.7 These organizations are exploring how to infuse their scorecards with data from Wall Street analysts and future-value analytics to gain better insight into the implications of decisions on shareholder value. Companies that develop such a capability might be well on the way to competitive advantage. Reporting and scorecards are most likely to lead to competitive advantage when the business environment is changing dramatically. In those circumstances, it’s particularly important to monitor new forms of performance.

Employing basic statistics (mean, median, standard deviation, etc.) to understand yield volume and quality, and to compare one batch of items with another—often displayed visually. Financial Analytics We’ll start by discussing financial applications, since they of course have the most direct tie to financial performance. There are several categories of financial analytics applications, including external reporting, enterprise performance management (management reporting and scorecards), investment decisions, shareholder value analysis, and cost management. External Reporting to Regulatory Bodies and Shareholders External reporting doesn’t lead to competitive advantage under “business as usual” conditions. It’s not normally an advantage to report more quickly and accurately beyond a certain level. Cisco Systems, for example, has touted over the last several years its ability to close the books instantaneously and to report its results almost immediately at the end of a financial period.

Choosing a Strategic Focus Organizations initially focus on one or two areas for analytical competition: Harrah’s: Loyalty plus service New England Patriots: Player selection plus fan experience Dreyfus Corporation: Equity analysis plus asset attrition UPS: Operations plus customer data Wal-Mart: Supply chain plus marketing Owens & Minor: Internal logistics plus customer cost reduction Progressive: Pricing plus new analytical service offerings To have a significant impact on business performance, analytical competitors must continually strive to quantify and improve their insights into their performance drivers—the causal factors that drive costs, profitability, growth, and shareholder value in their industry (only the most advanced organizations have attempted to develop an enterprise-wide model of value creation). In practice, most organizations build their understanding gradually over time in a few key areas, learning from each new analysis and experiment. To decide where to focus their resources for the greatest strategic impact, managers should answer the following questions: How can we distinguish ourselves in the marketplace?


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

However, we also discuss research indicating that, in general, capital markets function fairly well. In this case maximizing shareholder value is a sensible corporate objective. But for now, having glimpsed the problems of imperfect markets, we shall, like an economist in a shipwreck, simply assume our life jacket and swim safely to shore. QUESTIONS 1. Maximizing shareholder value Look back to the numerical example graphed in Figure 1A.1. Suppose the interest rate is 20%. What would the ant (A) and grasshopper (G) do if they both start with $100,000? Would they invest in their friend’s business? Would they borrow or lend? How much and when would each consume? 2. Maximizing shareholder value Answer this question by drawing graphs like Figure 1A.1. Casper Milktoast has $200,000 available to support consumption in periods 0 (now) and 1 (next year).

Very few companies pay out exclusively through cash dividends. Some historical evidence suggests that investors demand higher expected rates of return from high-dividend companies, but the evidence is not strong or sufficiently up-to-date to deter a corporation that wants to initiate cash dividends. 16-6 Payout Policy and the Life Cycle of the Firm MM said that dividend policy does not affect shareholder value. Shareholder value is driven by the firm’s investment policy, including its future growth opportunities. Financing policy, including the choice between debt and equity, can also affect value, as we will see in Chapter 18. In MM’s analysis, payout is a residual, a by-product of other financial policies. The firm should make investment and financing decisions, and then pay out whatever cash is left over.

Just remember the basic relationship: BEYOND THE PAGE ● ● ● ● ● Does MM apply to banks? brealey.mhhe.com/c17 MM’s propositions warn us that higher leverage increases both expected equity returns and equity risk. It does not increase shareholder value. Having worked through the example of Macbeth, this much should now seem obvious. But watch out for hidden changes in leverage, such as a decision to lease new equipment or to underfund the pension scheme. Do not interpret any resultant increase in the expected equity return as creating additional shareholder value. 17-3 The Weighted-Average Cost of Capital What did financial experts think about debt policy before MM? It is not easy to say because with hindsight we see that they did not think too clearly.4 However, a “traditional” position emerged in response to MM.


pages: 477 words: 144,329

How Money Became Dangerous by Christopher Varelas

activist fund / activist shareholder / activist investor, Airbnb, airport security, barriers to entry, basic income, bitcoin, blockchain, Bonfire of the Vanities, California gold rush, cashless society, corporate raider, crack epidemic, cryptocurrency, discounted cash flows, disintermediation, diversification, diversified portfolio, Donald Trump, dumpster diving, fiat currency, fixed income, friendly fire, full employment, Gordon Gekko, greed is good, interest rate derivative, John Meriwether, Kickstarter, Long Term Capital Management, mandatory minimum, mobile money, mortgage debt, pensions crisis, pets.com, pre–internet, profit motive, risk tolerance, Saturday Night Live, shareholder value, side project, Silicon Valley, Steve Jobs, technology bubble, The Predators' Ball, too big to fail, universal basic income, zero day

Before the corporate raiders of the ’80s, the mission statements of most companies were focused on creating the best product or providing the best service. Then corporate raiders forced management teams to prioritize share price above all else. Maximizing shareholder value became the new mantra. In making management decisions, those in charge had only to ask if the decision would increase the company’s share price, with the most direct means being an increase in profits; if it did, then the decision was easy to justify. Increasing profits is not a bad thing, of course; it’s a vital objective for any company. The model of maximizing shareholder value gave us a clear and concise North Star for making difficult management decisions. It would transform business by focusing action in a way that made the managing of global enterprises efficient and effective like no framework the business world had ever seen before, creating incredible growth, jobs, and opportunities for a globalizing world.

That, in turn, puts pressure on management teams to think very short term, focusing on the results for each quarter, rather than looking at long-term objectives. To meet a quarter’s earnings expectations, a company may be forced to close a sale quickly, settling for a lower price and worse terms, or, more concerning, to pursue less profitable business lines because they provide more immediate revenue opportunities. Thus, management teams might not have the ability to commit to maximizing shareholder value overall, but, rather, they must focus on maximizing quarterly shareholder value, and those two things are seldom aligned. When quarterly reporting requirements were first instituted in 1970, proponents pointed to the need for more transparency to safeguard investors, particularly individuals who may not have had the same access to information as an institutional investor. It was a way to level the playing field. It’s hard to imagine anyone could have predicted how those well-intentioned changes might have evolved into what they are today.

It would transform business by focusing action in a way that made the managing of global enterprises efficient and effective like no framework the business world had ever seen before, creating incredible growth, jobs, and opportunities for a globalizing world. Yet with such disruption, there’s always the risk that the changes in response to that disruption go too far. In that shift from focusing on creating the best product to maximizing shareholder value, something important was lost. Business became much more impersonal and antiseptic. We ourselves no longer had to fire Bob or Sue. Now it could be blamed on an RIF—a “reduction in force,” the acronym itself distancing us from having to face the fact that Bob and Sue were people with families who depended on these jobs. There was now less latitude to take into account considerations beyond profitability. The phrases It’s nothing personal and It’s just business became common justifications for any action that may have previously been viewed as ruthless and cold.


pages: 293 words: 78,439

Dual Transformation: How to Reposition Today's Business While Creating the Future by Scott D. Anthony, Mark W. Johnson

activist fund / activist shareholder / activist investor, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Amazon Web Services, autonomous vehicles, barriers to entry, Ben Horowitz, blockchain, business process, business process outsourcing, call centre, Clayton Christensen, cloud computing, commoditize, corporate governance, creative destruction, crowdsourcing, death of newspapers, disintermediation, disruptive innovation, distributed ledger, diversified portfolio, Internet of things, invention of hypertext, inventory management, Jeff Bezos, job automation, job satisfaction, Joseph Schumpeter, Kickstarter, late fees, Lean Startup, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, Minecraft, obamacare, Parag Khanna, Paul Graham, peer-to-peer lending, pez dispenser, recommendation engine, self-driving car, shareholder value, side project, Silicon Valley, Skype, software as a service, software is eating the world, Steve Jobs, the market place, the scientific method, Thomas Kuhn: the structure of scientific revolutions, transfer pricing, uber lyft, Watson beat the top human players on Jeopardy!, Y Combinator, Zipcar

For example, a 2011 article in Psychology Today notes that corporations display attributes of psychotic individuals. Over the past few years, a number of critics have suggested that the era of shareholder value maximization needs to come to an end. Top business thinkers such as Christensen as well as Roger Martin, former dean of the Rotman School at the University of Toronto, and HBS legend Michael Porter have argued that shareholder value has been exposed as a flawed paradigm. Even Michael Jensen, an academic and consultant—whose seminal 1976 article (with William Meckling) helped kick off both the focus on shareholder value as the measure of top executives’ success and the incentive of extensive stock grants (which was intended to encourage them to act like owners)—now rues the unanticipated impact of some of his contributions.

The organizational culture coming from the privatization days was basically a mindset of let’s go for excellent operating efficiency, top-of-the-line customer service, responsiveness, but, most of all, compliance to regulation. It is a mindset where we would say, “Let’s manage or minimize our risk and make sure our oversight authorities don’t call us out on any major issue.” It is almost everything that an innovative culture is the opposite of. I think we have, or at least have started to, develop a mindset that we need to embrace change if we are to grow. We need to be a different business if we are to create shareholder value. For his part, dela Cruz highlighted the new disciplines the journey has built. “I believe we have a more systematic, programmatic way of transforming the operating model and have really institutionalized an innovation discipline,” he said. “One thing you can say about Manila Water is when we do this type of project, we really internalize it.” Chapter 9 has further reflections from Ablaza, dela Cruz, and other leaders who have gone on the journey of dual transformation.

In that way, the railroad executives would have better understood the challenge, and the opportunities, represented by the planes that flew over their heads and the telephone and telegraph wires that ran alongside their tracks. Things have gotten worse, because now if you ask most companies why they exist, it isn’t even to sell a particular product or service, much less to serve any customers. No, it is to maximize shareholder value. As Harvard Business School professor Clayton Christensen likes to note, the primary job of many managers is to “source, assemble, and ship numbers.” And short-term numbers at that. Worshipping at what Christensen calls the “church of finance” hollows out a company’s competitive advantage; it loses the capacity to invest in innovation, and that drives the perpetual reinvention necessary in the world of temporary competitive advantage.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

Corporate History Sector Rotation in the S&P 500 Index Top-Performing Firms How Bad News for the Firm Becomes Good News for Investors Top-Performing Survivor Firms Other Firms That Turned Golden Outperformance of Original S&P 500 Firms Conclusion Chapter 9 The Impact of Taxes on Stock and Bond Returns Stocks Have the Edge Historical Taxes on Income and Capital Gains Before- and After-Tax Rates of Return The Benefits of Deferring Capital Gains Taxes Inflation and the Capital Gains Tax Increasingly Favorable Tax Factors for Equities Stocks or Bonds in Tax-Deferred Accounts? Conclusion Appendix: History of the Tax Code Chapter 10 Sources of Shareholder Value Earnings and Dividends Discounted Cash Flows Sources of Shareholder Value Historical Data on Dividends and Earnings Growth The Gordon Dividend Growth Model of Stock Valuation Discount Dividends, Not Earnings Earnings Concepts Earnings Reporting Methods Operating Earnings and NIPA Profits The Quarterly Earnings Report Conclusion Chapter 11 Yardsticks to Value the Stock Market An Evil Omen Returns Historical Yardsticks for Valuing the Market Price/Earnings Ratio and the Earnings Yield The Aggregation Bias The Earnings Yield The CAPE Ratio The Fed Model, Earnings Yields, and Bond Yields Corporate Profits and GDP Book Value, Market Value, and Tobin’s Q Profit Margins Factors That May Raise Future Valuation Ratios A Fall in Transaction Costs Lower Real Returns on Fixed-Income Assets The Equity Risk Premium Conclusion Chapter 12 Outperforming the Market The Importance of Size, Dividend Yields, and Price/Earnings Ratios Stocks That Outperform the Market What Determines a Stock’s Return?

Qualified dividend income must come from taxable enterprises, not “flow-through” organizations such as real estate investment trusts or investment companies. In 2013 the top bracket on capital gains was raised to 20 percent for married couples earning over $450,000, and for the first time a Medicare surtax of 3.8 percent was applied to investment income for couples earning more than $250,000. The tax rates on qualified dividend income were set equal to the new capital gains tax rates. 10 * * * Sources of Shareholder Value Earnings and Dividends The importance of dividends for providing wealth to investors is self-evident. Dividends not only dwarf inflation, growth, and changing valuations levels individually, but they also dwarf the combined importance of inflation, growth, and changing valuation levels. —ROBERT ARNOTT, 20031 It is just after 4 p.m. eastern time, and the major U.S. stock exchanges have just closed.

The reasons investors discount the future are (1) the existence of a risk-free rate, a yield on a safe alternative asset such as government or other AAA-rated securities, which allows investors the ability to transform a dollar invested today into a greater sum tomorrow; (2) inflation, which reduces the purchasing power of cash received in the future, and (3) the risk associated with the magnitudes of expected cash flows, which induces investors of risky assets, such as stocks, to demand a premium to that on safe securities. The sum of these three factors—the risk-free rate, the inflation premium, and the equity risk premium—determines the discount rate for equities. This discount rate is also called the required return on equity or the cost of equity. SOURCES OF SHAREHOLDER VALUE Earnings are the source of cash flows to shareholders. Earnings (also called profits or net income) are the difference between the revenues to the firm and the costs of production. The costs of production include all labor and material costs, interest on debt, taxes, and allowances for depreciation. Firms can transform these earnings into cash flows to shareholders in a number of ways. The first and historically the most important is payment of cash dividends.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, carried interest, cloud computing, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, high net worth, index fund, information asymmetry, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, price stability, ride hailing / ride sharing, rolodex, Sand Hill Road, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

To satisfy Revlon duties, boards should: (1) run a broad outreach to multiple potential acquirers, with the help of bankers where possible; (2) consider other possible paths forward (e.g., is there a financing alternative whereby the company remains a stand-alone entity to maximizes shareholder value?); (3) consider incorporating a go-shop provision into an offer they receive from an acquirer to permit other competing bids to surface; and (4) document a well-vetted process that shows the board considered all available possibilities to maximize shareholder value. The board is not obligated in all cases to take the highest price; it just has to reasonably maximize shareholder value. So, for example, the board can take a slightly lower offer if it feels that the offer is more likely to close or the form of consideration (stock versus cash) is more favorable. Ultimately, the processes of negotiating with the buyer and evaluating the various alternatives are likely to be sufficient as long as the price is within a range of reasonable prices.

It is often the case that by the time founders raise their first institutional financing round, they may be as much as 50 percent vested, assuming that they have been working on the company for at least two years prior to the time they raised financing. However, with companies staying private demonstrably longer these days, the work required to build the business into a successful venture has really just begun. Unfortunately, we often see cases where a cofounder leaves—whether voluntarily or otherwise—once she has fully vested, leaving the other cofounder to bear the brunt of managing the business and building long-term shareholder value for many years to come. And, although the remaining cofounder may receive incremental equity grants from the board over time for her continued service, the likely financial value of her new equity pales in comparison to the value of the fully vested equity the former cofounder has realized. The conversation with the remaining cofounder is the same each time: “I’m here every day working hard trying to build long-term equity value for my employees and investors while Joan [names have been changed to protect the innocent] is living the celebrity party scene.”

To deal with this situation, you will want to make sure that board seats are conditioned upon continued service to the company as an employee, not simply granted to someone as a function of having been a cofounder. This is a simple thing to implement as of the founding of the company, but an often overlooked one. Ultimately, this is about making sure that founder equity serves its purpose—to create long-term incentives—and that the economic rewards of success accrue to those who are remaining with the company over the long term to help increase shareholder value. And incentives are perfectly aligned here between you (as the remaining cofounder) and your VCs: the company retains valuable stock to grant the remaining employees who are actually contributing to the growth of the business. Transfer Restrictions Imagine that your cofounder has not only left but is now sitting on hundreds of millions of dollars in vested stock and wants to sell the stock privately.


pages: 741 words: 179,454

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

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, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, 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, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, 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, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, 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, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, 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 Thaler, Right to Buy, 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, Satyajit Das, 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, survivorship bias, 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 new new thing, 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, zero-sum game

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: 218 words: 62,889

Sabotage: The Financial System's Nasty Business by Anastasia Nesvetailova, Ronen Palan

algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bernie Sanders, big-box store, bitcoin, Black-Scholes formula, blockchain, Blythe Masters, bonus culture, Bretton Woods, business process, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Gordon Gekko, high net worth, Hyman Minsky, information asymmetry, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, price mechanism, regulatory arbitrage, rent-seeking, reserve currency, Ross Ulbricht, shareholder value, short selling, smart contracts, sovereign wealth fund, Thorstein Veblen, too big to fail

Shareholders were interested only in profits and cared not about the comfort of either the workforce or the managers. By introducing ‘shareholder value’ to American capitalism the liberals advocated a system that would be specifically oriented towards short-term profits. The shorter, the better; shareholder value imposed fierce competition in the marketplace. Competitive markets, the liberal believed, would force innovation and change. Shareholder value was positive. Profits were central. Greed was good. The argument quickly evolved into a disciplinary and political debate. Veblenians believed that Hayek and his disciples ignored a crucial point. Owners and shareholders did not innovate in any way, either in industry or in finance. Their mentality, their ‘habit of thought’, was that of sabotage. If liberals hoped that by introducing short-termism through shareholder value the shareholders would force reluctant managers and engineers to innovate, Veblenians thought the new liberal era would simply give licence to increased sabotage on a massive scale.

‘Excess profits’, Bain says, ‘whatever the figure for such excesses might be, are a sure sign that the market is in some sort of dis-equilibria.’ Alternatively, disequilibria are due to monopoly: ‘although excess profits are thus not a sure indication of monopoly, they are, if persisted, a probable indication’ (Bain, ‘ Profit Rate as a Measure of Monopoly Power’). 8. In other words, the state, a political entity that Hayekians tend to scorn. 9. K. Ward, Marketing Finance: Turning Marketing Strategies into Shareholder Value, 3rd edn, Routledge, 2011, p. 1. 10. Makowski and Ostroy, ‘Perfect Competition and the Creativity of the Market’, Journal of Economic Literature, vol. 39, 2001, pp. 479–535, https://doi.org/10.1257/jel.39.2.479. 11. L. Corey, The House of Morgan: A Social Biography of the Masters of Money, G. H. Watt, 1930, p. 193. 12. Ibid., p. 245. 13. T. Veblen, Absentee Ownership: Business Enterprise in Recent Times – The Case of America, Transaction Publishers, 2017, pp. 40–41. 14.


pages: 310 words: 85,995

The Future of Capitalism: Facing the New Anxieties by Paul Collier

"Robert Solow", accounting loophole / creative accounting, Airbnb, assortative mating, bank run, Berlin Wall, Bernie Sanders, bitcoin, Bob Geldof, bonus culture, business cycle, call centre, central bank independence, centre right, Commodity Super-Cycle, computerized trading, corporate governance, creative destruction, cuban missile crisis, David Brooks, delayed gratification, deskilling, Donald Trump, eurozone crisis, financial deregulation, full employment, George Akerlof, Goldman Sachs: Vampire Squid, greed is good, income inequality, industrial cluster, information asymmetry, intangible asset, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge economy, late capitalism, loss aversion, Mark Zuckerberg, minimum wage unemployment, moral hazard, negative equity, New Urbanism, Northern Rock, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, race to the bottom, rent control, rent-seeking, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, too big to fail, trade liberalization, urban planning, web of trust, zero-sum game

Fortunately, there is a lot of the future left. 4 The Ethical Firm In the Britain of my youth, the most respected company in the entire country was Imperial Chemical Industries. Combining scientific innovation and size it developed huge prestige, and to work for it was a matter of pride. This was reflected in its mission statement: ‘we aim to be the finest chemical company in the world.’ Yet in the 1990s ICI changed its mission statement. It became: ‘we aim to maximise shareholder value.’ What had happened, and why did it matter? Firms are at the core of capitalism. The mass contempt in which capitalism is held – as greedy, selfish, corrupt – is largely due to their deteriorating behaviour. Economists have not helped. Milton Friedman, Nobel Laureate, vociferously propounded the nostrum – first articulated in 1970 in the New York Times – that the sole purpose of a firm is to make profits.

Currently, when faced with the choice between ‘The primary purpose of business should be to make profit’ versus ‘Making a profit should be only one consideration among many’, the people who agree with Friedman are outnumbered three-to-one, a difference that is uniform across age groups and opinions about other matters.1 Who is right: Friedman or public opinion? A clue comes from what happened at ICI. Did its new Friedman-inspired mission statement motivate the company’s workforce to new heights? Has any worker for any company ever got up in the morning, thinking ‘today I’m going to maximize shareholder value’? That change in mission statement reflected a change in focus by the company’s board. Previously, it had tried to be a world-class chemical company, which implied paying attention to its workforce, its customers and its future. Now it tried to please shareholders with dividends. If you are under the age of forty you are unlikely to have heard of ICI. This is because the change of focus proved disastrous: the company went into decline and was taken over.* Academic opinion now agrees with public opinion.

A worker who stopped the line unnecessarily would in just a few minutes inflict costs on the company well in excess of his productive value over an entire year. So, this policy indicated that the management really trusted their workers to work for the company, not against it. In other words, it depended upon workers having a sense of purpose that was well aligned with that of the company. I rather doubt that they were thinking ‘I’m trying to maximize shareholder value.’ This was utterly different from the approach to quality control used by GM, which was the conventional one of checking a sample of completed cars. Eventually, a new CEO understood the problem: the culture needed changing. Confrontation between GM management and the United Autoworkers Union would be superseded by mutual trust. ‘If they’ve got robots, we’ll have robots’ was replaced by ‘If they’ve got Andon cords, we’ll have Andon cords.’


pages: 486 words: 150,849

Evil Geniuses: The Unmaking of America: A Recent History by Kurt Andersen

affirmative action, Affordable Care Act / Obamacare, airline deregulation, airport security, always be closing, American ideology, American Legislative Exchange Council, anti-communist, Apple's 1984 Super Bowl advert, artificial general intelligence, autonomous vehicles, basic income, Bernie Sanders, blue-collar work, Bonfire of the Vanities, bonus culture, Burning Man, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, centre right, computer age, coronavirus, corporate governance, corporate raider, COVID-19, Covid-19, creative destruction, Credit Default Swap, cryptocurrency, deindustrialization, Donald Trump, Elon Musk, ending welfare as we know it, Erik Brynjolfsson, feminist movement, financial deregulation, financial innovation, Francis Fukuyama: the end of history, future of work, game design, George Gilder, Gordon Gekko, greed is good, High speed trading, hive mind, income inequality, industrial robot, interchangeable parts, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, Jaron Lanier, Jeff Bezos, jitney, Joan Didion, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, knowledge worker, low skilled workers, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, Menlo Park, Naomi Klein, new economy, Norbert Wiener, Norman Mailer, obamacare, Peter Thiel, Picturephone, plutocrats, Plutocrats, post-industrial society, Powell Memorandum, pre–internet, Ralph Nader, Right to Buy, road to serfdom, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, Saturday Night Live, Seaside, Florida, Second Machine Age, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Stewart Brand, strikebreaker, The Death and Life of Great American Cities, The Future of Employment, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, union organizing, universal basic income, Unsafe at Any Speed, urban planning, urban renewal, very high income, wage slave, Wall-E, War on Poverty, Whole Earth Catalog, winner-take-all economy, women in the workforce, working poor, young professional, éminence grise

By the 1980s this approach had turned into a movement with a new name and mantra: shareholder value. Unlike Friedman’s contemptuous bah-humbuggery or Gekko’s Greed is good, it sounded neutral, uncontroversial, practically self-evident—like Law and Economics. Victory for the new dogma was fast and total. Back in 1981, the official scripture of the Business Roundtable, the big business politburo, still held that “corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices” and to “provide jobs, and build the economy.” The term shareholder value’s first apparent use in The New York Times came the following year. Boom: according to an economist who specializes in U.S. business history, “no one was talking about ‘shareholder value’ ” in 1984, but then boom, by 1986, “everyone was talking about it.”

After years of scholarly spadework and litigation here and there, the conservative legal and judicial counter-Establishment suddenly booms on its way to dominance. Some Key Changes in the 1980s Good for the Financial Industry Stock prices almost triple (before almost quadrupling again during the 1990s). The long-standing federal prohibition on companies buying their own stock, meant to prevent share price manipulation, is repealed. The new “shareholder value” movement’s redefinition of capitalism makes a company’s current stock price essentially the only relevant measure of corporate performance. The share of all stocks owned by a few big institutional investors triples (on its way to doubling again in the 1990s). Increasingly abstract and untried and unregulated financial bets on other financial bets, derivatives, become normalized and start becoming economically significant.

Boom: according to an economist who specializes in U.S. business history, “no one was talking about ‘shareholder value’ ” in 1984, but then boom, by 1986, “everyone was talking about it.” In the 1990s the Business Roundtable doctrine was amended accordingly, professing the new faith that the point of a business enterprise “is to generate economic returns to its owners,” period, by being “focused on shareholder value.” By then a more pointed and accurate term had been coined for the new stock-price monomania: shareholder supremacy. The most obvious way to make corporate executives obsess more over their stock price was to start paying them in shares of company stock instead of cash. Until the late 1960s only about one in five senior executives at big U.S. corporations were being paid partly, and fairly minimally, in stock options. In the 1970s a new standard accounting rule allowed corporate financial statements to pretend that stock-option pay didn’t really count as a corporate expense—free money!


pages: 807 words: 154,435

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

"Robert Solow", Airbus A320, Albert Einstein, Albert Michelson, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Benoit Mandelbrot, bitcoin, Black Swan, Bonfire of the Vanities, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, easy for humans, difficult for computers, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Hans Rosling, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, Moneyball by Michael Lewis explains big data, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, oil shock, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, popular electronics, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, World Values Survey, Yom Kippur War, zero-sum game

As students and academics we pursued the traditional approach of trying to understand economic behaviour through the assumption that households, businesses, and indeed governments take actions in order to optimise outcomes. We learnt to approach economic problems by asking what rational individuals were maximising. Businesses were maximising shareholder value, policy-makers were trying to maximise social welfare, and households were maximising their happiness or ‘utility’. And if businesses were not maximising shareholder value, we inferred that they must be maximising something else – their growth, or the remuneration of their senior executives. The limits on their ability to optimise were represented by constraints: the relationship between inputs and outputs in the case of businesses, the feasibility of different policies in the case of governments, and budget constraints in the case of households.

Although much can be learnt by thinking in this way, our own practical experience was that none of these economic actors were trying to maximise anything at all. This was not because they were stupid, although sometimes they were, nor because they were irrational, although sometimes they were. It was because an injunction to maximise shareholder value, or social welfare, or household utility, is not a coherent guide to action. Business people, policy-makers and families could not even imagine having the information needed to determine the actions that would maximise shareholder value, social welfare or household utility. Or to know whether they had succeeded in doing so after the event. Honest and capable executives and politicians, of which there are many, try instead to make incremental decisions which they think will improve their business, or make the world a better place.

Corporations select strategies to maximise shareholder value. Governments choose policies to maximise social welfare. A moment’s introspection is enough to tell us that they don’t. They could not conceivably have the information required to do so. They do not know all the available options, and they are uncertain what the consequences of them will be. They do not even know whether what they wish for today will be what they still want if they achieve it tomorrow. Young people do not know what their career progression will be, or what they will earn over the next forty years, or whether and when they will marry or divorce, or what they will need in retirement, or whether they will live that long. No chief executive knows what will maximise shareholder value, or after the event whether it has indeed been maximised.


pages: 309 words: 81,975

Brave New Work: Are You Ready to Reinvent Your Organization? by Aaron Dignan

"side hustle", activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, autonomous vehicles, basic income, Bertrand Russell: In Praise of Idleness, bitcoin, Black Swan, blockchain, Buckminster Fuller, Burning Man, butterfly effect, cashless society, Clayton Christensen, clean water, cognitive bias, cognitive dissonance, corporate governance, corporate social responsibility, correlation does not imply causation, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, David Heinemeier Hansson, deliberate practice, DevOps, disruptive innovation, don't be evil, Elon Musk, endowment effect, Ethereum, ethereum blockchain, Frederick Winslow Taylor, future of work, gender pay gap, Geoffrey West, Santa Fe Institute, gig economy, Google X / Alphabet X, hiring and firing, hive mind, income inequality, information asymmetry, Internet of things, Jeff Bezos, job satisfaction, Kevin Kelly, Kickstarter, Lean Startup, loose coupling, loss aversion, Lyft, Marc Andreessen, Mark Zuckerberg, minimum viable product, new economy, Paul Graham, race to the bottom, remote working, Richard Thaler, shareholder value, Silicon Valley, six sigma, smart contracts, Social Responsibility of Business Is to Increase Its Profits, software is eating the world, source of truth, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the High Line, too big to fail, Toyota Production System, uber lyft, universal basic income, Y Combinator, zero-sum game

As we’ve seen, this maxim has led corporations to optimize everything in society—the market, the law, even our attention—in order to drive short-term gain. At the same time, the cost to humanity and the environment has been profound. Unchecked growth has created the conditions for a climate crisis that is unfolding in real time. This singular focus has also led to rampant inequality and a level of worker engagement that is pathetic at best. A mission statement that places shareholder value as the definition rather than the result of success is uninspiring. Jim Barksdale, former CEO of Netscape, once quipped, “Saying that the purpose of a company is to make money is like saying that your purpose in life is to breathe.” Instead we can elevate purpose above all. Given that we spend so much of our lives at work, wouldn’t it be nice if that work were worthwhile? If it delivered meaning and connection?

In fact, the socially conscious and purpose-driven companies featured by professor and author Raj Sisodia in Firms of Endearment have outperformed the S&P 500 by a staggering 14x over a period of fifteen years, ten of which were after the publication of the book. A great purpose is aspirational, but it’s also a constraint. It focuses our energy and attention. It places a boundary around our efforts by saying, Here is where we will build our dream. Too mundane (e.g., shareholder value) and we lack meaning. Too vague (e.g., change the world) and we lack focus. Too concrete (e.g., a computer on every desk) and we can find ourselves rudderless after the moment of victory. Done well, purpose unites us, orients us, and helps us make decisions as we go. Thought Starters Fractal Purpose. Every organization has a purpose. But not every organization ensures that its purpose is fractal—that it shows up at every level.

Having a pipeline of ever-more-sophisticated BlackBerry mobile devices is great, but it doesn’t matter if the world is moving to touch screens. While we often think of this as the job of the CEO, these counterintuitive insights—unpopular by definition—are often hiding in the organization and waiting to be discovered. What’s more, many organizations forget how potent the connection between purpose and strategy really is. If you don’t have a compelling vision—a dent in the universe beyond shareholder value—your strategies will fall flat. Because how can we win if we don’t know what winning looks like? Thought Starters Wild Swings and Sure Things. His politics and cantankerous demeanor aside, Nassim Nicholas Taleb introduced an extremely valuable concept in his book The Black Swan called the barbell strategy. This financial strategy is named for how it distributes risk—to two extremes: invest 85–90 percent of your assets in extremely safe instruments, and place all of the remainder in highly speculative bets.


pages: 261 words: 86,905

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

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, 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, Myron Scholes, negative equity, 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, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, 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: 48 words: 12,437

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

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: 716 words: 192,143

The Enlightened Capitalists by James O'Toole

activist fund / activist shareholder / activist investor, anti-communist, Ayatollah Khomeini, Bernie Madoff, British Empire, business cycle, business process, California gold rush, carbon footprint, City Beautiful movement, collective bargaining, corporate governance, corporate social responsibility, Credit Default Swap, crowdsourcing, cryptocurrency, desegregation, Donald Trump, double entry bookkeeping, end world poverty, equal pay for equal work, Frederick Winslow Taylor, full employment, garden city movement, germ theory of disease, glass ceiling, God and Mammon, greed is good, hiring and firing, income inequality, indoor plumbing, inventory management, invisible hand, James Hargreaves, job satisfaction, joint-stock company, Kickstarter, knowledge worker, Lao Tzu, longitudinal study, Louis Pasteur, Lyft, means of production, Menlo Park, North Sea oil, passive investing, Ponzi scheme, profit maximization, profit motive, Ralph Waldo Emerson, rolodex, Ronald Reagan, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Socratic dialogue, sovereign wealth fund, spinning jenny, Steve Jobs, Steve Wozniak, stocks for the long run, stocks for the long term, The Fortune at the Bottom of the Pyramid, The Wealth of Nations by Adam Smith, Tim Cook: Apple, traveling salesman, Uber and Lyft, uber lyft, union organizing, Vanguard fund, white flight, women in the workforce, young professional

And when shares are bought and sold on financial markets, investors inevitably gain the upper hand; eventually founders or their families lose influence as their companies come to be led by professional managers. When that occurs, investor demand for short-term profit increases, and the sustainability of virtuous practices becomes imperiled. Recently deceased law professor Lynn Stout argued that the perceived need to maximize shareholder value drives many directors and executives—often unwillingly and against their better judgment—to focus almost exclusively on increasing profits in order to raise stock prices: “In the quest to ‘unlock shareholder value’ they sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance and research and development; delay replacing outworn, outmoded and unsafe equipment; shower CEOs with stock options and expensive pay packages to ‘incentivize’ them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency.”11 The problem does not arise simply from pressures by investors in public stock exchanges—as we saw, shares of Robert Owen’s and William Lever’s companies were not publicly traded; nonetheless, they came into conflict, respectively, with their nonmanaging partners and outside investors.

In sum, members of the business community seem more open than ever to the idea of expanding beyond their traditional economic role, yet they are uncertain how to do so in practice, not sure if it is possible to do so effectively and efficiently, and greatly concerned about doing so in a way that is profitable enough to satisfy investors. The enlightened capitalists were, as we shall see, practical idealists, who sought to create and maintain a delicate balance between profit and virtue. But practical idealism sounds oxymoronic to the ears of many business leaders today—graduates of business schools where they were instructed in “the primacy of shareholder value,” and readers of business publications reporting the fates of underperforming executives at the hands of shareholder activists. Questions, and More Questions, Business Leaders Need to Ask IN LIGHT OF THE powerful arguments offered in opposition to socially enlightened business practices, it is therefore legitimate for executives to ask why businesses should engage in activities that possibly detract from producing the wealth on which social, technological, and material progress is predicated (and on which government taxation and the funding of nonprofit universities, cultural institutions, and community-based charities depend).

As a fillip, Tom could boast he had achieved something Anita Roddick failed to do at L’Oréal: Colgate-Palmolive absorbed at least a degree of Tom’s of Maine’s environmentalism and social responsibility, and now issues an annual “social audit,” highlighting a growing number of enlightened societal activities. In sum, Chappell could claim to have struck a good deal for all involved. So, what’s not to like about the sale? To begin, Chappell, like Anita Roddick, lost credibility with many enlightened businesspeople who, rightly or wrongly, believe that virtuous practices are inherently incompatible with the central tenet of corporate capitalism: maximizing shareholder value. To achieve that goal, skeptics argue, all giant corporations are forced to standardize their organizational policies, systems, and structures to realize the efficiencies needed to justify the cost of the acquisitions they make. Thus it is merely a matter of time before Colgate has a bad quarter, and its leaders then feel compelled to “make some efficiencies” at their high-operating-cost subsidiary in Kennebunkport.


pages: 244 words: 66,977

Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It by Tien Tzuo, Gabe Weisert

3D printing, Airbnb, airport security, Amazon Web Services, augmented reality, autonomous vehicles, blockchain, Build a better mousetrap, business cycle, business intelligence, business process, call centre, cloud computing, cognitive dissonance, connected car, death of newspapers, digital twin, double entry bookkeeping, Elon Musk, factory automation, fiat currency, Internet of things, inventory management, iterative process, Jeff Bezos, Kevin Kelly, Lean Startup, Lyft, manufacturing employment, minimum viable product, natural language processing, Network effects, Nicholas Carr, nuclear winter, pets.com, profit maximization, race to the bottom, ride hailing / ride sharing, Sand Hill Road, shareholder value, Silicon Valley, skunkworks, smart meter, social graph, software as a service, spice trade, Steve Ballmer, Steve Jobs, subscription business, Tim Cook: Apple, transport as a service, Uber and Lyft, uber lyft, Y2K, Zipcar

Because it rode the shift to become a successful SaaS company with its “Commercial Cloud” business nearing its fiscal 2018 goal of a $20 billion annualized revenue run rate and its Office 365 Commercial business beating out its traditional licensing business in revenue generation. There are countless examples of software companies that have successfully made the shift to subscriptions and subsequently driven higher valuations and more shareholder value: IBM, Symantec, Sage, HP Enterprise, Qlik. Another big reason? IT buyers prefer opex to capex. Historically software companies have preferred capital expenditures (capex) for technology investments, as this afforded them the ability to take advantage of amortization and depreciation of the capital investments over a period of time. But as technology shifts to the cloud, there’s a complementary shift happening in favor of opex over capex.

In the second quarter of 2015, PTC recorded $303 million in revenue. A little over a year later, that number dropped to $288 million. In the same period, earnings swung from a $17.4 million profit to a loss of $28.5 million. But as I write, PTC’s stock is up 135 percent over less than two years, from a low of $28 in February 2016. In less than two years it has added more than $4 billion in shareholder value. Just a few years ago, PTC found itself in a similar position to where Adobe was in 2011—chugging along, like the rest of the traditional software sector, at low-single-digit growth. PTC had to begin every financial year at zero—revenue had to be clawed together one deal at a time, only to vanish again in twelve months. Overall revenue growth was a nice idea, but not at the cost of quarterly profits—unwittingly or not, PTC had lashed itself to a strict, GAAP-based valuation model.

They could justify ROI to their bosses (“This is what I used, so this is what I spent”), which is usually a much more difficult exercise with million-dollar project spend. There was way less bureaucracy and no painful IT integrations involved. So PTC announced a broad, systemic shift from perpetual licenses to cloud-based subscriptions, and it also confidently predicted that this shift would rekindle growth, expand margins, and maximize long-term shareholder value. It wound up going three for three. In October 2015, at the start of the journey, PTC told investors and analysts that in five years (FY2021) it was aiming for $1.6 billion in revenue, 10 percent revenue growth, an operating margin in the low thirties, and 70 percent of bookings coming from subscriptions. In stark contrast to Adobe’s announcement, PTC’s analyst call resulted in a nice little pop for them—PTC went from $32 per share at the end of September 2015 to about $37 per share at the beginning of November, or a 15 percent increase in its valuation.


pages: 247 words: 68,918

The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global reserve currency, global supply chain, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, shareholder value, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

articleID=2069&AspxAutoDetectCookieSupport=1. 2 The phrase “rise of the rest” was popularized by Fareed Zakaria in The Post-American World (New York: Norton, 2008). 3 Karl-Heinz Büchemann, “The ‘Dumbest Idea in the World’: Jack Welch, the Figurehead of Shareholder Value, Disowns His Doctrine,” Atlantic Times, Apr. 2009, http://www.atlantic-times.com/archive_detail.php?recordID=1716. 4 Organisation for Economic Co-operation and Development, Principles of Corporate Governance, May 1999. 5 Welch rejected the approach in an interview with the Financial Times, Mar. 12, 2009: “Shareholder value is a result, not a strategy.” 6 President Hoover was petitioned by more than a thousand leading U.S. economists of the time not to sign the Smoot-Hawley Act. Compared to the previous 1922 Tariff Act (which itself had led to dramatic increases in earlier levels), Smoot-Hawley increased tariffs for 890 groups of goods while decreasing them for 235.

That’s the theory. But when the state fails to properly regulate market activity, it allows for a system in which players have every incentive to value cleverness more than prudence, short-term gains over longer-term investment. During the twenty-five-year period before the market meltdown of 2008, the conventional wisdom in corporate management theory favored an approach that privileged “shareholder value,” a concept widely associated with former General Electric CEO Jack Welch, who was promoting the idea in speeches as early as 1981.3 The assumption was that since company shares are bought and sold in a marketplace, shareholders will collectively allocate a company’s resources more efficiently and intelligently than its management can. In other words, senior executives can only be sure they’re managing the company well if more and more investors are pushing its share price ever higher.

Many of them care little about a company’s multiyear prospects. As stock prices climbed, critics of this theory were dismissed. But when financial markets spiraled toward crisis in 2008, it became clear that the short-term thinking of the few had inflicted enormous damage on the many—including victims of the broader economic meltdown, the crisis’s “collateral damage.” By early 2009, even Jack Welch was denouncing the concept of shareholder value as “the dumbest idea in the world.”5 This is just one example of the sort of failure of imagination that sent markets into free fall in 2008. Reckless borrowing and lending, ill-conceived risk taking, poor risk management, and many other human failings played crucial roles, but the common denominator in all these mistakes is a lack of intelligent government oversight of all this activity. Any argument that the state should remove itself entirely from the marketplace is absurd, because markets have proven again and again over several centuries that they cannot and will not regulate themselves.


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Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, 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, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, 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, stocks for the long run, 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, zero-sum game

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.


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

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, 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.”


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

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, 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, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, 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 new new thing, 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.


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

corporate governance, creative destruction, 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.


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

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, Schrödinger's Cat, Shai Danziger, 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: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

Companies may claim the mantle of corporate social responsibility, but the first responsibilities of any corporation are to pay its fair share of taxes and not despoil the environment. Too many companies thrive off public investments in infrastructure, education, and technology, but are not willing to pay back society. The view that firms should simply maximize shareholder value is of recent origin, often dated to the influence of Milton Friedman and his right-wing ideology of the 1970s and early 1980s, a time when there was a shift to the right on both sides of the Atlantic. Friedman’s stance was ironic because at just the time he was arguing for shareholder capitalism, economic theorists were explaining why, in general, maximizing shareholder value would not lead to societal well-being.4 Only in simplistic economic models are public and private interests perfectly aligned. Public policy should aim to bring them into better alignment. But it never does so perfectly, which means that maximizing shareholder interests is seldom itself sufficient to ensure societal well-being.

An unwarranted trust in private industry—and the belief that it could be relied on to be self-regulating and naturally competitive—became the political manifestation of Europe’s confidence in markets. Companies were left to grow larger and larger. Measures that might have promoted competition rather than consolidation fell out of favor. Moreover, corporate governance was often judged on whether it maximized shareholder value and not whether it benefited society as a whole. Most destructively, as subsequent events would show, European governments, regulators, and thinkers greenlighted (even celebrated) a financial services industry that grew more reckless with every passing year. In a culture that celebrated the free market, the money that bankers raked in simply confirmed that they were smarter than the rest and able to regulate their own behavior.

The interests of executives have become decoupled from the interests of the company and of society as a whole. CEO bonuses and starkly higher pay for executives in some sectors, notably in finance but elsewhere as well, have become a lightning rod for public criticism, and rightly so. While the claim is that these bonuses are necessary to incentivize executives, the evidence is that these payments do not even fulfill the stated goal of increasing shareholder value but generate enormous negative side effects. In banking, they encouraged excessive risk taking and short-termism; in the auto industry, they facilitated attempts to circumvent environmental regulations; in some international businesses, they enabled corruption and bribery. As long as CEOs and other high-level corporate executives have their compensation and benefits linked to stock prices, and particularly stock prices in the here and now, as many currently do, they will be tempted to pursue short-term gains and creative—destructive is a better word—accounting tricks, which are ephemeral sources of growth at best, over adding real long-term value to their companies.


pages: 670 words: 194,502

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

3Com Palm IPO, accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, money market fund, 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, stocks for the long run, survivorship bias, the market place, the rule of 72, 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: 918 words: 257,605

The Age of Surveillance Capitalism by Shoshana Zuboff

Amazon Web Services, Andrew Keen, augmented reality, autonomous vehicles, barriers to entry, Bartolomé de las Casas, Berlin Wall, bitcoin, blockchain, blue-collar work, book scanning, Broken windows theory, California gold rush, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, citizen journalism, cloud computing, collective bargaining, Computer Numeric Control, computer vision, connected car, corporate governance, corporate personhood, creative destruction, cryptocurrency, dogs of the Dow, don't be evil, Donald Trump, Edward Snowden, en.wikipedia.org, Erik Brynjolfsson, facts on the ground, Ford paid five dollars a day, future of work, game design, Google Earth, Google Glasses, Google X / Alphabet X, hive mind, impulse control, income inequality, Internet of things, invention of the printing press, invisible hand, Jean Tirole, job automation, Johann Wolfgang von Goethe, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, knowledge economy, linked data, longitudinal study, low skilled workers, Mark Zuckerberg, market bubble, means of production, multi-sided market, Naomi Klein, natural language processing, Network effects, new economy, Occupy movement, off grid, PageRank, Panopticon Jeremy Bentham, pattern recognition, Paul Buchheit, performance metric, Philip Mirowski, precision agriculture, price mechanism, profit maximization, profit motive, recommendation engine, refrigerator car, RFID, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Mercer, Second Machine Age, self-driving car, sentiment analysis, shareholder value, Shoshana Zuboff, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, slashdot, smart cities, Snapchat, social graph, social web, software as a service, speech recognition, statistical model, Steve Jobs, Steven Levy, structural adjustment programs, The Future of Employment, The Wealth of Nations by Adam Smith, Tim Cook: Apple, two-sided market, union organizing, Watson beat the top human players on Jeopardy!, winner-take-all economy, Wolfgang Streeck

Inequality of wealth and rights was accepted and even celebrated as a necessary feature of a successful market system and as a force for progress.23 Hayek’s ideology provided the intellectual superstructure and legitimation for a new theory of the firm that became another crucial antecedent to the surveillance capitalist corporation: its structure, moral content, and relationship to society. The new conception was operationalized by economists Michael Jensen and William Meckling. Leaning heavily on Hayek’s work, the two scholars took an ax to the pro-social principles of the twentieth-century corporation, an ax that became known as the “shareholder value movement.” In 1976 Jensen and Meckling published a landmark article in which they reinterpreted the manager as a sort of parasite feeding off the host of ownership: unavoidable, perhaps, but nonetheless an obstacle to shareholder wealth. They boldly argued that structural disconnect between owners and managers “can result in the value of the firm being substantially lower than it otherwise could be.”24 If managers suboptimized the value of the firm to its owners in favor of their own preferences and comfort, it was only rational for them to do so.

Financial carrots and sticks persuaded executives to dismember and shrink their companies, and the logic of capitalism shifted from the profitable production of goods and services to increasingly exotic forms of financial speculation. The disciplines imposed by the new market operations stripped capitalism down to its raw core, and by 1989 Jensen confidently proclaimed the “eclipse of the public corporation.”32 By the turn of the century, as the foundational mechanisms of surveillance capitalism were just beginning to take shape, “shareholder value maximization” was widely accepted as the “objective function” of the firm.33 These principles, culled from a once-extremist philosophy, were canonized as standard practice across commercial, financial, and legal domains.34 By 2000, US public corporations employed fewer than half as many Americans as they did in 1970.35 In 2009 there were only half as many public firms as in 1997. The public corporation had become “unnecessary for production, unsuited for stable employment and the provision of social welfare services, and incapable of proving a reliable long-term return on investment.”36 In this process the cult of the “entrepreneur” would rise to near-mythic prominence as the perfect union of ownership and management, replacing the rich existential possibilities of the second modernity with a single glorified template of audacity, competitive cunning, dominance, and wealth.

Surveillance capitalism was born digital, but as we shall see in following chapters, it is no longer confined to born-digital companies. This logic for translating investment into revenue is highly adaptive and exceptionally lucrative as long as raw-material supplies are free and law is kept at bay. The rapid migration to surveillance revenues that is now underway recalls the late-twentieth-century shift from revenues derived from goods and services to revenues derived from mastering the speculative and shareholder-value-maximizing strategies of financial capitalism. Back then, every company was forced to obey the same commandments: shrink head count, offshore manufacturing and service facilities, reduce expenditures on product and service quality, diminish commitments to employees and consumers, and automate the customer interface, all radical cost-reduction strategies designed to support the firm’s share price, which was held hostage to an increasingly narrow and exclusionary view of the firm and its role in society.


pages: 348 words: 83,490

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) by Michael J. Mauboussin

Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, Benoit Mandelbrot, Black Swan, Brownian motion, butter production in bangladesh, buy and hold, capital asset pricing model, Clayton Christensen, clockwork universe, complexity theory, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, dogs of the Dow, Drosophila, Edward Thorp, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, fixed income, framing effect, functional fixedness, hindsight bias, hiring and firing, Howard Rheingold, index fund, information asymmetry, intangible asset, invisible hand, Isaac Newton, Jeff Bezos, Kenneth Arrow, Laplace demon, Long Term Capital Management, loss aversion, mandelbrot fractal, margin call, market bubble, Menlo Park, mental accounting, Milgram experiment, Murray Gell-Mann, Nash equilibrium, new economy, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Richard Florida, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, survivorship bias, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

As Buffett’s partner Charlie Munger notes, “one of the advantages of a fellow like Buffett is that he automatically thinks in terms of decision trees.”6 Says Buffett, “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.”7 Naturally, coming up with likely outcomes and appropriate probabilities is not an easy task. But the discipline of the process compels an investor to think through how various changes in expectations for value triggers—sales, costs, and investments—affect shareholder value, as well as the likelihood of various outcomes. Such an exercise also helps overcome the loss-aversion pitfall.8 The expected-value mindset is by no means limited to investing. The book, Bet with the Best, offers various strategies for pari-mutuel bettors. Steven Crist, CEO, editor, and publisher of the Daily Racing Form, shows the return on investment, including the track’s take, of a hypothetical race with four horses.

Power laws represent a number of social, biological, and physical systems with fascinating accuracy. Further, many of the areas where power laws exist intersect directly with the interests of investors. An appreciation of power laws may provide astute investors with a useful differential insight into the investment process. 36 The Pyramid of Numbers Firm Size, Growth Rates, and Valuation Growth is important because companies create shareholder value through profitable growth. Yet there is powerful evidence that once a company’s core business has matured, the pursuit of new platforms for growth entails daunting risk. Roughly one company in ten is able to sustain the kind of growth that translates into an above-average increase in shareholder returns over more than a few years. . . . Consequently, most executives are in a no-win situation: equity markets demand that they grow, but it’s hard to know how to grow.

I asked a similar, simple question: How would an equal-weighted portfolio of the largest fifty companies in market capitalization, purchased at year end, fare versus the S&P 500 in the subsequent one-, three-, and five-year periods? I ran the numbers from 1980 through 2006 and found that for each holding period, the S&P 500 outperformed the large cap portfolio (see exhibit 36.4). Again, it’s hard for the largest companies to meaningfully outperform the market because they are such a large percentage of the market.10 Another way to look at expectations is to break down the percentage of shareholder value that comes from assets in place versus the value attributable to future investments. In early 2007, 30 percent of the value of the twenty largest U.S. companies was expected to come in the future (see exhibit 36.5).11 Economies and markets are certainly vibrant. But underneath the constant change lurk robust patterns of growth and firm-size distributions. Mindful investors should take these patterns into account as they assess the growth prospects of companies—especially large ones. 37 Turn Tale Exploring the Market’s Mood Swings The conviction that the party is far from over is part of the reason . . . technology stocks soar ever higher.


Financial Statement Analysis: A Practitioner's Guide by Martin S. Fridson, Fernando Alvarez

business cycle, corporate governance, credit crunch, discounted cash flows, diversification, Donald Trump, double entry bookkeeping, Elon Musk, fixed income, information trail, intangible asset, interest rate derivative, interest rate swap, negative equity, new economy, offshore financial centre, postindustrial economy, profit maximization, profit motive, Richard Thaler, shareholder value, speech recognition, statistical model, time value of money, transaction costs, Y2K, zero-coupon bond

Just as a swiftly changing environment necessitated extensive revisions and additions in the second and third editions, new concerns and challenges for users of financial statements have emerged during the first decade of the twenty-first century. A fundamental change reflected in the third edition was the shift of corporations’ executive compensation plans from a focus on reported earnings toward enhancing shareholder value. In theory, this new approach aligned the interests of management and shareholders, but the concept had a dark side. Chief executive officers who were under growing pressure to boost their corporations’ share prices could no longer increase their bonuses by goosing reported earnings through financial reporting tricks that were transparent to the stock market. Instead, they had to devise more opaque methods that gulled investors into believing that the reported earnings gains were real.

As the rate of return on their fixed assets declines, producers of industrial commodities such as paper, chemicals, and steel must eventually face up to the permanent impairment of their reported asset values. It is not feasible, in the case of a chronically low rate-of-return company, to predict precisely the magnitude of a future reduction in accounting values. Indeed, there is no guarantee that a company will fully come to grips with its overstated net worth, especially on the first round. To estimate the expected order of magnitude of future write-offs, however, an analyst can adjust the shareholders’ value shown on the balance sheet to the rate of return typically being earned by comparable corporations. To illustrate, suppose Company Z's average net income over the past five years has been $24 million. With most of the company's modest earnings being paid out in dividends, shareholders’ equity has been stagnant at around $300 million. Assume further that during the same period, the average return of companies in the Standard & Poor's 400 index of industrial corporations has been 14 percent.

They also find that judgments based on the words used by chief executive officers and chief financial officers are more accurate than a model based on discretionary accruals. Relative to the answers given by truthful executives, the replies of deceptive executives contain more references to general knowledge (such as the phrase “you know”), fewer nonextreme positive emotions (“solid” or “respectable”), and fewer references to shareholder value and creating value. Furthermore, deceptive CEOs make fewer references to themselves and more to impersonal third parties, saying “the team” or “the company,” rather than “I.” They use more extreme positive emotions (“fantastic,” for example) and fewer extreme negative emotions, as well as fewer certainty and hesitation words. FRAUDSTERS KNOW FEW LIMITS Companies that cross the line from earnings management to outright fraud sometimes go to great lengths to cover their tracks.


pages: 184 words: 53,625

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

Airbus A320, airport security, algorithmic trading, banking crisis, barriers to entry, Bernie Sanders, call centre, Captain Sullenberger Hudson, Cass Sunstein, Charles Lindbergh, cognitive dissonance, credit crunch, crowdsourcing, dark matter, Dava Sobel, David Brooks, Donald Davies, future of journalism, hive mind, Howard Rheingold, HyperCard, Jane Jacobs, John Gruber, John Harrison: Longitude, Joi Ito, Kevin Kelly, Kickstarter, lone genius, Mark Zuckerberg, mega-rich, meta analysis, meta-analysis, Naomi Klein, Nate Silver, Occupy movement, packet switching, peer-to-peer, 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, US Airways Flight 1549, WikiLeaks, William Langewiesche, working poor, X Prize, your tax dollars at work

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: 382 words: 92,138

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

"Robert Solow", Apple II, banking crisis, barriers to entry, Bretton Woods, business cycle, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, creative destruction, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, endogenous growth, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, G4S, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, intangible asset, invisible hand, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, Philip Mirowski, 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: 254 words: 61,387

This Could Be Our Future: A Manifesto for a More Generous World by Yancey Strickler

basic income, big-box store, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, David Graeber, Donald Trump, Doomsday Clock, effective altruism, Elon Musk, financial independence, gender pay gap, global supply chain, housing crisis, Ignaz Semmelweis: hand washing, invention of the printing press, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Nash: game theory, Joi Ito, Joseph Schumpeter, Kickstarter, Louis Pasteur, Mark Zuckerberg, medical bankruptcy, new economy, Oculus Rift, off grid, offshore financial centre, Ralph Nader, RAND corporation, Richard Thaler, Ronald Reagan, self-driving car, shareholder value, Silicon Valley, Simon Kuznets, Snapchat, Social Responsibility of Business Is to Increase Its Profits, stem cell, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Travis Kalanick, universal basic income, white flight

But by becoming a PBC, Kickstarter was codifying and committing to what its Now Us, Future Me, and Future Us values said it should do, too. Becoming a PBC reflected the values that Kickstarter had always had. But those same values put us at some theoretical risk as a traditionally structured for-profit company. Theoretically our public statements about not wanting to sell or go public could have led to a shareholder suing because these decisions meant we were not open to all forms of maximizing shareholder value. Something like this happening was extremely unlikely, but there is precedent: in 2000, Ben & Jerry’s board of directors was pressured to sell the company to Unilever over the founders’ objections. If Ben & Jerry’s had declined the offer, investors were threatening to sue, accusing the board members of neglecting their fiduciary obligations. Even though Ben & Jerry’s’ values were central to its brand and identity, they had no standing compared to shareholders’ legally backed demands.

“our own worst enemies”: As reported in the Wall Street Journal (“Recycling, Once Embraced by Businesses and Environmentalists, Now Under Siege,” May 13, 2018) the case for financial maximization: Milton Friedman’s New York Times essay was titled “The Social Responsibility of Business Is to Increase Its Profits,” published on September 13, 1970. single goal: to maximize profitability: Background on what I call the Maximizing Class comes from several sources. Most important is analysis by economists William Lazonick and Mary O’Sullivan. In a paper called “Maximizing Shareholder Value: A New Ideology for Corporate Governance,” published in the journal Economy and Society in 2010, Lazonick and O’Sullivan detail the history of what I call financial maximization. Their research finds that before the early 1970s when this new idea emerged, companies followed a “retain and reinvest” model, where profits were turned into additional services, products, pay raises, and training for employees.

see what’s happened: Data on outstanding credit in America comes from the “Federal Reserve’s Consumer Credit Outstanding (Levels) 1943–2018” and the US Census Bureau’s Households by Type data. tends to go up: Background on stock buybacks comes from economist William Lazonick’s 2010 Brookings Institution paper “Stock Buybacks: From Retain-and-Reinvest to Downsize-and-Distribute,” and his 2011 paper “From Innovation to Financialization: How Shareholder Value Ideology Is Destroying the US Economy” (published in the Oxford University Press collection The Handbook of the Political Economy of Financial Crises). Additional background came from “Stock Buybacks: Misunderstood, Misanalyzed, and Misdiagnosed” by Aswath Damodaran for the American Association of Individual Investors, and data from a research report by Goldman Sachs analyst Stuart Kaiser.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

Affordable Care Act / Obamacare, Airbus A320, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business cycle, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, 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, industrial cluster, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost airline, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, MITM: man-in-the-middle, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, 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.


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

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 cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, 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, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, 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 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: 504 words: 139,137

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

activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, business cycle, buy and hold, 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, money market fund, mortgage debt, Myron Scholes, 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, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, 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.


pages: 257 words: 71,686

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

activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, 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: 120 words: 33,892

The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, business cycle, cognitive dissonance, corporate governance, corporate raider, Jeff Bezos, Paul Graham, Peter Thiel, Richard Thaler, shareholder value, Tim Cook: Apple

The sales price is too low, and the sale process is “unfair.”56 As chairman of Ralcorp and chief executive and chairman of Agribrands, Stiritz is on both sides of the sale. He’s “put[ting his] own personal interests ahead of the shareholders” and “strip[ping the] assets at an unfair price.”57 Loeb says that Agribrands’s cash and cash flows belong to Agribrands’s shareholders. They should not to be used to “serve the empire-building desire of Ralcorp’s management team.” Loeb wants Agribrands put up for sale “to maximize shareholder value.”58 Very truly yours, Daniel S. Loeb On December 4, 2000, three months after Loeb sends his letter, Agribrands announces that it will not sell to Ralcorp. Instead, Cargill, a privately owned processor of feed and agricultural products, will be the bidder. The price? $54.50 per share, $15.50 and 36 percent more than Ralcorp offered. It is a huge gain for Loeb’s second-biggest holding.

., then trading at $60, to pay out some of its huge pile of cash. Einhorn said that Apple’s $150 billion in cash was too much for a stock with only $60 billion in fixed assets. Apple could use it to buy “all but 17 companies in the S&P 500.”59 It earned next to no interest. It was better in the hands of shareholders. He said Apple’s stock price was discounted to the value of the cash, about $20 per share. Apple could “unlock significant shareholder value” by cutting the cash on its “bloated balance sheet.”60 Einhorn wasn’t the only activist to complain about Apple’s cash pile. Carl Icahn wrote an open letter to Apple’s chief executive, Tim Cook. Icahn asked for Apple to return cash through a $150 billion buyback. Icahn wrote in the letter:61 When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short-term anomaly.


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

asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, 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, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

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.


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

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, longitudinal study, 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, spread of share-ownership, 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?


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

3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, Chuck Templeton: OpenTable:, clean water, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, disruptive innovation, 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, John Markoff, Joseph Schumpeter, Kickstarter, lone genius, longitudinal study, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, QR code, 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: 385 words: 111,807

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

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, corporate raider, creative destruction, 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, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, 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, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, 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: 667 words: 149,811

Economic Dignity by Gene Sperling

active measures, Affordable Care Act / Obamacare, autonomous vehicles, basic income, Bernie Sanders, Cass Sunstein, collective bargaining, corporate governance, David Brooks, desegregation, Detroit bankruptcy, Donald Trump, Double Irish / Dutch Sandwich, Elon Musk, employer provided health coverage, Erik Brynjolfsson, Ferguson, Missouri, full employment, gender pay gap, ghettoisation, gig economy, Gini coefficient, guest worker program, Gunnar Myrdal, housing crisis, income inequality, invisible hand, job automation, job satisfaction, labor-force participation, late fees, liberal world order, longitudinal study, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass incarceration, mental accounting, meta analysis, meta-analysis, minimum wage unemployment, obamacare, offshore financial centre, payday loans, price discrimination, profit motive, race to the bottom, RAND corporation, randomized controlled trial, Richard Thaler, ride hailing / ride sharing, Ronald Reagan, Rosa Parks, Second Machine Age, secular stagnation, shareholder value, Silicon Valley, single-payer health, speech recognition, The Chicago School, The Future of Employment, The Wealth of Nations by Adam Smith, Toyota Production System, traffic fines, Triangle Shirtwaist Factory, Uber and Lyft, uber lyft, union organizing, universal basic income, War on Poverty, working poor, young professional, zero-sum game

For instance, in the chicken industry, farmer pay rose only 2.5 cents per pound from 1988 to 2016, while the wholesale price of chicken rose 17.4 cents in the same period.25 ProPublica describes how, at a Department of Justice antitrust hearing in Alabama, many black farmers “detailed how chicken companies dictated contract terms and how they were powerless to resist, even if the terms were financially ruinous.”26 A farmer named John Ingrum, who later went out of business, noted that under his contract, he would be paid less if the chickens were “sick or underfed,” even though the buyer—Koch Foods—actually supplied both the chicks and the feed he had to use.27 As another farmer said of the contract he was presented with, “Either I sign it or I ain’t got no chickens.” Predictably, the Trump administration has reversed an Obama administration rule that would have given farmers access to legal remedies for such unfair practices. STRUCTURING CORPORATE PURPOSE FOR SHAREHOLDER MAXIMIZATION OR OVERALL ECONOMIC WELL-BEING? The question of whether the ultimate end goal of corporations should be the maximization of shareholder value is another textbook example of the rule that all market structure is shaped by government policy. The idea that corporations must ultimately serve only the interests of shareholders has often been taught and presented as if it arises out of an intrinsic and long-standing market logic. The call for a broader corporate purpose is often seen as disruptive meddling with a long-standing market understanding and status quo.

He has written that despite the wide discretion courts provide corporate managers through the “business judgment rule,” under Delaware law, if a corporate executive or board “is treating an interest other than stockholder wealth as an end in itself, rather than an instrument to stockholder wealth, he is committing a breach of fiduciary duty.”31 For example, when Craigslist founder Craig Newmark explicitly admitted that his main concern was for the services provided to the consumer, rather than monetizing the website, he was successfully sued for not being solely focused on shareholder wealth.32 Think about how out of touch that is with widespread values. If a CEO made the candid admission in the middle of a recession that she was going to keep all her workers employed solely because she was putting her workers first regardless of shareholder value, she would be a folk hero, perhaps the subject of a Netflix movie. Yet the precise reason for such adoration—that she explicitly did it for the welfare of the workers and surrounding community alone—would be damning evidence in a lawsuit. This is a classic case of markets being structured in a way that virtue will not go unpunished. If members of the Business Roundtable want to show their seriousness about a stakeholder value standard, they should start by pushing for legislative changes to ensure those who seek to promote the economic dignity of their employees will not risk legal action for a failure to fulfill their fiduciary duty.

Some suggest that any movement away from a shareholder maximization goal will lead to a Wild West of corporate directors freed to pursue any personal pet cause or extravagant glorification without restraint. Really? With executive and board compensation still heavily stock-based, and given the needs for future financing and the threat of disinvestment, is there any serious basis for concern that if we moved to a stakeholder test, CEO after CEO would go hog wild in promoting workers and local communities at the expense of shareholder value?34 Or that courts could not develop case law that distinguishes an effort to be a good employer from a reckless transaction that makes zero business sense? Indeed, the entire notion that shareholders should be seen as the “owner” of the firm—the stakeholder who is the largest risk-taker in corporations—defies real-world experience. While shareholders may have their stock value at risk, most shareholders are passive and diversified precisely so that they have little risk in the success of any individual company in their portfolio.


pages: 261 words: 79,883

Start With Why: How Great Leaders Inspire Everyone to Take Action by Simon Sinek

Apple II, Apple's 1984 Super Bowl advert, Black Swan, business cycle, commoditize, hiring and firing, John Markoff, low cost airline, Nick Leeson, RAND corporation, risk tolerance, Ronald Reagan, shareholder value, Steve Ballmer, Steve Jobs, Steve Wozniak, The Wisdom of Crowds, trade route

To pass the School Bus Test, for an organization to continue to inspire and lead beyond the lifetime of its founder, the founder’s WHY must be extracted and integrated into the culture of the company. What’s more, a strong succession plan should aim to find a leader inspired by the founding cause and ready to lead it into the next generation. Future leaders and employees alike must be inspired by something bigger than the force of personality of the founder and must see beyond profit and shareholder value alone. Microsoft has experienced a split, but is not so far down the line that it can’t be put back on track. There was a time not too long ago that people at Microsoft showed up at work every day to change the world. And they did. What Microsoft achieved, putting a PC on every desk, dramatically changed the way we live. But then their WHY went fuzzy. Few people at the company today are instructed to do everything they can to help people be more productive so that they can achieve their greatest potential.

Gates recognizes the need for people to produce real change, but he neglected to remember that any effective movement, social or business, needs a leader to march in the front, preaching the vision and reminding people WHY they showed up in the first place. Though King needed to cross the bridge from Selma on his march to Montgomery, it was what it meant to cross the bridge that mattered. Likewise in business, though profit and shareholder value are valid and essential destinations, they do not inspire people to come to work. Although Microsoft went through the split years ago, changing from a company that intended to change the world into a company that makes software, having Gates hanging around helped Microsoft maintain at least a loose sense of WHY they existed. With Gates gone, Microsoft does not have sufficient systems to measure and preach their WHY anymore.

The amazing insight in all of this is not just how inspiring Sinegal is, but that almost everything he says and does echoes Sam Walton. Wal-Mart got as big as it did doing the exact same thing—focusing on WHY and ensuring that WHAT they did proved it. Money is never a cause, it is always a result. But on that fateful day in April 1992, Wal-Mart stopped believing in their WHY. Since Sam Walton’s death, Wal-Mart has been battered by scandals of mistreating employees and customers all in the name of shareholder value. Their WHY has gone so fuzzy that even when they do things well, few are willing to give them credit. The company, for example, was among the first major corporations to develop an environmental policy aimed at reducing waste and encouraging recycling. But Wal-Mart’s critics have grown so skeptical of the company’s motives that the move was largely dismissed as posturing. “Wal-Mart has been working to improve its image and lighten its environmental impact for several years now,” a column published on the New York Times Web site on October 28, 2008, read.


pages: 280 words: 74,559

Fully Automated Luxury Communism by Aaron Bastani

"Robert Solow", autonomous vehicles, banking crisis, basic income, Berlin Wall, Bernie Sanders, Bretton Woods, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, computer age, computer vision, David Ricardo: comparative advantage, decarbonisation, dematerialisation, Donald Trump, double helix, Elon Musk, energy transition, Erik Brynjolfsson, financial independence, Francis Fukuyama: the end of history, future of work, G4S, housing crisis, income inequality, industrial robot, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, James Watt: steam engine, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Kuiper Belt, land reform, liberal capitalism, low earth orbit, low skilled workers, M-Pesa, market fundamentalism, means of production, mobile money, more computing power than Apollo, new economy, off grid, pattern recognition, Peter H. Diamandis: Planetary Resources, post scarcity, post-work, price mechanism, price stability, private space industry, Productivity paradox, profit motive, race to the bottom, RFID, rising living standards, Second Machine Age, self-driving car, sensor fusion, shareholder value, Silicon Valley, Simon Kuznets, Slavoj Žižek, stem cell, Stewart Brand, technoutopianism, the built environment, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, transatlantic slave trade, Travis Kalanick, universal basic income, V2 rocket, Watson beat the top human players on Jeopardy!, Whole Earth Catalog, working-age population

This would not only offer a swift means of reversing privatisation, but simultaneously help build a more resilient, socially just alternative. Whereas the primary values of the present system are cutting costs and maximising shareholder value, here regional and income inequality would be mitigated and a far broader range of ownership models would emerge. In reality this would mean that the only companies able to bid for specific local contracts would have to meet specific criteria, whether it is being based within a certain distance (perhaps ten kilometres or within a county or state); being a worker-owned cooperative; offering organic products or being powered by renewable energy. Shareholder value would be replaced by these kinds of metrics in calculating what makes the most sense. People’s Businesses, People’s Banks Much of this won’t be possible without access to credit, with difficulty in accessing finance widely accepted as the single biggest hurdle for cooperatives and worker-owned businesses.

In each sphere the tide must be turned and, while doing so, placed within an explicit commitment to creating a world entirely different to that of the present. This break must start by switching off the privatisation and outsourcing machine. The reason why is simple: its prevailing logic demands that every public good – from healthcare and education to housing – be sacrificed on the altar of private profit and shareholder value. In this respect privatisation and outsourcing must be viewed as two sides of the same coin. While the former has taken centre stage in undermining the state’s provision of public goods – with whole industries privatised en masse over the last fifty years – the latter has proven equally effective in funnelling private profits while maintaining a veneer of public ownership and accountability.


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

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, business cycle, butter production in bangladesh, buy and hold, 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, Edward Thorp, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, intangible asset, 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, survivorship bias, 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: 290 words: 76,216

What's Wrong with Economics? by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

This does not mean that they are simply ‘creatures of institutions’.3 Institutional economists like Simon and Galbraith study the grammar of society, not its conversation. The above two analyses of non-market coordination help explain the seeming paradox of organisations which exist to serve the interests of their members imposing codes of behaviour which seemingly fail to maximise their independent utility functions. It helps explain the phenomena of military regiments which sacrifice themselves in a hopeless cause, of firms which fail to maximise shareholder value, of trade unions which fight for higher wages even if it means unemployment. It is true that a map filled with such agents doesn’t give you a sparse model. The motives of the organisation lack the hard edge of maximisation, and the outcomes of its behaviour are thereby indeterminate. But we require not better theory, but better understanding. ‘Neoclassical’ institutionalism With the ‘new’ institutional economics of the 1980s, institutionalism collapsed back into neoclassical economics.

For example, John Rawls’s (1921–2002) principle that inequality is justified to the extent that it improves the position of the least well-off owes something to Locke’s idea that property ownership requires a moral justification. Outside mainstream economics there has been a revival of interest in the question of the moral responsibilities of ownership. Should companies have moral responsibilities in addition to their legal responsibility to maximise shareholder value? Ideas of ‘corporate social responsibility’ and ‘stakeholder’ capitalism are fruits of such discussion, though ‘corporate social responsibility’ is largely big business propaganda. There have been studies showing that firms which take seriously their responsibilities to their employees, suppliers, and neighbourhoods achieve better ‘bottom lines’ than companies which attend only to the interests of their owners and senior managers.

Though neuroscientists are confident of cracking this problem: ‘[neuroscientists] can measure your emotional reaction to the things you see by simply monitoring the degree of your microsweating’. (Ramachandran, 2010: 95) 12. Locke, 1764 [1689]: 220 13. Pigou, 1932 [1920] 14. Kaldor, 1939 15. I vividly recall being at a debate in Moscow in the early 2000s between two Russian businessmen, Kakha Bendukidze and Mikhail Khodorkovsky. Bendukidze argued that a firm’s duty to society was limited to maximising shareholder value; Khodorkovsky claimed that it had an additional duty to society. Bendukidze was simply echoing the view of neoclassical economics that firms should be seen as giant-sized profit-maximising individuals. This indeed became the standard doctrine of the 1980s: firms had no social obligation beyond maximising profits for their owners (shareholders). This overthrew the older ‘stakeholder’ view of the company expressed by Owen Young, CEO of General Electric between the wars: ‘The stockholders are confined to a maximum return equivalent to a risk premium.


pages: 561 words: 114,843

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

activist fund / activist shareholder / activist investor, airport security, Albert Einstein, bank run, Ben Horowitz, 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, Rubik’s Cube, 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: 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

3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, 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 cycle, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable:, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, digital map, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Metcalfe’s law, 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, Robert Metcalfe, 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, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, winner-take-all economy, zero-sum game, 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: 713 words: 203,688

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

buy and hold, buy low sell high, corporate raider, Donald Trump, Gordon Gekko, margin call, Ronald Reagan, Rubik’s Cube, 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: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, 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, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, 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, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, 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, zero-sum game

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.


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Why Europe Will Run the 21st Century by Mark Leonard

Berlin Wall, Celtic Tiger, continuous integration, cuban missile crisis, different worldview, European colonialism, facts on the ground, failed state, global reserve currency, invisible hand, knowledge economy, mass immigration, non-tariff barriers, North Sea oil, one-China policy, Panopticon Jeremy Bentham, pension reform, reserve currency, Robert Gordon, shareholder value, South China Sea, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, Washington Consensus

Many Americans see the European economy as the business equivalent of a hippy commune – mired in the 1970s, unable to reform because of the cacophony of voices that erupt every time a decision needs to be made, and more interested in soft-headed ideas of quality of life than economic performance. They argue that it will not succeed until it emulates the USA with lower taxes, less social protection, a smaller state, and a narrow focus on shareholder value. There is just one problem with this conventional wisdom – it is not supported by the facts. Sweden is no longer the country of Björn Borg, Abba, Pippi Longstocking, bad porn movies, and worse haircuts. Its new economic icons are world-beating companies like Ikea, Ericsson, Volvo, Saab, Absolut Vodka, Astra Zeneca, and Hennes & Mauritz. Its vital statistics are the envy of the world, with 75 per cent of the population in employment and steady growth through the 1990s.2 But, unlike America, it continues to have low levels of inequality, high tax levels, strong trade unions, and a large public sector.

The UK, Finland, Portugal, and Austria are all on their way to catching up with the USA14 with participation rates around the 70 per cent mark. The reason for this is that they have shifted from having passive welfare states that provide a safety net for the sick to active ones that turn the State into a motor of opportunity. The final misapprehension is that Europe’s companies are underperforming because they balance their commitment to shareholder value with responsibilities to their staff and the wider community. Many of the biggest companies in the world are in fact European: 61 of the 140 biggest companies on the Global Fortune 500 rankings come from Europe (compared to 50 from the USA and 29 from Asia).15 And in key sectors – energy, telecoms, aeroplanes, commercial banking, and pharmaceuticals – it is European companies that are setting the pace for global business.


pages: 297 words: 84,009

Big Business: A Love Letter to an American Anti-Hero by Tyler Cowen

23andMe, Affordable Care Act / Obamacare, augmented reality, barriers to entry, Bernie Sanders, bitcoin, blockchain, Bretton Woods, cloud computing, cognitive dissonance, corporate governance, corporate social responsibility, correlation coefficient, creative destruction, crony capitalism, cryptocurrency, dark matter, David Brooks, David Graeber, don't be evil, Donald Trump, Elon Musk, employer provided health coverage, experimental economics, Filter Bubble, financial innovation, financial intermediation, global reserve currency, global supply chain, Google Glasses, income inequality, Internet of things, invisible hand, Jeff Bezos, late fees, Mark Zuckerberg, mobile money, money market fund, mortgage debt, Network effects, new economy, Nicholas Carr, obamacare, offshore financial centre, passive investing, payday loans, peer-to-peer lending, Peter Thiel, pre–internet, price discrimination, profit maximization, profit motive, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Ronald Coase, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, The Nature of the Firm, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, ultimatum game, WikiLeaks, women in the workforce, World Values Survey, Y Combinator

For the 68–73 percent estimate, see Nguyen and Nielsen 2014; for the 44–68 percent estimate, see Taylor 2013. In a famous 1990 study, Michael C. Jensen and Kevin J. Murphy found that for large American companies, if a CEO creates $1,000 in shareholder value, that CEO is likely to receive rewards of about $3.25 in return. This 1990 result is now out of date, it did not cover all forms of compensation, it has been revised, and furthermore it covers only gains at the margin rather than the CEO contract as a whole, and thus there are disparities with the results discussed in the text. Since the Jensen and Murphy paper was published, the use of stock options has risen rapidly, bringing CEO incentives closer into line with the shareholder value they create. According to some later estimates, CEOs capture four times more, in percentage terms, of the corporate value they create, or maybe more.

“An Economic Analysis of Limited Liability in Corporation Law.” University of Toronto Law Journal 30, no. 2 (Spring): 117–150. Hare, Robert D. Without Conscience: The Psychopaths Amongst Us. New York: Guilford Press. Hart, Oliver D., and John Moore. 1990. “Property Rights and the Nature of the Firm.” Journal of Political Economy 98, no. 6 (December): 1119–1158. Hart, Oliver, and Luigi Zingales. 2016. “Should a Company Pursue Shareholder Value?” Working paper, October 2016. Hartmann, Thom. 2010. Unequal Protection: How Corporations Became “People”—and How You Can Fight Back. San Francisco: Berrett-Koehler. Hauser, Christine, and Sapna Maheshwari. 2006. “MetLife Grounds Snoopy. Curse You, Red Baron!” New York Times, October 20, 2006. Hausmann, Ricardo, and Federico Sturzenegger. 2006. “U.S. and Global Imbalances: Can Dark Matter Prevent a Big Bang?”


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

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, buy and hold, centralized clearinghouse, clean water, computerized trading, 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, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, post-work, 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: 482 words: 122,497

The Wrecking Crew: How Conservatives Rule by Thomas Frank

affirmative action, anti-communist, barriers to entry, Berlin Wall, Bernie Madoff, British Empire, business cycle, 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, Nelson Mandela, 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: 726 words: 172,988

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

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, break the buck, business cycle, 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, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, 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: 436 words: 141,321

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

Albert Einstein, augmented reality, blue-collar work, Buckminster Fuller, call centre, carbon footprint, conceptual framework, corporate social responsibility, crowdsourcing, different worldview, 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, selection bias, shareholder value, Silicon Valley, the market place, the scientific method, Tony Hsieh, zero-sum game

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: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Albert Einstein, algorithmic trading, Andrei Shleifer, autonomous vehicles, bank run, banking crisis, basic income, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, disintermediation, Donald Trump, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, full employment, George Akerlof, germ theory of disease, German hyperinflation, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, market bubble, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, publish or perish, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

Other narratives in the same constellation with the Laffer curve sprang up around the same time. The terms leveraged buyouts and corporate raiders also went viral in the 1980s, often in admiring stories about companies that responded well to true incentives and that produced high profits as a result. One marker for such stories is the phrase maximize shareholder value, which, according to ProQuest News & Newspapers and Google Ngrams, was not used until the 1970s and whose usage grew steadily until the twenty-first century. The phrase maximize shareholder value puts a nice spin on questionable corporate raider practices, such as saddling the company with extreme levels of debt and ignoring implicit contracts with employees and stakeholders. Maximize suggests intelligence, science, calculus. Shareholder reminds the listener that there are people whose money started the whole enterprise, and who may sometimes be forgotten.

Shareholder reminds the listener that there are people whose money started the whole enterprise, and who may sometimes be forgotten. Value sounds better, more idealistic, than wealth or profit. Use of the three words together as a phrase is an invention of the 1980s, used to tell stories of corporate raiders and their success. The term maximize shareholder value is a contagious justification for aggressiveness and the pursuit of wealth, and the narratives that exploited the term are most certainly economically significant. The Laffer Curve, Supply-Side Economics, and Narrative Constellations After the Laffer curve epidemic, the Reagan administration (1981–89) reduced the top US federal income tax bracket from 70% to 28%. It also cut the top-bracket US corporate profits tax rate from 46% to 34%, and it reduced the top US capital gains tax rate from 28% to 20% in 1981 (though it returned to 28% again in 1987 during the Reagan presidency).

., 202 Mallon, Mary, 20 Mann, Dorothea Lawrence, 60 Marden, Orison Swett, 122 marketers: contagion rate engineered by, 60; lowering the forgetting rate, 62; profiting from narratives, xiii, 62; recurrence of narratives due to, 109–10 marketing: with accelerated analytics, 20; appeals to patriotism in, 155; background music and, 67; bizarre mental images in, 46; book jackets and, 60–61; contagion of economic narratives and, 60–63, 297; detested by many consumers, 62; focus group methods developed for, 283; logos and, 62–63, 148; self-referencing in, 77; social media used for, 274–75; of “the news,” 61–62 Marx, Groucho, 133 Marx, Karl, 102 master narrative, 92 master plots in fiction, 16 maximize shareholder value, 47–48 May, John Allan, 38 McCall, Samuel W., 168 McCormick, Anne O’Hare, 140, 143 McGinn, Daniel, 217–18 McKinley, William, 163, 164, 171, 313n29 McQuiggan, Scott W., 77–78 Meany, George, 202 “Measurement without Theory” (Koopmans), xv Meeker, Royal, 245 Mellon, Andrew, 44 Meloney, Marie, 220 memes, 60, 88 Memoirs of Extraordinary Popular Delusions (Mackay), 59, 119 memory: aided by rituals and symbols, 62; aided by visual stimuli, 45, 46–47; collective, 60; contagion of narratives and, 252; fear-related brain circuitry and, 57–58; flashbulb memory, 80–83, 233, 307n13; source monitoring in, 84, 307n21.


pages: 511 words: 132,682

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

affirmative action, Airbnb, Albert Einstein, Andrei Shleifer, Bernie Sanders, Boeing 737 MAX, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, Donald Trump, en.wikipedia.org, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, income inequality, income per capita, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta analysis, meta-analysis, Milgram experiment, mortgage debt, Network effects, out of africa, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, winner-take-all economy

Beginning in the late 1970s, such protections were gradually stripped away as the competition ideology, like kudzu, took over and smothered everything in its path—including the social, moral, and ethical values that might have mitigated its pernicious effects. Over the past forty years lobbyists, powerful firms, and ideologues have pushed for free market solutions, unmonitored and unregulated, even for services—like prisons—that are particularly ill-suited to an ideology that puts profits and “shareholder value” ahead of all other values. Politicians and policy makers promoted competition as the panacea for nearly every societal ill, while striving both to dismantle existing regulations and to resist any new ones, all in the name of avoiding “regulatory creep”—that supposedly lethal blow to the free market. The result: The regulatory framework and safety nets that are crucial to an inclusive and stable economy are gone.

This process begins by asking: What is your company’s why? What is its social purpose? What values does your company promote? What values and traits of your company’s corporate culture will help it in achieving its social purpose? What values and traits will get in the way of its social purpose? One common complaint is that companies have lost any sense of purpose beyond maximizing profits and, where applicable, shareholder value. Neither their executives nor their employees can identify any other kind of purpose—and many are not interested in doing so. One extreme example is an investment bank that once took pride in its ethical organizational culture. Servicing its clients’ interests was paramount. But in one of the more famous resignation letters, Greg Smith, a Goldman Sachs executive director, described how toxic competition had eroded the financial institution’s once-prized culture: How did we get here?

A 2019 study by Bates College and Gallup found that 80 percent of college graduates affirm the importance of finding purpose in their work, but less than half report having it.48 Consequently, Bates College, through its Center for Purposeful Work, is preparing its students “for lives of meaningful work [which] lies at the heart of the liberal arts mission.”49 But don’t we want companies to maximize shareholder value, as opposed to prioritizing these other social purposes? It wasn’t on the top of either the Deloitte or Harvard surveys. Instead the top social purposes were having a meaningful impact on clients/customers, and providing business services and/or products that benefit society. The fact that generating financial returns is relatively low on the priority list doesn’t mean that purpose-driven companies aren’t successful.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, 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, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, 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, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, 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, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

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.


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

Atul Gawande, Cass Sunstein, clean water, cognitive dissonance, corporate social responsibility, en.wikipedia.org, fundamental attribution error, impulse control, longitudinal study, 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: 366 words: 94,209

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

activist fund / activist shareholder / activist investor, Airbnb, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Burning Man, business process, buy and hold, 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, corporate raider, creative destruction, crowdsourcing, cryptocurrency, disintermediation, diversified portfolio, Elon Musk, Erik Brynjolfsson, Ethereum, 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, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, Marshall McLuhan, means of production, medical bankruptcy, minimum viable product, Mitch Kapor, 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, The Future of Employment, trade route, transportation-network company, Turing test, Uber and Lyft, Uber for X, uber lyft, unpaid internship, Y Combinator, young professional, zero-sum game, 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

Airbnb, Amazon Web Services, Andy Kessler, banking crisis, barriers to entry, basic income, Benevolent Dictator For Life (BDFL), bitcoin, blockchain, Burning Man, business climate, call centre, car-free, cloud computing, collaborative consumption, collaborative economy, collective bargaining, commoditize, congestion charging, creative destruction, crowdsourcing, cryptocurrency, decarbonisation, different worldview, do-ocracy, don't be evil, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, Ferguson, Missouri, Firefox, frictionless, Gini coefficient, hive mind, income inequality, index fund, informal economy, Intergovernmental Panel on Climate Change (IPCC), 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, peer-to-peer lending, peer-to-peer model, 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 Future of Employment, The Nature of the Firm, transaction costs, Turing test, turn-by-turn navigation, Uber and Lyft, uber 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: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

"Robert Solow", 8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, carried interest, collateralized debt obligation, collective bargaining, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, full employment, future of work, gender pay gap, George Akerlof, Gini coefficient, glass ceiling, helicopter parent, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, Paul Samuelson, payday loans, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Steve Jobs, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, Winter of Discontent, women in the workforce, working poor, young professional, zero-sum game

A review of the many complementary factors that favor debt-financed buybacks (including the connections to shareholder activism to restraints on managerial inclinations to serve other stakeholders) appears in Joan Farre-Mensa, Roni Michaely, and Martin C. Schmalz, “Financing Payouts,” Ross School of Business Paper No. 1263 (December 2016), 31–37. “separation of ownership and control”: See Adolph Berle and Gardiner Means, The Modern Corporation and Private Property (New York: Macmillan, 1932). maximize shareholder value: The term “shareholder value” was introduced by the lawyer-economist Henry Manne in his classic article “Mergers and the Market for Corporate Control.” See Henry Manne, “Mergers and the Market for Corporate Control,” Journal of Political Economy 73, no. 2 (April 1965): 110. Note that the date of publication comes at the twilight of the Great Compression. incumbent managers: As with the purely financial innovations discussed earlier, the leveraged buyout was conceived in the 1950s but did not become practically consequential until the 1980s, when a sufficient supply of super-skilled labor capable of deploying the innovation at scale first became available.

Where the midcentury firm’s insulation from the capital markets had been so effective that “separation of ownership and control” became the organizing ideal of midcentury management, the contemporary firm’s capital structure makes management intensely accountable to activist investors. Second, new legal technologies created the market for corporate control that takeover artists might deploy—routinely rather than just in exceptional cases—to discipline management that failed to maximize shareholder value. The discipline came through many mechanisms, including perhaps most importantly the leveraged buyout—an arrangement whereby an acquirer seeking to take over a firm uses the target firm’s own assets to secure a loan to buy the target’s shares. Beginning in the 1980s, leveraged buyouts acutely increased the pressure that potential takeovers placed on incumbent managers. Law firms such as Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom developed the legal frameworks to implement activist investing on a massive scale.

Investors are too far removed from the firm’s internal operations to monitor or control these workers directly; indeed, this distance is what makes them investors rather than being managers themselves. At the same time, the market for corporate control creates exceptionally high-powered incentives for top managers: investors can monitor top managers’ performance and apply both carrots (stock- and option-based pay packages) and sticks (the threat of being ousted) to induce a firm’s leadership to maximize shareholder value. This logic casts managerial discretion among non-elite workers as a cost to shareholders, and at the same time casts managerial capacity among a firm’s elite, if properly incentivized, as a benefit. The market for corporate control therefore induced precisely the innovations in managerial technology that displaced the midcentury regime’s widely dispersed management function in favor of the present-day practice of concentrating management at the very top of flattened corporate hierarchies.