Brilliant Article

Shareholder value: the dumbest idea in the world.

A scathing article on the retarded practices of the business world. One pretty startling point - it all started with creating a problem (principal-agent) that didn't really exist -

The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf.

The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders.

I call these people "Tinkerers," the types who are always trying to fix problems that don't really exist and in doing so, often create larger problems. Examples: fans of instant replay in football, drunk driving laws, health care regulations, rewrites on movie scripts, etc.

Jack Welch puts it well -

“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.”