“No law or logic says managers and shareholders won’t err in their pursuit of shareholder wealth – in fact, they certainly will: Knowledge is imperfect, the environment is competitive, the future is unpredictable.”, Holman W. Jenkins, Jr.
Are Shareholders Obsolete?
The woolly-headed search for a corporate governance that can please everybody.
By Holman W. Jenkins, Jr.
Fund manager James Montier sparked a modest sensation a few weeks ago with a speech and Web presentation claiming “shareholder value maximization is the world’s dumbest idea.”
In a nutshell, his argument is that shareholder wealth maximization has failed to maximize shareholder wealth. Therefore we need a principle other than shareholder wealth maximization to make sure shareholder wealth is maximized.
A lot of such declarations have been heard in the past year, mostly incoherent, mostly suggesting that the governance of publicly traded companies is somehow the source of our economic disappointments.
Let’s start by understanding how truly little we say when we say companies should maximize shareholder wealth. For one company that might mean running up big losses to develop a new product. For another it might mean slashing investment. For another it might mean a hiring binge. For another it might mean layoffs.
Shareholder value is not one thing or one set of actions. It is not a strategy, but an outcome of strategic choices as judged by the restless feedback of the market. It is not tantamount to short termism or reckless profit maximization. Any company can boost profits by cutting advertising, customer service and new product development, but its share value would plummet. The market is rich with companies with high valuations and little earnings precisely because investors see long-term potential.
“When companies focus on pleasing customers, rather than just shareholders, everybody can win,” goes one typical critique published by the Washington Post. Notice the sleight of hand, suggesting that pleasing shareholders is at odds with pleasing customers, when it’s hard to imagine how a company might succeed in pleasing shareholders if it doesn’t please customers.
Maximizing shareholder wealth necessarily means optimizing (not minimizing, not maximizing) other values like customer satisfaction and worker pay. Maybe there is a better approach, but then explain what it is. Maybe critics would like to say that shareholder wealth should be maximized, minus 10%. Explain how that is to be done.
But let’s face it, many such media jeremiads are fakely generalizing a complaint about a single company. Lately that company has been Timken , which under investor pressure last year separated its bearings business from its specialty steel business.
Critics of the transaction seem to worry that the strong bearings business won’t be available to prop up the weak steel business. But it’s hard to make a general principle of corporate governance out of a supposed duty of profitable businesses to subsidize unprofitable ones. If that’s to be society’s goal, shouldn’t the burden be placed more fairly on everyone (i.e., taxpayers) to prop up failing enterprises?
No law or logic says managers and shareholders won’t err in their pursuit of shareholder wealth—in fact, they certainly will: Knowledge is imperfect, the environment is competitive, the future is unpredictable. But Timken is one company among the 5,000 U.S. public companies; it’s one company among the 109,000 U.S. firms with 100 or more employees; it’s one company among the 1.7 million with 20 or more employees.
Timken can screw up without invalidating the general principle that owners seeking to maximize the value of their businesses end up doing a pretty decent job of satisfying customers and employees along the way.
Most transcendently blithering are those who argue that America’s shareholder-driven public companies (but only them!) are failing our economy by not investing and hiring more. This should remind you of National Lampoon’s solution for inflation in the 1970s: Pay people less for jobs, and charge less for things in stores.
While we’re at it, why not solve the problem of war. People, stop killing each other! OK, problem solved.
Of course, getting companies to invest more, hire more and pay higher wages won’t come from hectoring them to invest more, hire more and pay higher wages. It will come from creating a policy environment more conducive to growth, confidence in the future, and workers getting a chance to improve their skills and productivity.