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Business Week: Emphasis on Stockholder Value is Bogus

Bloomberg Businessweek

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Shareholder Value Focus Seen as The Dumbest Idea

By David Wilson December 03, 2014

Companies that focus on increasing their stock price are pursuing a flawed strategy, according to James Montier, a member of Grantham, Mayo, Van Otterloo & Co.’s asset-allocation team.

Annual returns in the last quarter century — a time in which “shareholder value maximization” became the primary goal for many managements — were lower on average than they were in the preceding 50 years, Montier wrote two days ago in a report. He cited data on the Standard & Poor’s 500 Index, adjusted for inflation and share-valuation changes.

The CHART OF THE DAY highlights a company-specific comparison he made: between International Business Machines Corp., which targeted shareholder value, and Johnson & Johnson, which followed a 1943 credo that said holders “should realize a fair return.” The credo was written by then-Chairman Robert Wood Johnson, a member of J&J’s founding family.

“The contrast between the two firms couldn’t be much greater,” Montier wrote. “Yet Johnson & Johnson has delivered considerably more return to shareholders than IBM.” He studied stock performance since 1973, while the chart begins in 1997.

Maximizing shareholder value is “the world’s dumbest idea,” according to the title of the London-based strategist’s report. He cited a similar comment that Jack Welch, the former chief executive of General Electric Co., made to the Financial Times in March 2009.

Companies that emphasize stockholders at the expense of others have contributed to falling U.S. business investment, increased income inequality and a drop in workers’ share of economic output, Montier wrote.

To contact the reporter on this story: David Wilson in New York at

To contact the editors responsible for this story: Chris Nagi at Jeff Sutherland, Jeremy Herron


Bloomberg Businessweek

Global Economics

How CEOs Became Beholden to Shareholders

By Peter Coy December 04, 2014

1970 Milton Friedman’s essay “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits” appears in the New York Times Magazine.

When Jack Welch came out in 2009 against the concept that the purpose of a corporation is to maximize value for shareholders, it was like the pope attacking Catholicism or Tiger Woods dissing golf. “On the face of it, shareholder value is the dumbest idea in the world,” the former chief executive officer of General Electric told the Financial Times. “It is a dumb idea. The idea that shareholder value is a strategy is insane.”

No CEO was more linked to the shareholder value concept than Welch in his years as chairman and CEO of GE from 1981 through 2001. GE kept its profits on a miraculously even upward trajectory for years. One common technique was to neutralize a big one-time gain that would cause a spike in earnings by arranging to take a one-time loss of about the same size in another business. That didn’t serve any business purpose but did impress Wall Street analysts. All the while, Welch closed down businesses, moved factories abroad, and shifted attention to the money-intensive, worker-light GE Capital operation. His nickname was “Neutron Jack” after neutron weapons, which supposedly killed people while leaving buildings intact.

Applied correctly, shareholder value theory is neither dumb nor insane. American accounting theorists Charles Sprague in 1907 and Henry Hatfield in 1909 developed the idea that a company’s books should be prepared from the perspective of the “proprietors,” which to them included shareholders of corporations. In a 1970 essay for the New York Times Magazine, Milton Friedman, the U.S.’s most famous free-market economist, argued that “the social responsibility of business is to increase its profits.” In 1983 economists Eugene Fama and Michael Jensen wrote about how to make sure that corporate managers act in the best interests of the owners—that is, shareholders.

The idea works fine as long as the shareholders are assumed to be enlightened people who care about long-term returns and (maybe even) good citizenship. It doesn’t work when maximizing shareholder value is taken to mean moving heaven and earth, Jack Welch-style, to beat quarterly earnings estimates.

In any case, shareholder value has lost its cachet in the 21st century. The new buzz phrases are corporate social responsibility, triple-bottom-line accounting, and stakeholder value, all of which make explicit the common-sense notion that companies have a higher purpose than making the numbers.

Peter Coy is Bloomberg Businessweek‘s economics editor. His Twitter handle is @petercoy.


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