Newswire: The Cult of Shareholder Value
The Financial Times is currently running a good series on the Future of Capitalism. “The credit crunch has destroyed faith in the free market ideology that has dominated Western economic thinking for a generation. But what can – and should – replace it?” Below are a few highlights from today’s analysis:
- A Need To Reconnect
by Justin Baer, Francesco Guerrera and Richard Milne, Financial Times, March 13 2009
Long-held tenets of corporate faith - the pursuit of shareholder value, the use of stock options to motivate employees and a light regulatory touch allied with board oversight of management - are being blamed for the turmoil and look likely to be overhauled. "We are in uncharted waters," says Jack Welch, the former General Electric boss who embodied an era when the untrammelled interplay of market forces, domineering chief executives and the laser-like focus on quarterly earnings rises reigned supreme.
Today, that focus on the here and now is seen as a root cause of the world's economic predicament. "Immediate shareholder value maximization, by itself, was always too short-term in nature," says Jeffrey Sonnenfeld at Yale School of Management. "It created a fleeting illusion of value creation by emphasizing immediate goals over long-term strategies." Even Mr. Welch argues that focusing solely on quarterly profit increases was "the dumbest idea in the world". "Shareholder value is a result, not a strategy," he says. "Your main constituencies are your employees, your customers, and your products."
Many business leaders object to what they regard as the growing encroachment by the state and other interest groups on their ability to run the company. "If there is a danger in the current situation, it is that we don't know how to exit from this little adventure in socialism so that the private sector can do what it does best - which is to innovate, grow and create jobs," says John Castellani, president of the Business Roundtable, the lobby group for some of America's largest companies.
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Posted by Michael McKinney at 09:56 AM
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