The myth of shareholder value

The long standing fixation with creating shareholder value still persists just below the surface despite the current crisis. ‘The Rise and Fall of Management’ flags up the much broader responsibilities that directors have legally shouldered for the past 150 years, but if the City and top directors have their way, when the current crisis is over, it’ll be ‘back to business as usual’. Those directors will still be aligned with shareholders rather than customers and employees, and paying themselves extreme amounts of money irrespective of either short or long term performance. The bonus culture is regaining momentum and no matter how much the media and politicians berate the greed of City martinets, until action is taken to restrict or tax unwarranted bonuses, they will continue to be taken.

The Rise and Fall of Management takes a longer term perspective in which it can be seen the bonus culture is the aberration. Past practice as well as company law, including the 2006 Companies Act, take a much more enlightened approach to governance than current City practitioners want to admit. Contrary to common assumptions, shareholders do not own companies – how could they and benefit from limited liability at the same time? And directors owing their duty to the company can’t be solely the “agents” of shareholders. The law charges them with acting fairly as between all company members and having due regard to the long term and the interests of all stakeholders. All directors, including those who have gained substantial equity holdings as a result of bonus payments and therefore consider themselves primarily as shareholders, have these legal obligations. But delivering shareholder value has become so engrained in custom and practice that the law is simply ignored.

Under successive governments over the past three decades, corporate governance has been encouraged to degenerate into an unregulated free for all where the few exploit the majority and the substance of industry itself is hi-jacked.

8 Comments

  1. Martin Parker says:

    Rather than all this nonsense about capitalism mending itself, isn’t it about time we stopped capitalists from doing what benefits them? Their interests are not the same as mine, as ours, and the sooner this is recognised and enshrined in statute, the better.

  2. Gordon Pearson says:

    Agreed. Sufficient statute is already in place to do the job. The 2006 Companies Act is habitually ignored. The legal duty of auditors to ensure accounts present a true and fair picture is ignored – balance sheets are prepared deliberately to hide more information than they present and auditors are content to accept it and still certify the accounts as true and fair. The law is OK, enforcement is nowhere.

  3. […] (John Kay) • Gold-hunting in a frugal age (The Economist) • The myth of shareholder value (Gordon Pearson) see also Down With Shareholder Value (NYT) • Why these business owners are hiring (CNN Money) […]

  4. da_mnm says:

    It is only natural.. If human being were left to put down rules for them selves, they will surely lead them selves into injustice.. Divine Guidance is there, we just need to find it, understand it and practice it..

  5. Mike Smith says:

    Are the owners of the firm entitled to some profit? Why else would they invest? The author simply doesn’t understand that a superior company has carefully selected the best employees, rewards them in both long and short terms and manages to deliver a superior product or service as a result of the combined efforts of a motivated workforce.

    I’ve been there and it does work. It fails when managers operate in theor own interests before that of their employees and customers.

    It isn’t rocket science and an MBA is a severe handicap to success.

  6. Gordon Pearson says:

    As Mike Smith says owners, by which I assume he means shareholders, would only invest if they earn a sufficient return. His comment re management’s role could have been taken from The Rise and Fall of Management – “The management issue in the 21st century is how to recruit, retain, support and develop highly skilled and educated people ….” People need to be the focus. The focus on shareholder value has led to financial predation on real firms in the real economy as indicated in several postings on this site.

  7. AHodge says:

    Long term steps to boost earnings power are good. Meaning sustainable real operating earings. Most other stock price boosting is bubble blowing – and doesn’t benefit anyone long term over the cycle. Except management, who can play games and hype their bonuses options value etc, and nimble traders ready to get out.

  8. Gordon Pearson says:

    Sad reflection on management (copmpare with Mike Smith’s version), but in the recent crunch many managements have played this self interest maximising role, and idnored heir real responsibilities

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