Saturday, August 11, 2012

Down With Shareholder Value

Tying CEO compensation to the stock price was a bad idea.  Corporate Boards, which are supposed to represent shareholders, primarily represent the CEO's who appointed them to the Board.  The only shareholders who influence corporations are institutional investors.  Most of them are only renters of the shares that they hold.  They buy and sell stocks to achieve short term performance goals that meet the needs of their clients as well.  Corporate management and institutional investors are linked at the hip.  They care primarily about short term financial performance.  A lot of "creative accounting" has been developed to assist in achieving that goal.

Its good to see that some of of our leading business schools recognize the folly in the singular focus on the stock price.  Efforts to change the current arrangement will be resisted by corporate managements and by Wall Street.  On the other hand,  ideas can be powerful.  Most people understand that stock prices have a momentum of their own.  They do not always serve as a good measure of management performance.  More importantly, however, corporations should have broader goals than hitting their quarterly financial targets.  In the US corporations are regarded as individuals whose rights are protected by the Constitution.  They should act more like responsible citizens of the states that have granted them those rights and protections.

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