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Little Sally Learns About the Toxicity of Shareholder Value Maximization

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A huge benefit to a company switching from the singular goal of maximizing shareholder value, measured by increasing its share price, to earning an acceptable real return on real shareholder investment, is that it can actually motivate its employees, not to mention its customers.

Think about it: what employee bounds out of bed in the morning thinking: "I am so excited to get to work today so that I can start maximizing shareholder value some more?"

Imagine a prototypical father who is a Vice-President of a publicly-traded company whose CEO has drunk the shareholder value maximization Kool-Aid and who has a precocious and inquisitive 10-year old daughter, Sally, who wants to know all about what her beloved father does for a living. And imagine further that her father feels compelled to answer all of her questions honestly and forthrightly. They are at the breakfast table, father in suit and tie ready to drive to work, and Sally dressed for school and ready to meet up with her friend next door to walk to school.

Sally: Daddy, my teacher asks me to listen carefully in class and do my homework every night. What does your boss ask you to do?

Daddy: He wants me to help him maximize shareholder value?

Sally: Huh? What does that mean?

Daddy: It means increasing our stock price to the highest we can make it go.

Sally: Why?

Daddy: Because that will make the shareholders happy.

Sally: Well who are these shareholders anyway?

Daddy: They are people who buy shares in our company.

Sally: What are they like? Do you know them?

Daddy: Actually we don't really know who they are. Every three months, we get a list of them but they buy and sell so often, the list changes routinely. And even the list we get is for organizations like mutual fund companies and pension funds that invest money on behalf of shareholders and aren't the actual shareholders.

Sally: This is getting a bit confusing. Are they at least nice people; these mutual funds and pension funds?

Daddy: It would be hard to describe them as terribly nice. They are really demanding and if we don't increase the stock price for them, they get pretty upset and sell our stock.

Sally: That isn't very nice. When they do that, do they sell to nicer people?

Daddy: No, typically they sell to people about like them - pretty impatient.

Sally: This sounds pretty weird. If you do get the share price to rise and the shareholders are happy rather than upset, do they do nice things for the company?

Daddy: Not really, Sally. What happens is that they then insist on us getting the share price to rise some more still. Or sometimes they sell their shares because the price has risen enough for them.

Sally: Whew. I must have this wrong but let me check. You go to work every day trying to increase your company's share price for people that you don't know, who don't act nicely at all, and if they are unhappy just sell their shares to some other people who you don't know either and are also not very nice. And if you succeed, they don't do anything for you other than put more pressure on you or sell because they are happy. They seem to sell whether they are happy or upset. That can't be much fun. Why do you do it Daddy? Why don't you try to do something a bit more fun?

Daddy: Well Sally, I know that it sounds kind of weird, but that is our capitalist system. It is our duty to maximize shareholder value, even if it is pretty unfulfilling and unpleasant. And I try to do the best job I can to help our CEO do that. And Sally, if I do a really good job helping my CEO, when he retires, he might appoint me CEO.

Sally: I love you Daddy and because of that I kind of hope that he doesn't make you CEO!

If given forthright answers, even a 10-year old can figure out that shareholder value maximization isn't even vaguely motivating for employees. Only the most brainwashed executive can possibly be motivated to work long days, weeks, months and years to maximize the value of faceless, nameless shareholders who blow off the company if they wake up in the morning in a bad mood. Indeed if executives are motivated entirely by money, they may be willing to commit to maximizing shareholder value as a means to an end of having their stock-based compensation provide a big pay-off to them. But as a rallying cry for a company, shareholder-value maximization is pathetic.

What is much more motivating to employees? How about: making the lives of your customers better, and doing so in a way that makes the parts of the world that you touch better off, and while doing that earning an attractive, risk-adjusted rate of return for any investor who actually gave you capital to do that - not for investors who speculate on your future by buying a share from someone other than the company. If you do a good job for customers, they will stick with you. You can get to know them and feel motivated by seeing their lives benefit from your product or service. They will have expectations, but by and large, those expectations won't rise to insane levels that can never be met as is routinely the case with the stock prices of highly successful companies.

What about customers? Imagine they have a choice of buying from a company that truly believes "our singular goal is to maximize shareholder value and we will do whatever it takes to achieve that goal" versus one that believes "our primary goal is to delight our customers and we think that if we do that, we will provide the shareholders with an attractive return on their investment." It is really hard to imagine any customer choosing the former company over the latter.

When it comes to motivating employees and customers, shareholder value maximization is toxic -- even 10 year-old Sally gets that.