Gustavo Ballvé on January 6th, 2012
Corporate Governance, Corporate Strategy, Food for thought, Home, Mental models, Portfolio Management, Risk management

Great thought-provoking article sent by our most loyal reader. The title is “The Dumbest Idea In The World: Maximizing Shareholder Value“. As the reader himself said, the discussion isn’t new – Jack Welch first perfected the earnings management game and then, already retired, famously denounced it (here and here) – but it’s always interesting. The real point of it is the power of incentives. The “too-simple” conclusion would be that “the road to hell is paved with good intentions” – but that would be wrong.

In fact, as the author of the book mentioned in the article notes, the fact is that “maximizing shareholder value” can mean a lot of different things to a lot of different people, and many of them are not aligned with the interests of long-term, risk-averse investors. That means the term can be used to justify all sorts of funny accounting and managerial games.

We wouldn’t go so far as the author does and claim it is the root of all shareholder-unfriendly moves, as well the possible future bane of capitalism, but it’s one more useful reminder to dig deep to really discover executives’, directors’ and controlling shareholders’ motivations.

What would seem like a semantics discussion is a fundamental difference between types of investors.

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