Excerpted from Business Week: “Put Investors In Their Place”, Clayton M. Christensen and Scott D. Anthony, May 28, 2007
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Why pander to people who now hold shares, on average, less than 10 months?
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The credo that management’s primary obligation is to maximize shareholder value is shaky to begin with, distorts managers’ sense of responsibility, and … has been rendered obsolete by developments in the capital markets.
How did managers develop this risky fixation? The entreaty to maximize investor value … came from economists. Calculus is a primary analytical tool of microeconomics. At some point, some now-defunct economist seems to have said: “Let us assume that managers’ responsibility is to maximize shareholder value.” Through endless repetition, nearly everyone came to assume that managers are responsible for maximizing shareholder value.
Through the 1960s … the average shareholding period was more than five years. Managers seeking to maximize the long-term strength and growth of their companies could reward these patient shareholders.
But today shares are held, on average, less than 10 months. Should managers really regard such investors, whose investment horizons are so short … as stakeholders whose value they ought to maximize?
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Perhaps it is time for companies to adjust the paradigm of management responsibility: “You are investors and speculators, not shareholders, and you temporarily find yourselves holding the securities of our company. You are responsible for maximizing the returns on your investments. Our responsibility is to maximize the long-term value of this company. We will therefore act in the interest of those whose interests coincide with our long-term prospects, namely employees, customers, the communities in which our employees live, and the minority of investors who plan to hold our securities for several years.”
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[It’s time to] curb a shareholder value paradigm that has run amok. Well-intentioned, smart managers are systematically destroying companies by failing to take actions they know are right in the long term. Instead of slavishly serving an antiquated and increasingly irrelevant [maximization] function, managers should find ways to reward investors and stakeholders who want innovation, not plunder.
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Full article;
http://www.businessweek.com/magazine/content/07_22/b4036100.htm?chan=search
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