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Propaganda of Shareholder Value

"Maximizing shareholder value" is very similar to the cult of GDP. The quantity is substituted for quality.

EvanED

Re:Object lesson (Score:4, Informative)

There are laws and rules that require publicly traded companies to maximize stockholder profit.

No [truthonthemarket.com] no [latimes.com] no [wikipedia.org] no [yahoo.com]!

It's not really true. It's not completely false to talk about the need of public companies to take into consideration, but there are significant problems with the argument most of the time you see someone trot out that line. Shareholder wealth maximization is a consideration, but is by far need not be be-all, end-all goal from a legal perspective. This is particularly true in this scenario of 20% time, because if the board thought that 20% time was a good thing to have from the company's perspective, they would be completely allowed to implement it.

"While the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day to day basis, this is not legally required or enforceable. The only constraint on board decision making is a pair of duties ‚" the "duty of care" and the "duty of loyalty." The duty of care requires boards to be well informed and to make deliberate decisions after careful consideration of the issues. Importantly, board members are entitled to rely on experts and corporate officers for their information, can easily comply with duty of care obligations by spending shareholder money on lawyers and process, and, in any event, are routinely indemnified against damages for any breaches of this duty. The duty of loyalty self evidently requires board members to put the interests of the corporation ahead of their own personal interest."

"But if shareholder value thinking is counterproductive, how did it become so prevalent? Non-experts often assume the approach is rooted in law, and that public companies are legally required to maximize profits and shareholder returns. This is pure myth. Thanks to a legal doctrine called the business judgment rule, corporate directors who refrain from using corporate funds to line their own pockets remain legally free to pursue almost any other objective, including providing secure jobs to employees, quality products for consumers and research and tax revenues to benefit society."

"[Dodge vs. Ford Motor Company] is frequently cited as support for the idea that "corporate law requires boards of directors to maximize shareholder wealth." The following articles attempt to refute that interpretation. ... In that context, the Dodge decision is viewed as a mixed result for both sides of the dispute. Ford was denied the ability to arbitrarily undermine the profitability of the firm, and thereby eliminate future dividends. Under the upheld business judgment rule, however, Ford was given considerable leeway via control of his board about what investments he could make. That left him with considerable influence over dividends, but not as complete control as he wished."

"Many of us have heard that corporations are legally required to maximize shareholder value. Guess what, they are not. The law in the United States does not require management to maximize shareholder value (except under rare circumstances such as when the company gets put up for sale). This may surprise you because you've also probably also heard that shareholders own the corporation. That's not true either."

And finally, to make things ever more interesting [innov8social.com]:

"In case law speak, judicial commentary articulating an opinion and not decisive to the case is known as "dicta" and is not binding in the court of law. The comments that have made Dodge v. Ford the single-most known case for defining a corporation's duty to maximize shareholder growth...comes in, well, dicta."

 


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[Aug 17, 2013] The Decline of '20% Time' at Google -

August 17, 2013 | Slashdot

One of the things Google is known for is giving their employees so-called '20% time' - that is, the freedom to use a fifth of their working hours to pursue their own projects. Many of these projects have directly improved Google's existing products, and some have spawned new products entirely. An article at Quartz on Friday made that claim that 20% time was all but dead at Google, largely due to interference from upper management. Some Google engineers responded, and said that it has essentially turned into 120% time - they're still free to undertake their own projects, but they typically need their whole normal work week to meet productivity goals. "What 20% time really means is that you- as a Google eng- have access to, and can use, Google's compute infrastructure to experiment and build new systems. The infrastructure, and the associated software tools, can be leveraged in 20% time to make an eng far more productive than they normally would be."

An article at Ars makes the case that this is not necessarily a bad thing, because Google has enough good products that simply need iteration now, making the more innovative 20% time less useful.

"Google wasn't hurting for successful products when it started to tout its 20 percent time: off the backs of its pre-IPO services, it earned a market cap of over $23 billion. But if it was a company that wanted to grow and diversify beyond products that were either related to search or derivative of what already existed, it needed more ideas, better ideas, as quickly as possible. Hence, liberal use of 20 percent time made a lot of sense.

Now, Google is not only an enormous company of nearly 45,000 employees with a market cap twelve times that of its first IPO ($286 billion), it has a lot of big products that it wants to make work. More than it needs more ideas, it needs to make the ideas it has great."

Anonymous Coward

Object lesson (Score:5, Insightful)

The stock market kills companies.

Cryacin

Re: Object lesson (Score:2)

This comes down to the discovery that ideas are an expense. Until the execution of the idea has been implemented, an idea just burns money. Ideas are plenty, especially in Google since for quite some time now, there has been a surplus generated by financial and cultural encouragement.

Google has realised that now it needs to focus in on execution rather than get more expenses. It is the unfortunate reality of making a profit, rather than an endless and inefficient reinvestment cycle.

EvanED

Re:Object lesson (Score:4, Informative)

There are laws and rules that require publicly traded companies to maximize stockholder profit.

No [truthonthemarket.com] no [latimes.com] no [wikipedia.org] no [yahoo.com]!

It's not really true. It's not completely false to talk about the need of public companies to take into consideration, but there are significant problems with the argument most of the time you see someone trot out that line. Shareholder wealth maximization is a consideration, but is by far need not be be-all, end-all goal from a legal perspective. This is particularly true in this scenario of 20% time, because if the board thought that 20% time was a good thing to have from the company's perspective, they would be completely allowed to implement it.

"While the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day to day basis, this is not legally required or enforceable. The only constraint on board decision making is a pair of duties ‚" the "duty of care" and the "duty of loyalty." The duty of care requires boards to be well informed and to make deliberate decisions after careful consideration of the issues. Importantly, board members are entitled to rely on experts and corporate officers for their information, can easily comply with duty of care obligations by spending shareholder money on lawyers and process, and, in any event, are routinely indemnified against damages for any breaches of this duty. The duty of loyalty self evidently requires board members to put the interests of the corporation ahead of their own personal interest."

"But if shareholder value thinking is counterproductive, how did it become so prevalent? Non-experts often assume the approach is rooted in law, and that public companies are legally required to maximize profits and shareholder returns. This is pure myth. Thanks to a legal doctrine called the business judgment rule, corporate directors who refrain from using corporate funds to line their own pockets remain legally free to pursue almost any other objective, including providing secure jobs to employees, quality products for consumers and research and tax revenues to benefit society."

davester666

Re: Object lesson (Score:1)

It's just how the whole stock market/analyst reports/etc are reported/portrayed in North America.

Meet the numbers that a bunch of random guys have made up as to how much you "should" have sold this quarter, or your stock price drops because a bunch of hedge funds have decided that the random guys know more about running your business than you do.

Ellie K

Re:Object lesson or going public (Score:1)

Public companies have a lot of latitude in fulfilling their fiduciary interests to shareholders. Look at what bank CEO's (and Larry Ellison of Oracle) are paid now. Are they really worth a salary that is over 1000 times that of the average employee? Maybe they are sometimes, but certainly not when they are running the business into the ground with layoff's, bad decisions and huge losses.

IF QZ is correct- they probably are, as I've read this elsewhere- that the 20% time had ended, then it is Google management's decision. It isn't motivated by fiduciary interests to shareholders. Google could justify why it is necessary for their employees to have that 20% time. Maybe it really is necessary. I've read that Google employees have been leaving at a higher rates than in the past. But I'm not sure, can't remember sources for that.

Opportunist

Re:Object lesson (Score:3)

Because money is tempting. Imagine this, there is a LOT of money (use your own definition of LOT) being dangled in front of you with the promise to not take any direct influence in your decisions. Hey, as long as I hold 50%+1 of the company I call the shots, right?

It usually doesn't take long to realize that those 50-1% hold a LOT of power over you when they can afford losing them and you cannot.

bondsbw

Re:Object lesson (Score:4, Insightful)

Shareholders want to turn as much profit as they can in as short a time frame as can be done.

Going public is a great way to slowly kill a good company. Many shareholders don't care where the company is in 10 years; they care about their dollar in one year. When the stocks start on a permanent trend downwards, those shareholders sell and move to the next company that has potential in the near term.

jd2112

Re:Object lesson (Score:2)

Many shareholders don't care where the company is in 10 years; they care about their dollar in one year.

If only it were that long term. At best most shareholders care only about where the stock is next quarter. Some only care where it is next week. Some not even that long.

Billly Gates

Re:Object lesson (Score:1)

But those shareholders don't have real power compared to the long term invested who vote and the big players in the long terms.

One word. Icahn!

Those shareholders can fire the CEO and force changes. HP and Yahoo are all examples. Yahoo actually was making some money again when they fired Wang. Icahn wanted a numbers guru instead of a techie to move things with creative accounting.

XcepticZP

Re:Object lesson (Score:1)

I'm sure there are a lot of bright economists out there that might know a whole lot more than I do on this. But to me, it seems as if a lot of the greedy profit motive these days is being driven by a fear of losing out on inflation. Especially the short time frame aspect you speak of.

If our currency is constantly reducing in value, then we are going to try very very hard to make sure that every single piece of capital we have lying around is making us money, in order to "beat" inflation. Even more so when so many of these actual "stocks" aren't owned by individual people. They're probably mostly owned by funds, which have an incentive to drive up the value of their stocks. And they do that because most people pick funds in their individual category by their "growth" in value. Again, the only reason why people want 'growth' in their portfolios/funds is because they have to beat inflation.

Jane Q. Public

Re:Object lesson (Score:3)

There are two things wrong with what the article states. The first, is that it goes on and on about how Google just doesn't do it anymore. Which is a clear example of circular reasoning: "We don't need it anymore because we aren't doing it anymore."

The second thing is the last part of OP's post:

"More than it needs more ideas, it needs to make the ideas it has great."

This is a nonsensical statement. You don't "make an idea great". It either is or isn't. You can make a plan or a business great, but ideas, by definition, stand on their own, or not.

In fact Google is rather infamous for taking lots of pretty good ideas and driving them into the ground... perhaps for precisely the reason that they were trying to follow some misguided notion of "making the ideas better".

All in all, it sounds rather like an apologia for a company that has grown more like a cancer than a weed, and is now more of an evil Frankenstein's monster than it is a Jolly Green Giant.

Jane Q. Public

Re:Object lesson (Score:2)

"I think the phrase "make a good idea great" means to implement it effectively and come up with closely related good ideas so that the net result of the original good idea is beyond what a baseline, minimal implementation would effect."

It might. But part of my point is that Google just hasn't shown itself to be any damned good at that. Out of maybe 100 "good ideas" that Google has had its hands on over the last 20 years or so (if I sat down with pencil and paper and some old blog posts, I might find that many... that we have known about), it has managed to take maybe 2 or maybe 3 good ideas and run with them. The rest it squandered or actively killed off.

And those 2 or 3 are already about as developed as they will get. In fact, people are actually rebelling against them now: user-tracking for "targeted ads", abuse of search data, corporate lock-in of supposedly "open" products... etc. Hell, Google has already Googlified Google Glass too much, to the point that I predict it will be dead in the water. People are about to start using Augmented Reality on their phones in earnest, and don't need to wear it on their heads, with Google services being pushed into their eyes and ears all the time.

like that, from what I can tell). But Google is not like other companies in terms of management. They even had Schmidt step down, so that Larry Page could be CEO again. Larry Page and Sergey Brin know that cost cutting at the expense of design and research is unwise. Well, they should. They did, in the past.. Maybe they are too distant now.

Trepidity

bad thing for who? (Score:5, Insightful)

by (597) <<gro.hsikcah> <ta> <todhsals-muiriled>> on Saturday August 17, 2013 @05:03PM (#44596169)

An article at Ars makes the case that this is not necessarily a bad thing, because Google has enough good products that simply need iteration now, making the more innovative 20% time less useful.

A change from a work environment where you can spend 20% of your time experimenting with new ideas you have, and 80% working on the "regular" mainline products, to one where you're expected to spend at least 100% of a regular workweek iterating on the "regular" products, seems like a bad thing from the perspective of the engineer at least. Ars seems to be arguing that it's not necessarily a bad thing for Google's stockholders, which is a pretty different question.

Anonymous Coward

Given that both Chrome and GMail were (Score:1)

... "stolen" from already established open source projects that were started and developed BY OTHERS, I have no idea what you rant.

Maybe people should learn how Google is the king of stealing code from open source projects and then claiming that they developed something.

anvilmark

Attack of the MBAs (Score:4, Interesting)

The more MBAs in your organization the less innovation you will have. They don't think in terms of success through better (or more diverse) products, only in squeezing maximum efficiency from everything - Marx would applaud them.

mark_reh

Back when I started working as engineer for (Score:5, Insightful)

Motorola in 1981 they used to say "work smarter, not harder", we got comp time off for overtime worked, etc. After a while it became "work harder", and the comp time off went away, and overtime was expected with no compensation. A little while later it became "work!", followed by "work, goddamit!" where you were viewed unfavorably if you used company time to take a leak.

The bean counters always win...

Reconsidering the Proper Corporate Master

in CategoryEthics, CategoryLeader's Mindset, CategorySystems Thinking tagged TagEconomics, TagLabor

If you manage in an organization owned by someone other than yourself, to whom do you owe your loyalty and best efforts?

In the private sector the overwhelmingly popular answer, of course, is to the stockholders. "Maximize shareholder value" has become a ubiquitous managerial mantra and rallying cry sung in unison across all industries, reverberating throughout corporate corridors the world over.

The ethos of serving the interests of a business's stockholders has become so commonplace, it is veritably self-evident. Unless you've read the thinking of the late Sumantra Ghoshal of the London Business School. Consider his argument about appropriate corporate loyalty and see if you don't reconsider your reflexive response.

The [prevailing economic] theory assumes that labor markets are perfectly efficient-in other words, the wages of every employee fully represent the value of his or her contributions to the company and, if they didn't, the employee could immediately and costlessly move to another job.

With this assumption, the shareholders can be assumed as carrying the greater risk, thus making their contribution of capital more important than the contribution of human capital provided by managers and other employees and, therefore, it is their returns that must be maximized (Jensen & Meckling, 1976).

The truth is, of course, exactly the opposite. Most shareholders can sell their stocks far more easily than most employees can find another job. In every substantive sense, employees of a company carry more risks than do the shareholders.

Also, their contributions of knowledge, skills, and entrepreneurship are typically more important than the contributions of capital by shareholders, a pure commodity that is perhaps in excess supply (Quinn, 1992). As Grossman and Hart (1986) showed, once we admit incomplete contracts, residual rights of control are optimally held by the party whose investments matter more in terms of creating value. If these truths are acknowledged, there can be no basis for asserting the principle of shareholder value maximization. There just aren't any supporting arguments. [Source: Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1), p. 80. Emphasis added.]

Then there's all the research showing that how a company treats their employees eventually translates into customer behavior, loyalty, and profit.

When you're assessing priorities and the proper allocation of your fidelity, you might think past the first mantra that springs to mind.



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