As there are no lucrative profits anymore in shareholdings at the moment, and big losses in share values, maximising shareholder value is regarded a "dumb idea":
A need to reconnect
By Francesco Guerrera in New York
Published: March 12 2009
(...) Since [former General Electric boss Mr Jack] Welch made the concept [of shareholder value] famous in a speech at New York's Pierre Hotel in 1981, the short-term goal of rewarding shareholders by increasing profits and dividends every quarter has become a mantra for companies around the world. With the share price of GE and other shareholder-focused companies soaring, executives from all over the world took up the credo Alfred Rappaport spelt out in his 1986 book, Creating Shareholder Value: "The ultimate test of corporate strategy, the only reliable measure, is whether it creates economic value for shareholders."
Fund managers encouraged this attitude, as pressure from their own quarterly reviews addicted them to the periodic improvements in earnings and stock prices promised by the prophets of shareholder value.
Today, that focus on the here and now is seen as a root cause of the world's economic predicament. "Immediate shareholder value maximisation, by itself, was always too short-term in nature," says Jeffrey Sonnenfeld at Yale School of Management. "It created a fleeting illusion of value creation by emphasising immediate goals over long-term strategies." Even Mr Welch argues that focusing solely on quarterly profit increases was "the dumbest idea in the world" [FT March 12 2009]. "Shareholder value is a result, not a strategy," he says. "Your main constituencies are your employees, your customers and your products." (...)
http://www.ft.com/cms/s/0/822ed110-0f3d-11de-ba10-0000779fd2ac.html
Welch condemns share price focus
By Francesco Guerrera in New York
Published: March 12 2009
(...) Mr Welch, whose record at GE encouraged other executives to replicate its consistent returns, said that managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company. "On the face of it, shareholder value is the dumbest idea in the world," he said. "Shareholder value is a result, not a strategy?.?.?.?Your main constituencies are your employees, your customers and your products." Mr Welch spoke before Thursday's news that GE, which he left in 2001, had lost its triple A rating from Standard & Poor's.
His comments, made in an interview for the FT's series on the future of capitalism, come as the economic crisis has caused a radical rethinking by many leading executives and policymakers. Alan Greenspan, former chairman of the Federal Reserve and a high priest of laisser-faire capitalism, told the FT last month that the US might have to nationalise some banks on a temporary basis to fix the financial system.
The birth of the shareholder value movement is commonly traced to a speech that Mr Welch gave at New York's Pierre hotel in 1981, shortly after taking the helm at GE. In the speech, titled "Growing Fast in a Slow-Growth Economy", Mr Welch did not mention the term but outlined his beliefs in selling underperforming businesses and cutting costs to increase profits faster than global economic growth. GE "will be the locomotive pulling the GNP, not the caboose following it", he was quoted as saying. Mr Welch last week said he never meant to suggest boosting a company's share price should be the main goal of executives. "It is a dumb idea," he said. "The idea that shareholder value is a strategy is insane. It is the product of your combined efforts - from the management to the employees". (....) http://www.ft.com/cms/s/0/294ff1f2-0f27-11de-ba10-0000779fd2ac.html
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Received on Sat Mar 14 07:19:55 2009
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