Ebook: The End of Shareholder Value: Corporations at the Crossroads

This book is an exercise in fuzzy thinking. Kennedy is totally confused about what shareholder value is. He is confusing shareholders' legitimate desire to get a meaningful return on their capital (enough to compensate for the risk they assumed) with management's unscrupulous attempts to increase reported EPS over the short term. Whatever contributes to the former creates shareholder value. Whatever contributes to the later, doesn't necessary do so. The puruit of shareholder value has nothing to do with unscrupulous management. But that's not all. He doesn't understand the mechanics of a modern capitalist economy nor does he understand the interactions among different groups in society and the fundamental principals of business valuation and corporate finance. I should also mention his constant misinterpretation of facts: Kennedy is idealizing the 19th century entrepreneurs as men who started their businesses only for the sake of the common good. Wealth, according to him, was only a byproduct of their charitable attempts to improve society. I doubt if that was true. Being open about one's own greed was not an acceptable social behavior in 19th century. Subsequently, men of wealth tried to come up with noble excuses for their profit seeking. Kennedy argues that maximizing shareholder value ignores employees, customers, suppliers, communities and the government. If that was true then everything we know about modern Economics must be wrong! Let's start with employees. Do they really suffer from shareholders' attempts to maximize their own profit? If shareholders didn't care about profit, they wouldn't start the business to begin with and without the business, employees would have nowhere to work. Conclusion: profit seeking (maximizing shareholder value) creates value for workers. The alternative would be a centralized communist economy where government runs all businesses. Business ventures are not evaluated by the profits they could generate but by the amount of people they would employ (more is better). What about governments? The purpose of government is to serve the people. Government has no other purpose. Therefore we can not say that corporate behavior harms government unless that behavior harms Society. Harm done to a government by a corporation that doesn't harm Society is no harm at all. An example would be any legal attempt to minimize taxes. It harms government because it decreases the amount of funds available to expand bureaucracy but it benefits Society because businesses can allocate capital more efficiently than governments. What about suppliers? Are they being harmed by the "shareholder value menace"? Suppliers are also businesses with shareholders of their own. Each and every company is both a buyer and a supplier. If a company is being squeezed by its customers, it can always attempt to do the same to its suppliers. It is true that many communities, many local and national governments, and many workers end up abused by businesses (big and small). It is also true that many businesses are being endlessly abused by militant labor unions and governments. It doesn't follow that business owners should be prevented from seeking lawful ways to increase their wealth. Kennedy even goes as far as to argue that increasing shareholder value harms shareholders. Here logic fails him completely. The discussion of GE is an illustrative example. Although Kennedy admits that GE's cost cutting initiatives increased value for current shareholders, he claims that the inflated stock price at the end of 1999 will prevent those who buy today (1999) to realize similar gains. True. So what? No one is being forced to buy overpriced common stock. People suffer their own ignorance about corporate valuations. Do we need to hold CEOs responsible for holding their stock prices low so that anyone, who buys a share of common stock at any time, can have a decent return? Wall Street does not hold CEOs responsible for the stock price of their companies (low or high). It does hold them responsible for the operating results. Stock prices take care of themselves. His recommendations for change are even sillier then his criticisms. He suggests to replace the pursuit for shareholder value with...building shareholder wealth!!! If I were a Boston snob I could probably see the difference but I am not. It sounds all the same to me. Arguing about the usage of words and terms (among vs. between; many vs. a lot; shareholder value vs. shareholder wealth; etc.) is intellectual no more challenging then collecting stamps or baseball cards. If the Boston snobs think otherwise then I would let them have it their way.