When I read in the FT that former GE CEO Jack Welch had condemned the focus on share price, I nearly fell off my chair. This is the father of the 'shareholder value' movement, the man who ruthlessly downsized and restructured in order to enhance shareholder value. Now, safely and comfortably ensconced in retirement- Welch had helped himself to some post-retirement perks that later proved controversial-, the man now pontificates about the evils of shareholder value maximization.
I wouldn't have minded if he had put forth sound arguments for his contention. I can't see any. Welch says:
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.Tell me, does that sound terribly original? Has any worthwhile CEO claimed that shareholder value creation was a strategy? Not at all. CEOs merely focus on it as the objective. Now I know that lots of academics and practitioners think there is something terribly wrong with this objective- I wrote about this in an earlier post. But none has come up with a worthwhile substitute for it.
Of course, management must focus on employees, customers and products. Of course, they must focus on innovation. And, sure, they must behave in socially responsible ways. But if the share price does not capture these dimensions, if the stock market is not efficient enough, then what would be the measure of performance and who is to do the measuring?
Let Welch tell us how we are to know whether management is adequately focused on employees, customers and products- other than by watching the share price. I will then take back what I have said here.