Friday, March 13, 2009

Jack Welch lashes out at focus on 'shareholder value'

'Capitalism in crisis' is the lament of the day. Heaven knows there's a great deal of reconstruction that needs to be done now, most importantly in the realm of financial regulation. But we have to be careful to sift out populist rhetoric and plain inanity from serious proposals for reform. To put it bluntly, in today's distressed situation, there's a lot of rubbish that is sought to be palmed off as great wisdom by the high and mighty.

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.

1 comment:

Ravee said...

To start on a lighter vein, JW only talks about shareholder value as the dumbest idea NOT share value. Be that as it may, no CEO worth his salt will be a leader of any substance if he or she sees the share price as day trader does! So, if shareholder value has outlived its usage, what measure will take it place? One thing which the hawk eyed Buffet says he watches in respect of any business is its product and services - do they excite the present and prospective customers? will you as an investor buy those products and services as your first choice? will you buy anything else that the business may bring to the market? Put in a different way, Peter Lynch once said that businesses which continue to produce desirable products (add services if you want) and there is a growing market, you have a winner at hand. I guess each of these, desirable products (market share?)and growing market, is measurable. Sure, they are not as prone for analytics as share price is. Well then, who wants the entire business world to be taken over by 'quants' seeing what it has done to the present world!