Thursday, March 19, 2009

More on shareholder value

I had a post earlier on shareholder value maximisation and how Welch's criticism of this principle was unfounded. Those who criticise shareholder value maxisation say that it allows managers to focus on short-term value at the expense of the firm's long-term interests. But this reflects market inefficiencies. We should redouble efforts to increase market efficiency- through regulation, governance, better microstructure, etc.

Secondly, managers can get away with short-term results only as long as their incentives or rewards are linked to such results. The way to get them to focus on the long-term is to design incentives accordingly. There is growing consensus now that stock options should vest only over a long period- say, 10 years.

It's not the focus on shareholder value that needs to be remedied. The things that need remedying are the effectiveness of boards, executive pay and, above all, the concentration of powers in the CEO. If corporations are to create sustainable value, we must end corporate dictatorships. More on this in my ET column, Shareholder value's not the issue.

3 comments:

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Anonymous said...

Earlier on the Subiksha issue you opined that managers should focus on all stakeholders and not just shareholders. Here you criticize Jack Welch for saying the same?!