Chapter Content
Okay, so, um, this chapter is called "The Dumbest Idea in the World," which, right off the bat, is pretty strong, right? And it kicks off with a quote from Jack Welch, the CEO of General Electric back in the day. He basically says, shareholder value? It's a *result*, not a strategy. Like, your priorities should be your employees, your customers, and your products. And then there's Warren Buffett saying, "I’d be a bum on the street with a tin cup if the markets were always efficient." Which, I mean, that’s Buffett being Buffett, right? A little, you know, folksy wisdom there.
So, the chapter's kind of diving into this idea of maximizing shareholder value, and whether it's really all it's cracked up to be.
It talks about this merger back in, uh, the late 90s, between Travelers Insurance and Citibank. Sandy Weill, who was running Travelers, was all about increasing shareholder value. There’s a story about him, like, constantly checking the stock price on a monitor. And the other CEO, John Reed, he was more focused on building a good business that helped middle-class people. Well, guess what? Reed got pushed out, and, um, Citigroup later got bailed out by the government. So much for maximizing shareholder value, huh?
And then the chapter gets into Jack Welch, who a lot of people thought started this whole "shareholder value" thing. Apparently, he didn't actually *say* the words "shareholder value." But some consultant, Alfred Rappaport, might have coined it. Anyway, Welch eventually called it "the dumbest idea in the world." Later, he kind of walked it back a little bit, but still.
Think about it, right? Is some Walmart cashier really gonna be motivated by maximizing shareholder value? Or did Bill Gates and Jeff Bezos want that on their tombstones? Probably not.
So, how did this whole thing take off? Well, some economists came to the rescue with something called the "efficient market hypothesis." This idea that the stock market is, like, super smart and already knows everything about a company. So, maximizing shareholder value just means maximizing the current stock price. Easy peasy, right? Well, not really.
The thing is, if the market *already* knows everything, then there's no reason for anyone to do any research, which, you know, generates the information in the first place. It's a little bit of a catch-22. There's a joke about an economist who won't pick up a five-dollar bill off the street because if it was real, someone would have already grabbed it. It kinda highlights the flaw in the logic.
Buffett nailed it when he said that academics saw the market being *frequently* efficient and then jumped to the conclusion that it was *always* efficient. Huge difference.
The chapter points out that, like, management can only speculate on the company's future. The market can also speculate. To think the market *knows* more about the company's future than the management is, well, pretty ridiculous.
And then there's executive pay. So, if you want executives to maximize shareholder value, you gotta pay them based on the stock price, right? Stock options became a thing, so execs could profit from rising stock prices without taking the hit from falling ones. Not surprisingly, executive pay went through the roof. But, the chapter points out, these incentive plans became a source of friction *between* shareholders and managers. Managers used the plans to enrich themselves.
What if you're a CEO and you're told to maximize shareholder value? The investor relations people are going to tell you the market cares about the numbers. You just "make the numbers," which, you know, often leads to all sorts of, uh, questionable behavior.
The chapter also gets into this thing called "the winner's curse." The idea is, the winner of an auction often overestimates the value of what they're bidding on. It's not always true, but there is something to that. The market value of a security might not really reflect the value created in the business long-term.
A counterargument is that focusing on profit is clear and easy to implement. This chapter argues that it isn't. "Go and make money," isn’t that helpful or specific. What makes jobs different are the different organizations. What motivates Disney employees isn't making money for the corporation. It's making sure the guests have fun. Intrinsic motivation leads to making money for the business.
And, even in retrospect, it's impossible to say whether someone "maximized" long-term shareholder value. Did Alfred Sloan or Steve Jobs maximize long-term shareholder value? I don't know and neither did they. But they created great businesses.