GMO’s James Montier slays the ‘shareholder value maximization’ (SVM) nonsense that is widely regurgitated as incontrovertible principles of finance today.
In 14 easy to read pages and charts, Montier examines the shift in corporate culture from an ‘era of managerialism’ (1940-1990) where businesses strove to serve customers, employees and communities and in so doing, build long-term value that delivered a ‘fair return’ to investors, to the present area of SVM (1990-2014) where companies follow the fallacious and destructive belief that they have a dominant duty to shareholders first, and that this duty is best served by increasing share prices as quickly as possible. He goes on to demonstrate that this short-term, extractive mentality has led to reckless use of debt and obscene executive compensation levels, as management has become largely paid with stock and options (especially in finance) while degrading the strength and stability of the host companies, the workforce and the economy itself.
Brilliantly and concisely presented. A must read, must understand. See: The World’s Dumbest Idea
Time to circle back to smarter incentives and practices focused on building long term, sustainable value for all stakeholders: customers, employees, taxpayers and investors–in that order.