Short shrift for shareholder value

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"If I were Euromoney editor, I would beat up on institutional investors for the insanity they've been creating," says Allan Kennedy. He has written a book, The end of shareholder value, about the embracing of this ethic and its adverse aVect on business practices. Kennedy has seen the "insanity" spread at close quarters. He held a top position with McKinsey.
Arguing that "something destructive is happening" to companies, Kennedy sounds familiar warnings about managers focusing on raising the share price to a maximum in the short term, disregarding the long-term impact on the rest of the business. Kennedy cites General Electric, much lauded under the stewardship of CEO Jack Welch as a generator of returns to shareholders, as a company that has suVered from this practice. When GE was the market leader in walkie-talkies it cut funding on R&D, and has since excluded itself from the lucrative cellular phone market.
Although enshrining shareholder value as a company's single guiding principle may satisfy investors, Kennedy contends "it was the wrong idea and the wrong time driven to enormous excesses which we will all pay for".The most prominent manifestation of this excess, he says, is the "bubble" in the US stock markets. With so many companies aiming to drive share prices higher in the short term, stock prices have become artiWcially inXated. In Kennedy's view this can only lead to a market collapse.He portrays the rise of shareholder value as a recent development in the history of US business. In the 19th century, businesses such as AT&T were founded primarily to support families. After World War II, the product became the focus of business, as with Hewlett-Packard. The 1970s marked another shift when businesses were founded for the purpose of making money. This practice was amended in the 1980s when businesses wanted to make as much money as quickly as possible. During this time, accountants began to measure the size of a company through the value of the shares. "It is an ill-conceived fad that swept the business community," says Kennedy, and American businesses were simply the Wrst to adopt the practice. If CEOs are paid such exorbitant salaries for maximizing shareholder value, as Kennedy claims, they will not be inclined to change their practices. According to Kennedy, "the greed that motivates this practice will not change unless there is a market collapse."

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