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Summary of Week 05-Reading: The shareholder value myth. Lynn A. Stout (2012)
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The rise of shareholder value thinking


Before 1900, businesses were owned by relatively few people. After that, a new model of ownership was created, but the little investors knew relatively little about the firms they "co -owned" Examples: AT&T, GE, RCA In the early years of the new model, the purpose was the most questioned. The separation of ownership and control was a big challenge to understand the new model. Many saw the public corporation as a new way of social service Many others thought the social vision was naive because the "controlers" would not have other interests than their own selfish benefit. By 1970, the vision started to lean more towards increasing profits more than any other purpose. It became so powerful, that a manager that dares to even think about any other purpose, will be labeled as a bad manager. The Shareholder value is very powerful It is appealing to academics who like ''maximizing-value" equations It appeals to the popular press and business media Is easy to understand for the readers It provided an easy target to blame when things go south: the corporate "agents'' It appeals to lawmakers and consultants: Thin model suggests obvious solutions to virtually any problem Give board of directors less Give Shareholders more power incentivize executives, It obviously appeals to executives and directors From 1984 to 2001, equity-based compensation went from 0 to 66% By 2003 executives made 500 times the salary of a normal employee. Zenith Most scholars have accepted that the only valid purpose is to maximize an ever-growing profit By 2001 two famous scholars predicted that the model would take over the world, However, there is a tiny hope that this theory is not the absolute truth. One evident fact is that no part of the law requires public corporations to "maximize shareholder value"

Short - term speculations versus long-term investors


One big fear of "maximizing Profit" is that it harms the long-term life of the firm, The "efficient market'' hypothesis stated that the market would take care of the long-life problem Even with its weaknesses people wanted to believe and wanted to have confidence in this model However, after some really hard experiences, move this theory is no longer so popular. Of course, long-term investors want long life, and short - term investors can't care less: There in a conflict of interests among investors with different time horizons. Short - term investors are proliferating because the transactions have became cheaper and cheaper. Activists and short -term investors have an advantage because they reach their goals fast and don't care what happens in the future. The result is that everyone leans towards the short-term, and this fuels the potential for corruption and unethical moves Managing expectations What investors don't see is that at the end of the day, focusing in the short-term harms everyone. It only benefits the executives who take their multibillion bonuses and leave. The short / long term conflict is like dynamite: only very few will benefit, and the explosion will blow up everyone's faces equally, no matter if you were a long or short term advocate

Prepared by Ariadna 73

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