business decisions made in the interest of maximizing shareholder value have caused Mass
layoffs environmental catastrophes an endless list of corporate frauds and record inequality in the
workplace the very same CEO who made millions of dollars by being the first champion of maximizing
shareholder value in the' 60s called it the dumbest idea in the world and something that
could Rock capitalism to its core but worst of all maximizing shareholder value isn't even good
for the shareholders indeed um managers the CEO have a they have a fiduciary duty
to their shareholders to be concerned only with the bottom line we think this is wrong a serious
mistake but continue to create the capacity to be able to reward our shareholders as we have
done in 2023 and as we hope to continue to do in 20124 Roundtable today sparking a debate about
the purpose of a corporation and why maximizing shareholder returns is no longer the main goal
if you hate your job here is a history lesson for you that might make it start to make sense in 1916
the Ford Motor Company had revolutionized the automobile industry with the Ford Model T Henry
Ford the founder and majority stockholder of the company wanted to use the Surplus cash they had
accumulated to build additional plans and hire even more workers to build even more cars Ford
had also famously and controversially raised factory worker wages significantly and offered
benefits like the 40-hour work week in press interviews Ford spoke about his plans for the
company my ambition is to employ still more men to spread the benefit of the industrial system to the
greatest possible number to help them build up their lives in their homes to do this we
are putting the greatest share of our profits back into the business this angered minority
shareholders in the company that just wanted him to lower wages again raised the price of the Model
T and keep paying them a regular dividend since Ford was the majority shareholder in the company
though their options were limited so they took him to court but the court sided with the minority
shareholders Ford was forced to consider the best interest of shareholders above his other business
Ambitions this was the case that set the precedent for shareholder Primacy in America meaning the
board of directors and Executives in a company must always try to maximize shareholder value
to the best of their ability some have mistaken this ruling to mean that CEOs and the boards that
appoint them have a legal mandate to maximize shareholder value but the reality is that this
simply isn't true the case was awarded in favor of the minority shareholders but it upheld the
business judgment rule which means that Executives can do what they believe is in the best interest
of the company even if it doesn't make the number on a stock chart go up Ford himself wasn't paying
his workers more and making new jobs because he wanted to be nice he was a ruthless businessman
who wanted to control a larger share of the growing automobile Market by paying his workers
better and offering them higher wages he was just denying his competitors a Workforce and
by pricing his model T's just above cost he made it almost impossible for any other manufacturer
to sell a profitable budget automobile the biggest irony of all of this is the minority share holders
that took Ford to court were John and Horus Dodge they owned about 10% of the company and used their
special dividends to fund growth of their own company Dodge a car maker that would eventually
become one of Ford motor's biggest Rivals so this Court ruling was bad for the company's leaders bad
for workers bad for the country and bad for the shareholders in Ford who sacrific market dominance
for a quick payday but there are three reasons why people still believe in maximizing shareholder
value and three reasons why companies that operate this way are almost guaranteed to fail so it's
time to learn how money Works to find out how the worst idea in business history became the new
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Cod hmw Corporate America didn't always have the dangerous obsession with shareholder value that
it does today and even after the Landmark Dodge versus Ford case in 1919 companies were slow to
change between the mid1 1960s and 1970s American Stock markets traded mostly sideways corporate
CEOs still had a duty to do what was best for the company but they were paid a normal salary and a
small bonus just like every other normal employee according to the economic policy Institute and the
National Bureau of Labor Statistics CEOs at this time made around 20 times as much as the average
employee of their company so they were still rich but not so rich that they could retire after one
good year their motivation was primarily to keep the company running safely so they could maintain
their well-paid jobs for as long as possible by the 1990s a small group of financiers got the idea
that in order to grow to get better returns from their companies they should align the interest of
their CEO with their own interest of getting the stock price as high as possible they did this by
paying the CEOs a smaller cash salary but added stock options that directly tied CEO bonuses to
stock performance in the 1990s CEO compensation went from 60 times average worker pay to 380 times
average worker pay my friend Patrick Bole did a great video on how this small change in corporate
Norms eventually led to people like Elon Musk demanding $50 billion in compensation for one
year's work now that there was so much money to be made CEOs and other senior Executives were happy
to go along with with the lie that it was their legal duty to maximize shareholder value even if
it would destroy their companies in the long term the first strategy they used was picking
up pennies in front of a steamroller it won't surprise you that some of the biggest companies
in the world have taken dumb risks we have seen some of the biggest corporate bankruptcies in
history happening just the past 24 months and it's becoming more common if you are a CEO with a
multi-million doll bonus package on the table you are going to do everything in your power to tick
the boxes you need for the board to Grant that bonus a top priority for you as a CEO is going
to be to increase your company stock price pay a big dividend or both most bonuses are awarded
year-to-year and according to Fortune Magazine the average tenure of a Fortune 500 CEO is now
only 7 years for you big projects that could pay off over decades are effectively useless unless
their announcement could drive up your stock price but even that's unlikely investors rarely
care about long-term business strategies because they so rarely come come true anyway your best
strategy is to control bad publicity and focus on next quarter's financials an easy place to cut
expenses is in areas like security auditing risk management safety controls long-term development
and training if you cut these enough you might even increase Revenue at the same time because
sales staff and revenue centers can operate more freely without pesky compliance departments making
sure things aren't being done illegally Silicon Valley Bank one of the largest bank failures in
American history had a risk manager Department that Regulators described as terrible that's
about the harshest thing that Financial Regulators say about anything Leeman Brothers went bankrupt
because it couldn't say no to the revenue it was making from subprime mortgage bonds
Boeing's repeated string of Airline failures has been blamed on a push to get new planes into the
air by cutting down on safety controls and testing HSBC one of the biggest banks in the world made
billions of dollars in Revenue by providing Financial Services to International criminals
people have lost their jobs lost savings and lost their lives in these scandals but worse than all
of that the shareholders lost billions of dollars from scandals like these and others that are too
numerous to list but the CEOs that ultimately oversaw the companies making these terrible risk
trade-offs already made their enormous bonuses and some of them even got a golden parachute
on the way out business departments like Risk Management and cyber security have tough jobs
if everything is going well people question what good they are doing for the business if things
are going badly people question what good they are doing for the business you can make a little money
by picking up pennies in front of a steamroller but if something goes wrong you get smushed all
for a few dollars the short sighted nature of CEOs mandated to maximize shareholder value is also the
second reason it's one of the worst ideas in the history of business it guarantees that businesses
become worse Jack Welch was the chairman and CEO of General Electric from 1981 to 2001 he worked
his way up in the company from an entry-level position but upon stepping into the top job he
radically reshaped the company in the name of the shareholders Welch made 72,000 of ge's 400,000
employees redundant he sold off entire company divisions and he invested heavily in financial
and media arms of the business GE Capital became the primary focus of an engineering company that
made consumer appliances commercial machinery and Aerospace Parts Welch also pioneered Outsourcing
and bragged about it on CNBC a News Network he created to focus on business news after GE
acquired MBC his ruthless strategy worked and during his 20 years as CEO GE stock price Rose
from $6 a share to a high of almost $370 a share a year before being asked to walk away from the
company he did but not before being awarded an exit package estimated at $417 million other CEOs
who are now getting paid mainly with stock options saw this Maverick CEO talking about his strategies
on his own News Network and they figured they couldn't argue with the results according to
data from the economic policy and Institute the year that Jack Welch took over as the CEO of
General Electric was the last year when increases in worker productivity kept pace with increases in
wages make of that what you would Welch's focus on shareholder above every other stakeholder in the
business worked well for a long time but since he was pushed out of the company the stock price of
GE has fallen by roughly 70% from its all-time high even during a record bull run where the
market is up by 400% GE used to make high quality products that customers were highly loyal to ge's
Outsourcing delivered worst products to the market leading customers to buy from other brands GE used
to be one of the most attractive companies to work for because they were stable paid well and let
employees like Jack Welch himself work their way up the corporate ladder GE CEO proudly boasting
about Mass layoffs and firing the bottom 10% of Staff every year meant it became one of the least
desirable companies to work for so top talent went elsewhere by sacrificing customers and employees
to appease shareholders they made it worse for them too Welch himself even said in an interview
that maximizing shareholder value was stupid a high stock price is the result of doing everything
else correctly why didn't he follow his own advice well because he made too much money by keeping the
people that paid him happy during Welch's tenure as CEO GE was almost suspiciously good at meeting
financial goals Roger Martin the dean of the rotman School of Business at the University
of Toronto said in an interview with Forbes that GE met orb analyst forecast in 46 of 48 quarters
between December 31st 1989 and September 30th 2001 a 96% hit rate even more impressive in 41 of those
46 quarters GE hit the analyst forecast to the exact Penny 89% Perfection of course this wasn't
amazing management it was good old fashioned Creative Accounting a practice that got GE and
hot water with the SEC and was part of the reason why welch was eventually asked to nicely leave the
company despite his tarnished record Welch's business practices are still common in a lot
of corporate boardrooms across the world okay so you might ask if encouraging CEOs to pursue
short-term gains has shown to be bad for everyone including the shareholders who appoint the board
who employ the CEO why are companies still doing this well that's because the third reason why
maximizing shareholder value is a terrible idea for everyone the short term is all that matters
according to data from the largest stock exchanges in America the average holding period for stocks
has been consistently declining for decades in 1975 investors held on to stocks for an average
of 5 years in 2021 they held on to them for less than one year electronic brokerages have made
buying and selling shares much easier and people are generally in financial situations that are
much less secure where selling shares becomes a way to cover an unexpected expense that's not how
long-term investing should be done but staying ahead financially these days is hard the largest
dips and shareholder holding periods happened in 2001 and 2008 during down markets and job losses
where people were probably selling out a loss on their Holdings but needed to cover their expenses
one way or another long-term capital gains tax laws also encourage people to seek profits from
buying and selling year toe rather than a dividend strategy which can be less tax efficient the
result is that if people are holding on to shares for less time then they also only care about short
term wins so a CEO that delivers a profitable fourth quarter will be more popular than a CEO who
reinvests company earnings into training R&D or safety that won't pay off for years this kind of
short-term thinking is not sustainable but that's another shareholder in CEO's problem but this
isn't the only way I am going to ride an oped on business and Leadership teams that I have worked
with in the real world that are doing things a little bit differently to great success on
my totally free email newsletter compounded daily for free articles like this and to get access to
these videos a day early sign up for that in the description below if you want to see just how bad
things can get in the name of shareholder value go and watch my video on the deadly monetization of
nursing homes to find out how this exact business strategy has caused the death of tens of thousands
of vulnerable Americans and don't forget to like And subscribe to keep on learning how money works