The Fallacy of Catering to Shareholders

In my Salon essay on the Rupert Murdoch takeover bid for Dow Jones, the central thrust of my argument was that public ownership has not been good for the newspaper business. I point out several examples of how the philosophy of "maximizing shareholder value" has laid waste to a host of fine newspapers.

The current issue of Business Week has a guest essay (subscription required) entitled "Put Investors in Their Place" that takes this idea one step further. The authors are Clayton M. Christensen, a professor at Harvard Business School, and Scott D. Anthony, president of a consulting firm called Innosight.

The notion that managers must above all appease investors drives behavior that focuses exclusively on quarterly results. Thus, many management teams hesitate to invest in promising innovations that are likely to hurt near-term financial performance. As a consequence, leaders in industries facing disruptive change—such as grocery retailing and newspapers—lose both direction and strength as they try to figure out what kind of shareholder value they should create.

I don't know about grocery retailing, but that certainly has been true in newspapers.

The problem, they argue, boils down to the fact that most shareholders own stocks, on average, for less than ten months -- down from five years or more in the 1960s.

Christensen and Anthony observe:

Perhaps it is time for companies to adjust the paradigm of management responsibility: "You are investors and speculators, not shareholders, and you temporarily find yourselves holding the securities of our company. You are responsible for maximizing the returns on your investments. Our responsibility is to maximize the long-term value of this company. We will therefore act in the interest of those whose interests coincide with our long-term prospects, namely employees, customers, the communities in which our employees live, and the minority of investors who plan to hold our securities for several years."

This is, I think, a thought-provoking and valuable essay.

© 2007 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.