The World's Dumbest Idea
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The World's Dumbest Idea
Article in the UK Daily Telegraph December 8th 2014.
" UK investors may be heading for disaster and they are being led astray by the very people paid to protect them. In a devastating piece of analysis investment writer and expert James Montier argues that the modern management mantra of "maximising shareholder value" has failed investors and - even worse - could be holding back the entire economy, impoverishing us all.
In a new paper titled "The World's Dumbest Idea" Mr Montier, who sits on the asset allocation team for GMO, the $120 billion US Investment giant, examines the error of managing a Company purely in the interests of shareholders.
The idea itself and the title of the paper is not born out of some Left Wing ideology - instead it comes from a bastion of Capitalism, General Electric and its former CEO Jack Welch. Mr Welch said in an interview five years ago "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy - your main constituencies are your employees, your customers and your products."
Shareholder value as a strategy seems to have crept into business thinking in the Eighties before becoming widespread throughout the following decade.
Simply stated, the strategy is that Company success is measured by the extent to which it enriches shareholders so Management team can be made to maximise the profits and deliver returns to shareholders. That is all very well until Management grant themselves so many share options and bonuses that the goal becomes running the Company in the short term. Mr Montier presents a compelling case against the current obsession with how companies are run and Management is paid. He compares the half century of corporate performance up to 1990 in what is called the era of managerialism when the focus was on employees, customers and shareholders and contrasts this with the era of shareholder value we live in today.
During the era of managerialism, CEO pay remained relatively low and stable but in sharp contrast it soared from 1990 onwards. Reasearch shows that when pay reaches a certain level, hitting targets that allow payouts of share options and bonuses become the obsession of Management - not running the Company for the benefit of all parties.
In the mid 90's, pay of (normally men) at the top of FTSE 100 Companies was 60 times the pay of the average worker - now it's 160 times!
Here in the UK, the most startling example of a corporate that appeared to be managed in the interests of the shareholders was Tesco. The Company lost focus on its customers focusing on profits and growth. When things went wrong it carried on paying dividends to shareholders while debts soared. Towards the end, the shareholder tale was wagging the corporate dog while Management desperately defended the strategy while customers left in droves.
Advice to investors:-
Look for Companies that put the customer and the product first while treating employees fairly.
Watch out for CEOs receiving a large portion of their pay package in shares and bonuses.
Ring a bell to anyone of the old timers...........
" UK investors may be heading for disaster and they are being led astray by the very people paid to protect them. In a devastating piece of analysis investment writer and expert James Montier argues that the modern management mantra of "maximising shareholder value" has failed investors and - even worse - could be holding back the entire economy, impoverishing us all.
In a new paper titled "The World's Dumbest Idea" Mr Montier, who sits on the asset allocation team for GMO, the $120 billion US Investment giant, examines the error of managing a Company purely in the interests of shareholders.
The idea itself and the title of the paper is not born out of some Left Wing ideology - instead it comes from a bastion of Capitalism, General Electric and its former CEO Jack Welch. Mr Welch said in an interview five years ago "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy - your main constituencies are your employees, your customers and your products."
Shareholder value as a strategy seems to have crept into business thinking in the Eighties before becoming widespread throughout the following decade.
Simply stated, the strategy is that Company success is measured by the extent to which it enriches shareholders so Management team can be made to maximise the profits and deliver returns to shareholders. That is all very well until Management grant themselves so many share options and bonuses that the goal becomes running the Company in the short term. Mr Montier presents a compelling case against the current obsession with how companies are run and Management is paid. He compares the half century of corporate performance up to 1990 in what is called the era of managerialism when the focus was on employees, customers and shareholders and contrasts this with the era of shareholder value we live in today.
During the era of managerialism, CEO pay remained relatively low and stable but in sharp contrast it soared from 1990 onwards. Reasearch shows that when pay reaches a certain level, hitting targets that allow payouts of share options and bonuses become the obsession of Management - not running the Company for the benefit of all parties.
In the mid 90's, pay of (normally men) at the top of FTSE 100 Companies was 60 times the pay of the average worker - now it's 160 times!
Here in the UK, the most startling example of a corporate that appeared to be managed in the interests of the shareholders was Tesco. The Company lost focus on its customers focusing on profits and growth. When things went wrong it carried on paying dividends to shareholders while debts soared. Towards the end, the shareholder tale was wagging the corporate dog while Management desperately defended the strategy while customers left in droves.
Advice to investors:-
Look for Companies that put the customer and the product first while treating employees fairly.
Watch out for CEOs receiving a large portion of their pay package in shares and bonuses.
Ring a bell to anyone of the old timers...........
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goal becomes running the Company in the short term
He compares the half century of corporate performance up to 1990 in what is called the era of managerialism when the focus was on employees, customers and shareholders and contrasts this with the era of shareholder value we live in today.
Reasearch shows that when pay reaches a certain level, hitting targets that allow payouts of share options and bonuses become the obsession of Management - not running the Company for the benefit of all parties.
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Anyone here run a small..or any sized, business? Do you expect it to be run for the benefit of anyone but the owner?
Does the Tesco example support the case as presented? paying a dividend that isn't supported by underlying profit is plainly a hiding to nowhere - but that doesn't mean the shareholders oughtn't to be the beneficiaries.
Does the Tesco example support the case as presented? paying a dividend that isn't supported by underlying profit is plainly a hiding to nowhere - but that doesn't mean the shareholders oughtn't to be the beneficiaries.
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Despite the fact that my pilot license bequeaths me with quasi unlimited understanding of the financial world (as we all know...), I fail to understand why businesses need to look after shareholders so much?
Surely, in an era of virtually null interest rates, investors shouldn't be that hard to please...
In any case, I agree with the article's author. We don't have to look very far for examples of businesses that would rather turn their back on their employees to hand out cash to their investors.
Why should someone who does not, in any way, participate in the company's bottom line expect to be paid for it?
The point of buying shares is to expect capital growth when the business does well, not to entitle yourself to part of a salary you're not working for.
Surely, in an era of virtually null interest rates, investors shouldn't be that hard to please...
In any case, I agree with the article's author. We don't have to look very far for examples of businesses that would rather turn their back on their employees to hand out cash to their investors.
Why should someone who does not, in any way, participate in the company's bottom line expect to be paid for it?
The point of buying shares is to expect capital growth when the business does well, not to entitle yourself to part of a salary you're not working for.
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Look at Ben and Jerry's. Conceived as a loss making enterprise to shelter profits from a software company. Their concept was to provide a value product at a high price, pay their employees with FULL benefits so as to incur a loss. How many decades later, one of the great entrepreneurial success stories even if it was ill conceived.
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Never a truer word....
Good business is a four legged chair.
Customer, Employees, management & shareholders
If the interests are not balanced, the chair tips over !!
A decade ago I was on the board of a FTSE100 company which became slaves to "shareholder value creation" .... I ignored it and ran the most profitable global region as a result, but was pushed out as a result of not getting with the programme.
Now they are all gone and the company is in deep sh1t, I found other profitable enterprises to keep me interested.
Tried and tested, keep those four legs balanced !!
Good business is a four legged chair.
Customer, Employees, management & shareholders
If the interests are not balanced, the chair tips over !!
A decade ago I was on the board of a FTSE100 company which became slaves to "shareholder value creation" .... I ignored it and ran the most profitable global region as a result, but was pushed out as a result of not getting with the programme.
Now they are all gone and the company is in deep sh1t, I found other profitable enterprises to keep me interested.
Tried and tested, keep those four legs balanced !!
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Bonuses For CEOs Make Them Worse - Business Insider
Probably applies to DFOs and GMAs as well.....
High CEO pay is back in the news. This is disappointing. We keep thinking that the tide is turning, and that top corporate executives and their self-serving remuneration committees have finally grasped that it is nuts to pay people enough to transform their finances for generations, to run a company that they didn’t start and don’t own.
We keep being wrong.
The Mail on Sunday this week reported on the tripling of the amount to be paid to Mike Tye, the chief executive of Spirit Group, and on the £9.5m to be paid to Carolyn McCall of EasyJet.
There was also a row over at BG Group earlier in the month when CEO Helge Lund was awarded a total package worth something in the region of £14m. This was later halved – but £7m is still clearly an awful lot of money to earn in one year for taking over a going concern.
We’ve written here a great deal about the pointlessness of all this, about the ‘talent myth’, and about the silly long-term incentive plans that got us to this point. But there is one experiment, pointed out to me by David Gait of First State, that makes the case particularly well for dumping financial incentives and going back to fixed pay levels for all.
It is the candle task. Subjects are given a candle, a book of drawing pins, and a box of matches. They are asked to use them to find a way to fix the candle to the wall so that wax will not drip on to the floor when the candle is lit. The answer is to empty the matchbox and pin it to the wall. You then put the candle in the matchbox. Job done.
This sounds easy, but for most people the matchbox is not immediately obvious as a tool: it is seen purely as a container for matches. They can’t do it. (But if you take the matches out, pile them next to the box and give a subject the same task, almost everyone can do it).
This experiment was refined in 1962 by Sam Glucksberg to see how financial incentives affected the outcome. Two groups were used. The first were not offered cash rewards, just told that it was pilot work on problem solving. The second were told that those who finished the task fastest would get $5 or $20, with the very fastest getting the latter.
Here’s what happened: those incentivised by high cash payments performed worse than those not incentivised by payment at all. Yes you read that right: worse.
There are several explanations. It could be about justification – people think that if they are getting paid that much to do something it must be really hard, so they over complicate it.
Or it could be that making payment dependent on performance creates stress, something that we know can shut down our creative and problem-solving skills (think ‘fight or flight’). Glucksberg reckoned it was the latter.
The conclusion was that if you are hiring people to do what is essentially problem solving work (as most management is), tying their pay directly to the result of that work is a really bad idea. Something for shareholders to think about.
This article originally appeared at MoneyWeek. Copyright 2014.
Probably applies to DFOs and GMAs as well.....
High CEO pay is back in the news. This is disappointing. We keep thinking that the tide is turning, and that top corporate executives and their self-serving remuneration committees have finally grasped that it is nuts to pay people enough to transform their finances for generations, to run a company that they didn’t start and don’t own.
We keep being wrong.
The Mail on Sunday this week reported on the tripling of the amount to be paid to Mike Tye, the chief executive of Spirit Group, and on the £9.5m to be paid to Carolyn McCall of EasyJet.
There was also a row over at BG Group earlier in the month when CEO Helge Lund was awarded a total package worth something in the region of £14m. This was later halved – but £7m is still clearly an awful lot of money to earn in one year for taking over a going concern.
We’ve written here a great deal about the pointlessness of all this, about the ‘talent myth’, and about the silly long-term incentive plans that got us to this point. But there is one experiment, pointed out to me by David Gait of First State, that makes the case particularly well for dumping financial incentives and going back to fixed pay levels for all.
It is the candle task. Subjects are given a candle, a book of drawing pins, and a box of matches. They are asked to use them to find a way to fix the candle to the wall so that wax will not drip on to the floor when the candle is lit. The answer is to empty the matchbox and pin it to the wall. You then put the candle in the matchbox. Job done.
This sounds easy, but for most people the matchbox is not immediately obvious as a tool: it is seen purely as a container for matches. They can’t do it. (But if you take the matches out, pile them next to the box and give a subject the same task, almost everyone can do it).
This experiment was refined in 1962 by Sam Glucksberg to see how financial incentives affected the outcome. Two groups were used. The first were not offered cash rewards, just told that it was pilot work on problem solving. The second were told that those who finished the task fastest would get $5 or $20, with the very fastest getting the latter.
Here’s what happened: those incentivised by high cash payments performed worse than those not incentivised by payment at all. Yes you read that right: worse.
There are several explanations. It could be about justification – people think that if they are getting paid that much to do something it must be really hard, so they over complicate it.
Or it could be that making payment dependent on performance creates stress, something that we know can shut down our creative and problem-solving skills (think ‘fight or flight’). Glucksberg reckoned it was the latter.
The conclusion was that if you are hiring people to do what is essentially problem solving work (as most management is), tying their pay directly to the result of that work is a really bad idea. Something for shareholders to think about.
This article originally appeared at MoneyWeek. Copyright 2014.
