Arfur Dent
9th Dec 2014, 01:17
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...........:ok:
" 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...........:ok: