Wow.  Sometimes for the most stinging critiques of capitalism, you need to look in a business magazine.  Such as Steve Denning’s article in Forbes on the catastrophe that is managing companies to maximize stockholder value.  (The article in turn is a review of Roger Martin’s Fixing the Game).

The culprit turns out to be Jensen & Meckling’s infamous 1976 paper which argued that CEOs should be incentivized to share the concerns of shareholders, which was to be done by giving them massive amounts of company stock.  The CEOs didn’t object, of course, since this meant obscene amounts of money. 

What this led to was an epidemic of short-term thinking, a shorter business cycle, corruption and business scandals, and an orientation toward gaming the system (e.g. looting the pension fund, or outsourcing, in order to meet quarterly targets).  And as a kicker, the system fails at its own intended purpose: stockholder value has grown slower than back when companies were managed to maximize real-world benefits for customers.  

These things can be fixed, though it will require legal changes.  E.g. MArtin favors repealigng the “safe harbor” provision and FASB 142, both of which require executives to make predictions about stock performance and penalize them for not making targets. 

In short, companies that focus on delighting the customer not only do better for those customers, and for their employees, but they make more money and thus keep the stockholders happier too.  The whole trend of overpaying the CEO isn’t merely a great injustice; it’s also bad business.

 

 

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