Maximizing shareholder value is “the dumbest idea in the world”

Steve Denning, writing in Forbes:

In today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called “the dumbest idea in the world”, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

Denning is summarizing the ideas contained in Roger Martin’s new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL.

In Fixing the Game, Roger Martin reveals the culprit behind the sorry state of American capitalism: our deep and abiding commitment to the idea that the purpose of the firm is to maximize shareholder value. This theory has led to a massive growth in stock-based compensation for executives and, through this, to a naive and wrongheaded linking of the real market — the business of designing, making, and selling products and services — with the expectations market — the business of trading stocks, options, and complex derivatives. Martin shows how this tight coupling has been engineered and lays out its results: a single-minded focus on the expectations market that will continue driving us from crisis to crisis — unless we act now.

(thx, david)

• books
• business
• finance
• Fixing the Game
• Roger Martin
• Steve Denning