The dogmatic pursuit of "shareholder value" is based on a flawed concept, leading to management structures and behaviors that not only limit stock market returns but actually damage the very structure of corporate America. At least, that's the provocative idea behind Lynn Stout's new book The Shareholder Value Myth.
The first problem is the inherent assumption that there is one "shareholder" body for whom value means the same thing. "'Shareholder" actually is an animal that doesn't exist," Stout explains in the attached video. "What we've really got are human beings that hold shares." Humans aren't readily lumped together in one big basket with a common set of desires and ideals. Stout points to what she calls a "chasm" between investors putting money to work for the long-term and those looking for the quick kill as exhibit A; but the issue is more nuanced. Eventually every shareholder is looking to cash out of an investment. If you've been saving for a retirement that starts tomorrow, your self-interest is perfectly aligned with that of a day-trader.
Ultimately, shareholder rights efforts are less about wanting investing time-frame than the desire to hold managers accountable for their actions. Stout says the ability for shareholders to take legal action against thieving managers is sufficient for those purposes. For executives who aren't corrupt but simply inept, the truth is outsiders don't have as much information or insight as managers, making shareholders the wrong people to engineer a turnaround of even the most dysfunctional operation.
What can individuals do in such an environment? Invest in companies with the very worst corporate governance. Companies like LinkedIn (LNKD) and Google (GOOG) have the right idea by giving shareholders no rights whatsoever. Dual-Class share structures leave the power in the hands of founders and insiders—exactly where it should be, as Stout sees it. "It turns out that corporations that have the 'best' corporate governance, and lets put 'best' in quotes, are among those that are doing most poorly for investors."Stout is pointing out that founders and chieftains have the most information and the greatest incentive to manage for the long-haul—there's nothing to be gained by making them hand over power to outsiders and quick-flip artists. If shareholders had any power they wouldn't know what to do with it anyway. As an individual, that means the best companies to invest in are those that don't seem to respect your rights at all.
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