Little Sally's Epiphany

On Dec. 22 I posted an article about the doctrine of maximizing shareholder value, what former GE CEO Jack Welch called "the dumbest idea in the world." I shared the views of Steve Denning at Forbes who discussed the contradictions, to use a Marxist term, of management's blind allegiance to improving the net worth of shareholders. Denning, in turn, featured a new book by Roger Martin.

Martin has another article on this called "Little Sally Learns About the Toxicity of Shareholder Value Maximization." In it, Martin makes the case that corporations committed to maximizing shareholder value have perverse expectations of employees. Why would management expect, Martin says, employees to be motivated by a corporate culture that cares most about making mostly rich people richer, people the employees do not even know?

Martin's recognition of the basic psychology of employee motivation should sound familiar to the longstanding view, often held by progressives, that American corporate culture is short-sighted and less committed to improving its products than their bottom line. Recall that General Motors' management of yesteryear boasted that GM was not in the business of making cars, but of making money. GM's subtle indifference to product quality and innovation weighed heavily on it for a generation and nearly destroyed it. Its future remains uncertain.

There are, in fact, two separate arguments at play here; One is the Denning-Roger idea that management is inappropriately concentrating on short-term profits and boosting share price, practices which are systematically distorting management decisions. The other is that focusing on the interests of the investor class, the one percent, creates a bias against workers, community, and ultimately the corporation itself. It is a model best suited to maximizing wealth for a few; it does that very well.

The result is that US corporate culture has the deeply held tendency to treat employees as a mere input, an irritating expense that must be reduced, the abstract L for Labor in the cold computations of economists. It is this second argument which explains why, in the US more than, say, Germany or Sweden, the middle class is squeezed, why jobs are scare, but the investor class is richer than ever. It is the triumph of corporate profits as the centerpiece of American political economy, economics as if people didn't matter.

These are two different lines of argument, from different sources, politics, and traditions, that have dovetailed into a single unavoidable conclusion. I can only hope that we finally see a few inchoate signs that free market economists, free traders, and other purveyors of casino capitalism are beginning to realize the intellectual poverty of their ideology and the aching unsustainability of the American corporate model they have created and upon which they feed.

I leave you with an illustrative dialogue Roger Martin shared about Little Sally.

Sally: Daddy, my teacher asks me to listen carefully in class and do my homework every night. What does your boss ask you to do?

Daddy: He wants me to help him maximize shareholder value?

Sally: Huh? What does that mean?

Daddy: It means increasing our stock price to the highest we can make it go.

Sally: Why?

Daddy: Because that will make the shareholders happy.

Sally: Well who are these shareholders anyway?

Daddy: They are people who buy shares in our company.

Sally: What are they like? Do you know them?

Daddy: Actually we don't really know who they are. Every three months, we get a list of them but they buy and sell so often, the list changes routinely. And even the list we get is for organizations like mutual fund companies and pension funds that invest money on behalf of shareholders and aren't the actual shareholders.

Sally: This is getting a bit confusing. Are they at least nice people; these mutual funds and pension funds?

Daddy: It would be hard to describe them as terribly nice. They are really demanding and if we don't increase the stock price for them, they get pretty upset and sell our stock.

Sally: That isn't very nice. When they do that, do they sell to nicer people?

Daddy: No, typically they sell to people about like them - pretty impatient.

Sally: This sounds pretty weird. If you do get the share price to rise and the shareholders are happy rather than upset, do they do nice things for the company?

Daddy: Not really, Sally. What happens is that they then insist on us getting the share price to rise some more still. Or sometimes they sell their shares because the price has risen enough for them.

Sally: Whew. I must have this wrong but let me check. You go to work every day trying to increase your company's share price for people that you don't know, who don't act nicely at all, and if they are unhappy just sell their shares to some other people who you don't know either and are also not very nice. And if you succeed, they don't do anything for you other than put more pressure on you or sell because they are happy. They seem to sell whether they are happy or upset. That can't be much fun. Why do you do it Daddy? Why don't you try to do something a bit more fun?

Daddy: Well Sally, I know that it sounds kind of weird, but that is our capitalist system. It is our duty to maximize shareholder value, even if it is pretty unfulfilling and unpleasant. And I try to do the best job I can to help our CEO do that. And Sally, if I do a really good job helping my CEO, when he retires, he might appoint me CEO.

Sally: I love you Daddy and because of that I kind of hope that he doesn't make you CEO!

Less Wall Street, More Main Street

I want to share a post by airmechild who captures much of what is wrong with the American economic model. I quote at length:

There is a show on one of the major networks, ABC I think, called the Shark Tank. Basically the show is about entrepreneurs looking for investment capital to start or expand their business. They pitch their ideas to a group of likely investors hopping to get at least one of them to invest money in their business.

In one show a business woman asked for an investment to expand her line of shoes into the next lower class of stores. Her shoes sold well in very upscale boutiques and she wanted to sell in stores like Nordstrom’s and Macys. All of which would require expanding her manufacturing and distribution base.

One of the “sharks” asked where she had her shoes manufactured. She replied Florida and Mass. His response was that she should moved it (manufacturing) to China. The show includes several minutes of bantering between investors and the client until a deal is reached. After all “you have to respect the money.” One of the investors will say during the deal making processes.

Simply, it’s all about the money. Wall Street, the unofficial indicator of “profitability” of Americas companies, has dictated it to be so. Over and over since Reagan came along we have heard the mantra “Wall Street says…” or “the Street…” as the gospel of business or the economy.

Remember this, if you learn nothing more about economics, Wall Street does not represent the American worker, businessman or America. It only represents the greed of the investors. In recent years many a business decision, work force cuts or outsourcing was made simply at the behest of Wall Street. Not one of these decisions bettered America, the economy or a worker (blue or white color.)

It has had just the opposite effect. Wall Street made pitting a company and its tax structure against communities and states for “competitive” tax rates. Another moniker for improved wealth to the investors. The next step was to pit American workers against Foreign workers. After all according to the “Street” our wages are to high.

So the contestant should move production to China? That's our investor class talking; if it can juice up profit margins, they are all for it. Lost jobs? Not my problem.

This infatuation with giving what the investor class wants is seriously undermining this country. They have convinced themselves, and apparently many others, that individual greed is all we need and the less one cares about others, the better off we will be. It is all about me and my profits. Labor is just an abstract, a necessity. The lower management can lower labor costs, the better investors like it.  

No wonder other countries are doing better than the US. Germans, for example, are in utter disbelief and think we are insane. 

Hat tip to airmechild. There is more at the original.