March 14, 2009

The dumbest idea in the world

Bigger Isn’t Always Better is sharply critical of the shareholder value approach to running a corporation. It calls it a strategy built on dubious logic, flawed assumptions, and a belief in magic.

That book was published in 2006. Now, three years later, Jack Welch, ex-CEO of General Electric and celebrity poster-child for the shareholder value movement, publicly admits it was a dumb idea:

"Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was ‘a dumb idea’ for executives to focus so heavily on quarterly profits and share price gains.

The former General Electric chief told the Financial Times the emphasis that executives and investors had put on shareholder value, which began gaining popularity after a speech he made in 1981, was misplaced.

Mr Welch, whose record at GE encouraged other executives to replicate its consistent returns, said that managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company.

‘On the face of it, shareholder value is the dumbest idea in the world,’ he said. ‘Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers and your products.’"
- Financial Times, March 12, 2009

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