Thursday, December 29, 2011

The Dumbest Idea In The World

The Dumbest Idea In The World: Maximizing Shareholder Value is a much-discussed article about a much-discussed book (Peter Drucker's "The Practice of Management"). Here's a taste (I hope you'll read it all, though):
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.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

Interesting stuff. Sometimes somebody has to state the obvious to make us really see deep changes. And this sheds light on a vexing economic mystery: why are the folks at the top of the economy so eager to suppress the middle class, when that's the worst possible move for commerce and economic growth? Harming commerce and growth ought to harm the rich. After all, a thriving middle class was the engine that enriched America's upper class in the first place.

But commerce, I suppose, is just so very last millennium. At this point it's all about the side bets: a few thousand tycoons betting against each other in an arena as untethered from the real economy as those junk mortgage derivatives they so love to swap around.

Hand me my hacky sack; I'm heading down to Wall Street....

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