The statement 'maximizing shareholders value' is meaningless without the timeframe. The correct phrasing is to 'maximize shareholders value in the long term'. The 'long term' bit is crucial, and it is not reflected in today's management incentives.
The choice that managers of public companies are facing is the well known "Consume vs. Invest". Or, in the terms of an evolutionary fitness landscape, "Exploit vs. explore".
If a manager wants to maximize his next quarter's earnings, he could stop new product development, shut down customer service and equipment maintenance departments and sell, sell, sell. He could have a short short-term spike in profitability, but in the long term the company won't survive. He has exploited his current position but has failed to explore, to look to the new opportunities and threats, and to provide for the future.
(Note: the manager could also buy a portfolio of high-yielding/high risk securities hoping that the crash will not happen before his next bonus is due. This is the same thing -- maximising short-term gains at the expense of the long-term prospects of the company).
The manager could also overexplore, that is to overinvest in customer and product development, purchase the newest equipment and end up with a croud of excited customers and an exciting new technology/product, but no liquidity left in the bank to live to see it taking over the market.
"Maximizing shareholders value" idea got a bad press, because it has become associated with the 'exploit' approach. Managers endanger the long-term prospects of the company because they can be paid well for achiving relatively short-term goals.
But the working definition should be "Maximizing shareholders value in the long term"
Let's make the law that the managers' options can only be excersized after 10 years. That'll do the trick.
Why is the long term bit crucial? Specifically, what timeframe do you define as "long term", and why do you privilege that timeframe over other timeframes?
And sometimes exploitation is better than exploration.
Microsoft is a great example of this. Currently MS dumps billions into Bing, a form of exploration. If the shareholders were given a choice, do you think the would choose this? Most likely not - if they wanted to explore search, they would probably dump billions into GOOG. Microsoft shareholders would probably be better off if MS stopped exploring, exploited current revenue streams, and allowed shareholders to invest in businesses with a brighter future.
The working definition should be "maximizing shareholder's time and risk discounted value". After all, $100 now is better than $100 over 10 years (maybe, if we are lucky). When a company focuses on creating long term value, they are gambling with shareholder wealth. They should only do this when the odds are good.
Let's make the law that the managers' options can only be excersized after 10 years. That'll do the trick.
Many companies already do this - a lot of CEO/executive comp is restricted shares.
>Microsoft shareholders would probably be better off if MS stopped exploring, exploited current revenue streams, and allowed shareholders to invest in businesses with a brighter future.
That's your judgment. I have to honestly say I'm thankful you're not in charge of Microsoft, because someone trying to compete with Google in the search space is a great thing. (And with Google doing a lot to make Microsoft's core markets vanish, getting into search could save Microsoft's existence in a 10-year timeframe.)
The two scenarios, supposing that MS's current product line is dead in 10 years, and pretending share prices cost $1 right now):
Own MS now. $10 investment yields $20 in profits, all invested in Bing. Net result, in 10 years, you have 20 shares of Bing.
Own MS now. $10 investment yields $20 cash in your hands. You buy google. Net result, in 10 years, you own 20 shares of Google.
Unless you think Bing is a better investment than Google, you are better off taking the cash and reinvesting in Google.
And as an investor, I don't care if MS exists in 10 years. I care whether my portfolio is up or down in 10 years. And I care about liquidity - all else held equal, I'd rather have $1 cash in my hands than $1 cash in MS's hands with me owning shares. If I can invest $10 into MS, take $20 cash out, and have the company die, that's not a bad thing.
Yes. The article frustratingly kept identifying "maximizing shareholder value" as the problem and the naive "delight customers" as the solution. Maximizing shareholder value would be much more closely aligned with society's interests if shareholders had the information needed to distinguish real value being built from a company being strip mined.
You need a second constraint. The shareholders have to care about long-term value. Many institutional shareholders don't care and have no incentives to care about long term value. To them, firms are not long term investments - they are merely symbols moving up and down on a price chart. If your symbol moves down too often, they'll pull money out of your firm, even when those gyrations are being caused by forces completely outside your control (natural disasters, or sector-wide trends).
With shared information and rational actors (unrealistic, I know) stock prices should reflect long term expectation, even in the short term.
shareholder investment window is up to the shareholders. if shareholders push for short term profits at the expense of long term stability that is FINE. In a healthy market they get eaten. We have an unhealthy market where some get to maximize short term profit and then go crying to mommy when the consequences roll in.