Monday September 10, 2012

The Providence (R.I.) Journal, Sept. 7, 2012

The emphasis in many U.S. publicly held companies in the past 30 years or so on maximizing short-term shareholder wealth above all else has brought with it socio-economic problems for middle-and-lower-income groups even as it has produced immense riches for other groups, such as senior corporate executives.

Justin Fox, editorial director of the Harvard Business Review Group, has probably been the most notable recent advocate of the need for broader definitions of "corporate purpose" that include, he writes, "satisfying customers, providing good jobs, even paying taxes."

The demand to maximize shareholder wealth has too often been satisfied in a very short-term way -- pumping up share price to get through the next quarter or next year. The obsession of the financial news media with quarterly reports instead of annual reports (a pathology that got going strongly in the ‘70s) and with celebrity chief executives has encouraged myopic policies that may ultimately undermine companies by reducing long-term investment in producing more and better goods and services.

Senior executives, and especially chief executive officers, at many companies tend not to serve very long anyway; they have too much incentive to take the money and run, even if it means goosing reported profits in dubious ways to jack up the share price.

Of course, the maximization of long-term (say five

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years or more) shareholder value is a very sound goal -- albeit difficult to pull off amid America’s short-termism about most everything. However, such investors, most famously Warren Buffett’s Berkshire Hathaway Co., have stuck to this long-term and patient focus and done very well.

There are, after all, such other stakeholders in companies as the employees and the public, especially those living near where a company has operations. The owners of the companies, working through their representatives on the board and in senior management, have the final say, of course, but it seems just good business -- as well as good citizenship -- to pay more attention to the other constituencies, too.