Mike Mauboussin is an analyst for Legg Mason Capital Management, and a pretty smart guy. I’ve read some of what he’s written over the past few years, and think he’s generally on target with his views. He gave a speech last year (sorry, didn’t see it until @reaburn tweeted a link to it recently) to the CFO Executive Summit titled It’s All About Managing For Value. In his speech, he made the following comment:
A company’s single-valued objective should be maximizing long-term shareholder value.
Mauboussin makes his case for why this should be, and, not surprisingly, makes a strong case. But, in this particular instance, Mike is wrong. Here’s why “long-term shareholder value” doesn’t work as your firm’s single-valued objective:
1. Shareholders are too diverse — or too singular — an audience. Shareholders can be a diverse lot. Some are looking for immediate income and share price growth. Others aren’t necessarily looking for immediate returns, and would prefer to see resources allocated to produce a return over a longer timeframe. Sure, some stocks are categorized as growth or income but stock market categorization is very different than company objective setting. On the other hand, not every company is public. And “shareholders” — in the plural — may be inaccurate. I don’t know too many successful entrepreneurs who became successful by just focusing on their own long-term value.
2. There is no such thing as the “long term.” For a 75 year-old investor, “long-term” is what? Two years? To a 25 year-old, it may be 40 years. We tend to admire companies that make tough decisions that trade short-term gains for longer-term potential, but is taking a hit this year for an expected gain next year really doing something for the “long-term”? The fact of the matter is that the “long-term” is not a timeframe that can be used to make decisions.
3. It doesn’t help make trade-offs. Speaking of decisions, Mauboussin writes: “Running a business requires evaluating, and deciding about, trade-offs. And to properly judge tradeoffs, you have to have a single objective.” Mike is 100% correct. Problem is, “maximizing long-term shareholder value” doesn’t help you make those tradeoffs. Points #1 and #2 help prove him incorrect. If there are shareholders with competing investment objectives, and no clear definition of what the long-term is, then Mauboussin’s single-valued objective is of no help in making critical decisions.
4. It doesn’t inspire and motivate employees. Unless the set of employees equals the set of shareholders, Mauboussin’s objective is bound to produce conflicts. Another reality of modern-day organizational life is that people look for personal fulfillment in their jobs. We want to feel like we make a contribution, both to ouselves, as well as others. Because “shareholders” are an intangible concept for employees of public corporations, maximizing the return to shareholders is not a very motivating objective.
So, if Mauboussin’s objective is wrong, what’s the right objective?
It’s one that aligns employees, customers, and shareholders. It’s an objective that defines what the company will do for customers (and for which customers). Dare I say the right objective is a customer-centric objective?
The reason why that type of objective works is that it motivates employees, better enables the tough tradeoffs to be made (these decisions will never be easy), and — this is important — lets shareholders decide if this is the kind of company they want to invest in.
It’s all about cause and effect.
We make business decisions not to produce long-term shareholder value, but to create and meet market needs — which IN TURN produce shareholder value. Value in varying degrees for the short- and longer-term.
You can’t effectively manage a complex company if you’re simply trying to maximize long-term shareholder value. And I hope that there’s a large U.S. bank that’s listening.