[helene_t]

Not sure how widespread the assertion that companies should only maximize shareholder's proftit is. I've certainly heard it from economists that I don't consider far right. The logic is that other interests groups (employees, suppliers, customers) can vote with their feet if they don't like the line of the management. The shareholders are bound to the company - they can sell their shares, but if the management don't act in their interests, share prices will reflect that.

[mike777]

http://www.econlib.o...nc/Profits.html


http://www.k-state.e...sh/E520CHP7.HTM


http://alpha.fdu.edu...five%202001.htm

Perhaps if I try and rephrase the debate: Does mazimizing the geometric mean almost certainly lead to a better outcome, then the expected value utility of its outcomes exceeds that of of any other rule, in the long run. Paul Samuelson( a guy from MIT I think but again my memory can be foggy) would say no, this is a false collollary of saying that acting to maximize the geometric mean at every step will, if the period is "sufficiently long" "almost certainly" results in higher terminal wealth and terminal utility than from any other decision rule.

As I said this is an ongoing debate but that is the classical, accepted viewpoint. I have no idea what a blogsphere or whatever is I do not read blogs except for bridge and one on science. You guys just want to attack but never with any facts, even when I make a simple claim like 50% of all americans do not pay taxes(think of children and the very old) you and show you proof, you misread the proof and think it says only 41% of all americans pay taxes or on the millions killed Cambodiaor one million killed and other horrors in Vietnam you misread the proof, I give up. God bless you all.

[hrothgar]

Mike

It might be useful to spend some time framing this debate.

I am not claiming that profit maximization / maximizing shareholder value is not an acceptable goal for management. I don't think that there is anything wrong with a company that explictly decides to pursue profit maximization as its be all / end all.

However, I think that it is a mistake to believe that all companies should be required to embrace this same philosophy. I can point to large numbers of companies that are explictly committed to social responsibility in one form or another. "The Body Shop" is probably the classic example. (Its the one that's used in the HBS case study). Whole Foods ("Whole Paycheck") and Starbucks are other well known examples of a large national chain with a similar philosophy. What is important about these companies is that the management is very open and upfront about its governing philosophy. They directly acknowledge that their company is committed to certain forms of social activism and allow potential investors to make an informed decision. I don't think that the management of these companies should be forced to abandon their principles because some economist thinks that profit maximization is "better".

Its important to recognize Economist's models are driven by utility maximization which is not necessarily the same as revenue maximization. There are a lot of people out there who are willing to sacrifice a percentage point off their expected return in order to feel better about themselves.

Here's one last important point to consider: Starbucks, Whole Foods, the Body Shop, and any number of other similar companies are publically traded entities. Lets consider the full ramifactions of perfect markets. If socially responsible operating principles lead to unacceptably low returns these companies would be vulnerable to hostile takeovers. Someone would swoop in, take the company private, eliminate the whole "social responsibility" crap, and then sell off the company at a profit. These types of things happen all the time in the business world. I don't know of any significant examples where a corporate raider started targetting "socially responsible" companies.

[pbleighton]

"you misread the proof and think it says only 41% of all americans pay taxes"

That's what the link you provided said.

As for children not paying taxes, give me a break.

Peter

[Impact]

What is often described as "return to shareholders" is actually short-term return as opposed to maximising longterm return.

Short-term return also tends to impose a conflict between management which organises bonuses/golden handshakes etc on shareprice spikes as opposed to sustainable performance.

We have seen such conflict produce "creative accountancy" (and even without the nefarious inference) there are on-going issues and debatable classifications which can make all the difference to management rewards.

There are no easy answers - but part of the solution is to have active non-executive directors who are attuned to considering the necessary conflict and making those determinations.

Obviously, there is a huge difference between privately owned corporations and those listed corporations - if for no other reason the immediate accountability of management to shareholders who are not so much represented on a Board, but actually ARE the Board.

It is a difficult position where the Board is composed largely of appointees of institutions which will have different criteria: generally not to rock the boat but as professional investors on occasion the need to sell at a profit or to claim a larger dividend to offset other factors.

Diligence by directors and concern for the true "best interests of te company" (whatever that phrase may mean) is the sole defence of the small shareholder - and too little defence it has proven to be all too often.

regards