Customer Reviews

The End Of Shareholder Value: Corporations At The Crossroads

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Managers currently has as their mandate the creation of shareholder value. Kennedy advocates discarding this benchmark for a new, fuzzier set of measures that addresses the needs of other stakeholders (employees, government, environment, suppliers).

This is neither necessary nor appropriate; shareholder value works - and in effect successfully considers non-shareholder stakeholders. Kennedy makes some interesting points in this book, but in the end in his quest to end the philosophy of shareholder value he is throwing the baby out with the bathwater.

Kennedy's contention is that high paid managers of our public corporations are running their companies into the ground in the pursuit of, as he repeatedly calls it, "higher share price now." They are, he claims, mortgaging their companies' futures for profits today.

Kennedy does not make a particularly strong argument for this view; his examples of current corporate abuses are weak, and he ducks issues that would contradict his claim.

The two main case studies Kennedy presents are General Electric and Cisco. Both companies, even by his reckoning, are rock solid companies. They will continue to grow, both in revenues and probability. The problem? A) their stocks are overvalued and B) it is unlikely that they will continue to grow at the same astronomical rates.

Fair enough. But this is not much of a criticism on management. Kennedy consistently fails to show that managers are acting inappropriately, or that they're actually destroying value. This book might have more appropriately been titled "the markets are out of their minds." The correction will come. In this vein Kennedy's argument is convincing.

That's not to say that I think that Cisco is a bad company, nor that the Cisco managers have acted inappropriately. Indeed, they've performed splendidly. We have every reason to believe that the company will continue its success. However it is inappropriate that the stock is currently trading at 100+ multiples.

An important principle of market theory is that the stock price is a proxy for long-term profitability. As we've seen in the Cisco case, this does not work perfectly all of the time (that is what market corrections are for). The market whips around as the speculators move in and out based on quarterly earnings and other news, but in the long run the stock price should reflect all available information about the company which impacts the company's long-term profitability.

Kennedy includes entire chapters on the destructiveness of the shareholder value movement on governments, suppliers, and employees. However, his treatment is superficial - these interests (those of the shareholders and the various stakeholders) should in the long-term be aligned. A company who abuses their employees will see their intellectual capital flee as employees leave to work for the competition. This affects the share price. A company who flaunts environmental regulations should in the least be affected adversely by customers who choose to buy from more responsible firms, and in stronger cases be sued back to the stone age. This affects the share price.

End the end companies add value to society by being profitable. The efficient market hypothesis tells us that the share price is a proxy for this long-term profitability, incorporating all available information. Kennedy never explicitly addresses this theory; this is the book's biggest blind spot.

Some of the recommendations are insightful; particularly those that deal with the composition of corporate boards and with the release of information. This is a provocative and though provoking book, but in the end Kennedy makes a weak case for throwing out the benchmark of shareholder value as the motivation which guides our corporations.

I agree with Allan Kennedy that companies would achieve much better results if they concerned themselves with providing all stakeholders (including employees, suppliers, government, and communities) with great results, not just shareholders.

Where I disagree with his book is I think his argument is flawed on how he comes to this conclusion. Basically, he outlines the major ways that stakeholders can be shortchanged (putting employees through constant downsizing, with products that don't meet customer needs, too much pressure on suppliers to provide low prices, and reneging on deals with governments) and acts as though every company does all of these things non-stop. That's certainly the exception, not the rule, in my experience.

He then places a lot of weight on the idea that because stock prices are so high now that companies cannot possibly hope to accelerate stock prices any more with the existing exploitive tools listed above. That seems like apples and oranges to me. I work with companies to help them improve stock price, and I don't know of any companies that are doing more than 20 percent of the things that could improve their stock price. I agree that stock prices may not go up a lot more for old economy companies, but the reason is that the managements don't know how to expand stock price any more, not that the stock prices could not be expanded further.

Kennedy uses GE as an example and flatly sees no future stock-price improvement for that company. That seemed like a fallacious argument to me because partially breaking the company up with new equity securities that would have a higher multiple than the parent could easily double this company's valuation in just a few months. The company's e-commerce initiatives have enormous potential for a high and large valuation, for example.

Our research with the most successful companies in expanding shareholder value shows that balanced benefits for all stakeholders is the best way to grow stock price. So even if you subscribe to the 'greed is good' school, you should share. The reason for this result is because cooperation from the other stakeholders adds value that allows the companies to grow faster and be more profitable. Kennedy missed that point, even though I have been publishing annual articles on this subject documenting this point for many years in Chief Executive Magazine and on our various Web sites.

If you want to learn more about some of the flawed and stalled thinking that has emerged in some companies that subscribe to discounted cash flow stock-price valuation methods, you have found the right book. If you want to know what will be the best practices for rewarding all stakeholders in the future, this one has some of the vision but not all of the right stuff.

This book is an exercise in fuzzy thinking. Kennedy is totally confused about what shareholder value is. He is confusing shareholders' legitimate desire to get a meaningful return on their capital (enough to compensate for the risk they assumed) with management's unscrupulous attempts to increase reported EPS over the short term. Whatever contributes to the former creates shareholder value. Whatever contributes to the later, doesn't necessary do so. The puruit of shareholder value has nothing to do with unscrupulous management. But that's not all.
He doesn't understand the mechanics of a modern capitalist economy nor does he understand the interactions among different groups in society and the fundamental principals of business valuation and corporate finance.
I should also mention his constant misinterpretation of facts: Kennedy is idealizing the 19th century entrepreneurs as men who started their businesses only for the sake of the common good. Wealth, according to him, was only a byproduct of their charitable attempts to improve society. I doubt if that was true. Being open about one's own greed was not an acceptable social behavior in 19th century. Subsequently, men of wealth tried to come up with noble excuses for their profit seeking.
Kennedy argues that maximizing shareholder value ignores employees, customers, suppliers, communities and the government. If that was true then everything we know about modern Economics must be wrong!
Let's start with employees. Do they really suffer from shareholders' attempts to maximize their own profit? If shareholders didn't care about profit, they wouldn't start the business to begin with and without the business, employees would have nowhere to work. Conclusion: profit seeking (maximizing shareholder value) creates value for workers. The alternative would be a centralized communist economy where government runs all businesses. Business ventures are not evaluated by the profits they could generate but by the amount of people they would employ (more is better).
What about governments? The purpose of government is to serve the people. Government has no other purpose. Therefore we can not say that corporate behavior harms government unless that behavior harms Society. Harm done to a government by a corporation that doesn't harm Society is no harm at all. An example would be any legal attempt to minimize taxes. It harms government because it decreases the amount of funds available to expand bureaucracy but it benefits Society because businesses can allocate capital more efficiently than governments.
What about suppliers? Are they being harmed by the "shareholder value menace"? Suppliers are also businesses with shareholders of their own. Each and every company is both a buyer and a supplier. If a company is being squeezed by its customers, it can always attempt to do the same to its suppliers.
It is true that many communities, many local and national governments, and many workers end up abused by businesses (big and small). It is also true that many businesses are being endlessly abused by militant labor unions and governments. It doesn't follow that business owners should be prevented from seeking lawful ways to increase their wealth.
Kennedy even goes as far as to argue that increasing shareholder value harms shareholders. Here logic fails him completely. The discussion of GE is an illustrative example. Although Kennedy admits that GE's cost cutting initiatives increased value for current shareholders, he claims that the inflated stock price at the end of 1999 will prevent those who buy today (1999) to realize similar gains. True. So what? No one is being forced to buy overpriced common stock. People suffer their own ignorance about corporate valuations. Do we need to hold CEOs responsible for holding their stock prices low so that anyone, who buys a share of common stock at any time, can have a decent return?
Wall Street does not hold CEOs responsible for the stock price of their companies (low or high). It does hold them responsible for the operating results. Stock prices take care of themselves.
His recommendations for change are even sillier then his criticisms. He suggests to replace the pursuit for shareholder value with...building shareholder wealth!!! If I were a Boston snob I could probably see the difference but I am not. It sounds all the same to me. Arguing about the usage of words and terms (among vs. between; many vs. a lot; shareholder value vs. shareholder wealth; etc.) is intellectual no more challenging then collecting stamps or baseball cards. If the Boston snobs think otherwise then I would let them have it their way.

Kennedy bases his assumptions on Benjamin Graham's and David Dodd's classic, SECURITY ANALYSIS, and argues that as he was writing his book, the stock indexes were as crazed as the tulip craze of the 1630s when tulip bulb values were run to more than $20,000. (See Mackay's EXTRAORDINARY DELUSIONS for an excellent early recounting of the tulip and other crazes.) Kennedy's book looks not just at the Internet stock run-up but also the P/E values of other companies, such as GE, which he argues are also over-valued based on their earnings. His picture painted is a bleak one and his question of whether the leaders of the dot-com movement such as amazon.com will ever have enough margins to boast any profits are especially prescient given the dot-com downturn that followed the publication of his book. (See Geoffrey Moore's LIVING ON THE FAULT LINE for an opposing view of shareholder value.)

In The End Of Shareholder Value: Corporations At The Crossroads, Allan Kennedy persuasively maintains that managing businesses solely to get the stock price higher is bad for workers, customers, suppliers, and ultimately bad business for the stock holders as well. While for the few who hold the stock, and the fewer still who manage the company and then cash out when the stock price is high, the style of managing for stock price benefits, will invariably result in an erosion of company value with employees and shareholder being adversely affected under a short-term management practice and perspective. The End Of Shareholder Value is "must" reading for anyone seeking to build a successful stock portfolio through buying shares in any corporation regardless of size, past performance, or managerial reputation.

I'm not an economist and I don't have an MBA, but for the most part, I found this book to be easily understood and informative. I especially enjoyed the study of the three phases of the evolution of large companies, from family-derived to the greed merchants of the 1990's. Because I "cheated" and read the last couple of chapters first, I was concerned that Mr. Kennedy appeared to have a somewhat anti-business view of how to correct things (power to the people and all that). But I have to admit that his remedies do make a great deal of sense, and that it will take some real revolutionary changes to get us out of this mess we're in.

I must say that, for the most part, big corporations (and I've worked with quite a few, as a customer, employee and supplier) do take advantage of the "other" stakeholders (employees, suppliers and customers!) and that, often, senior management is much more concerned with feathering their own personal nest than in doing the job that they're paid a lot of money to do. That's pretty frightening, because it's in the hands of these managers that the future of corporate America rests. I just hope that somehow we can get them to listen.

I'd sure like to buy about fifty copies of this book and send it to some senior managers I know (anonomously, of course!)

In The End Of Shareholder Value, Allan Kennedy persuasively maintains that managing businesses solely to get the stock price higher is bad for workers, customers, suppliers, and ultimately bad business for the stock holders as well. While for the few who hold the stock, and the fewer still who manage the company and then cash out when the stock price is high, the style of managing for stock price benefits, will invariably result in an erosion of company value with employees and shareholder being adversely affected under a short-term management practice and perspective. The End Of Shareholder Value is "must" reading for anyone seeking to build a successful stock portfolio through buying shares in any corporation regardless of size, past performance, or managerial reputation.