Quote:
Welch condemns share price focus
By Francesco Guerrera in New York
Published: March 12 2009 18:13 | Last updated: March 12 2009 18:13
Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was “a dumb idea” for executives to focus so heavily on quarterly profits and share price gains.
The former General Electric chief told the Financial Times the emphasis that executives and investors had put on shareholder value, which began gaining popularity after a speech he made in 1981, was misplaced.
Mr Welch, whose record at GE encouraged other executives to replicate its consistent returns, said that managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company.
“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.”
Mr Welch spoke before Thursday’s news that GE, which he left in 2001, had lost its triple A rating from Standard & Poor’s.
His comments, made in an interview for the FT’s series on the future of capitalism, come as the economic crisis has caused a radical rethinking by many leading executives and policymakers. Alan Greenspan, former chairman of the Federal Reserve and a high priest of laisser-faire capitalism, told the FT last month that the US might have to nationalise some banks on a temporary basis to fix the financial system.
The birth of the shareholder value movement is commonly traced to a speech that Mr Welch gave at New York’s Pierre hotel in 1981, shortly after taking the helm at GE.
In the speech, titled “Growing Fast in a Slow-Growth Economy”, Mr Welch did not mention the term but outlined his beliefs in selling underperforming businesses and cutting costs to increase profits faster than global economic growth.
GE “will be the locomotive pulling the GNP, not the caboose following it”, he was quoted as saying.
Mr Welch last week said he never meant to suggest boosting a company’s share price should be the main goal of executives.
“It is a dumb idea,” he said. “The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees”.
|
FT.com / Companies / Industrials - Welch condemns share price focus
this appeared in the main paper this morning--i think it's linked to the future of capitalism page as well, but in case it's not, i've pasted it here.
this is interesting for several reasons:
first it amounts to a wholesale rejection of one of the basic tenants of milton friedman's view of what a corporation does. so it cuts to the heart of one of the central ways of thinking and acting that's come to characterize neoliberalism. thing is that neoliberalism was both a general ideology--a set of basic assumptions about markets and so forth---and a set of particular understandings within these general views concerning priorities (defining variables, setting up relations between them and providing weights that enable these relations to function dynamically are all aspects of ideology---and if you think about it, the translation for static relations to assumptions that can function dynamically is central, without that, an ideology is just a bunch of sentences on paper).
so in this case, what's being thrown out the window is the exclusive orientation of shareholder returns as *the* guage of corporate performance. not only is it being thrown out the window, but on the way out it's labelled insane, not a strategy.
what's this cut to?
it's a rejection of the notion that a firm can be understood through it's stock alone---on the basis of its quarterly balance sheets alone---which is in turn a rejection of one of the main illusions that neoliberalism generated, which is that capital is autonomous and that wealth is generated by the circulation of capital. this runs in two directions: first toward a reinsertion of the social functions and responsiblities associated with value creation, which is now relinked to what a firm does in the world--what it produces. secondly, it links to a the obvious argument that in order to be successful, firms have to be able to think in longer term ways about what they're doing. neoliberal assumptions opened onto the shortest of short term thinking, making strategy very difficult except insofar as it was maximizing shareholder returns.
this thinking has ben fundamental to the modes of operation in the financial sector and thinking about it goes a long way toward explaining how it was possible for i-banks and others to get to tightly involved with derivatives.
i think welch is correct in characterizing this viewpoint on capitalist firms--and capitalism more generally--as insane.
but think about how deeply this cuts into the socio-economic ideology that's been dominant in the united states since the reagan period. think about who's talking in this article, what his role was in the legitimation of this nutty ideology. and then you start to get an idea of just how far and how fast the crumbling is moving.
what do you make of this?