03 December 2014

An Aside on the Corporate Purpose

Over the years I've posted several times on the purpose of corporations. Check here, here, and here to demonstrate I'm telling the truth. In short, profits are the efficient but not final cause of the existence of business firms including corporations.

Notwithstanding my insights, since around 1990 the dominant model of corporate purposefulness is shareholder value. One might think that such a model would produce great returns for shareholders. But one would be wrong.

Go here to read an article in The Economist that argues that shareholder return since 1990 were less than in the preceding 50 years. Why? Because, as James Montier suggests,
[Even though] shareholder returns haven't gone up in the era of "shareholder value". CEO pay has, though. Hard to believe but CEOs got by in the 1970s on $1m or so; their total remuneration has grown eightfold in real terms since then. The focus on the share price has led to an unhealthy concentration on meeting the short term earnings per share target; surveys have shown that executives will reject a project with a positive rate of return if it damages the ability to meet the next quarter's eps.
Thus, even on its own terms, defining corporate purpose solely in terms of profits has the effect of reducing profits. Seems there might be a moral here.

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