The Myth of Shareholder Value
Business Week interviews Harvard Business School’s Clayton Christensen about his Innovator’s Dilemma and the future of Apple Computer. The money shot has nothing to do with Innovation or Apple. Christensen’s last comment is the take away:
“I’ve been thinking about this a lot — about whether managers ought even to think about what Wall Street says. In the 1960s, the average investor held shares for over six years. In that world, it made sense to frame the job of the manager as maximizing shareholder value. But today, 10% of all shares are owned by hedge funds, and do you know what their average holding period is? It’s just 60 days! And another 85% of the equities are owned by mutual funds and pension funds, and the average tenure there is 10 months.
Their time horizon is shorter than even that of even the shortest-term managers. So I don’t think it’s right to think of [these investors] as shareholders of your company. They’re investors who temporarily own securities in your company at a particular point in time. They’re responsible for maximizing the stock value of their investments. You as the CEO are responsible for maximizing the long-term health of your company. “
If CEOs should no longer align themselves with these short term shareholders who drive the stock price, how do you give them the right incentives to maximize long-term health? If the board, to whom the CEO reports, represents the shareholders, and their best measure of shareholder satisfaction (aside from getting voted out) is stock price, how do they measure whether a CEO is maximizing long-term health?
Christensen is on to something and he opens the door to a bevy of questions that could drastically change the foundation of corporate structure.