The Dumbest Idea in the World: Maximizing Shareholder Value

Fascinating, bracing article by Steve Denning in Forbes based on Roger L. Martin’s new book, Fixing the Game:

Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” […]

The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders.

Eye-opening, common-sense argument.

★ Wednesday, 28 December 2011