After Retirement Business Ideas In India – The idea that maximizing shareholder value takes legal and practical priority above all else became popular in the 1970s. The person who did most to advance this idea was business school professor Michael Jensen, who wrote in the Harvard Business Review and elsewhere that CEOs pursue their own interests at the expense of shareholders. Among other things, he discussed stock-based incentives that would cleanly align CEO and shareholder interests.
Shareholder supremacy quickly became corporate fraud. It has greatly changed the way and how much directors are compensated. And it arguably distorted capitalism for a generation or so. Critics have long charged that maximizing shareholder value ultimately encourages CEOs and shareholders to line their own nests at the expense of everything else: jobs, wages and benefits, society and the environment.
After Retirement Business Ideas In India
The past few years have seen a backlash against shareholder capitalism and the rise of so-called shareholder capitalism. After half a century in power, is increasing shareholder value on the way out?
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. Each week, the editor talks to world-class educators and experts about the most influential ideas of the first 100 years, such as disruptive innovation, scientific management, and emotional intelligence.
. The debate over how much control should be given to shareholders has been around for a long time. The first firm with publicly traded shares, the Dutch East India Company in the 17th century, quickly fielded complaints from angry stockholders who thought the company was hostile to their interests. And in the centuries that followed, managers and owners would clash endlessly over matters of ownership and control.
Until the 1970s, that is, when the idea of being a shareholder is at the forefront the idea that increasing shareholder value takes a more legitimate and effective place than anything else has emerged. The person who did the main thing to advance this idea was Michael Jensen, a professor at the University of Rochester Business School and later, a professor at the Harvard Business School and a colleague who wrote in the Harvard Business Review and elsewhere, discussed them, among others. things, stock-based incentives that can neatly align CEO and shareholder interests, maximizing shareholder value has been the mantra of every Fortune 500 CEO, achieve it or risk being sidelined.
Critics have long charged that increasing shareholder value ultimately encourages CEOs and shareholders to line their own nests at the expense of everything else, jobs, wages and benefits, society, and the environment. Now the last few years have seen a backlash against shareholder capitalism and the rise of so-called shareholder capitalism.
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. Each week, for four weeks, we’ll be talking to educators and experts about the most influential ideas of the first 100 years. This week, it’s the share price. Joining me to discuss this issue are Lynn Paine and Mihir Desai, professors at Harvard Business School, and Carola Frydman, a corporate historian at Northwestern University’s Kellogg School of Management. I’m Adi Ignatius, editor-in-chief of the Harvard Business Review, and your host for this episode.
Carola, let me start with you, you are a historian. Let’s say 100 years ago, this was the founding period, you had a boom in business. There were many businesses, many managers. There were many shareholders. What kind of dynamic was then taking place between the firm’s shareholders and its managers?
CAROLA FRYDMAN: Well, let me take us back a little bit to set the stage. So, if you were to go back to the 1850s, in the US economy, you would find that every town here had factories that produced almost everything, and the owner and manager of these factories were the same. So, what changes, setting the stage to the 1920s is that the economy is growing, and the firms are getting much bigger. The rise of the railroad is a big change. And these big companies need a lot of money. So, one person cannot provide all the funding these companies need, and so we are starting to see more shareholders starting to fund these companies. Thus, the structure of firms is changing from having one owner and manager, to having multiple owners and having professional managers.
So, what is emerging is what we can call the separation of ownership and control. That those who own the firms that will receive the cash flow are no longer the same people who make the day-to-day decisions in those firms. And that’s what happened in the 1920s. We are seeing a huge rise in the stock market, nothing like what we are seeing today. So, I would say that in the late 1920s, maybe about 15% of households had one share or more. They really have limited rights, and they have limited knowledge about what the firms are doing. So, we started to see disagreements between shareholders and managers emerge. All of this set the stage for things to happen later in the middle of the 20th century.
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ADI IGNATIUS: Lynn, what were the interests of the companies at that time? Was there at that time a philosophy on how to prioritize these important things?
LYNN PAINE: Well, you know, it’s very interesting to listen to Carola talk about the history of the rise of a large corporation. As early as the 1920s, there was a growing debate about who the organization should serve. There was real concern about the power of this large concentration of capital.
That appeared in print in the early 1930s in a famous debate between Columbia Professor Adolf Berle and Harvard Law School Professor Merrick Dodd. Berle argued that managers are what he called shareholders’ advocates. Dodd took the position that, no, managers are fiduciaries, and they are trustees of the corporate body, and they are responsible for many constituencies. We didn’t have the name of the participants back (laughs) then, of course. He called them constituencies, customers, employees, shareholders, of course, and the general public.
, where he said, the argument was settled in Professor Dodd’s favor. That is, managers were institutional trustees with many responsibilities. But an interesting caveat, he says the debate is settled, “for now.” And it wasn’t long before that debate was reopened.
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ADI IGNATIUS: It’s really interesting. So, Mihir, you know, as business grows when stock ownership spreads widely among individuals and corporations, you know, what happens to the concept of ownership of shares and the understanding of what power and authority it gives to shareholders?
MIHIR DESAI: Well, I think just as Carola and Lynn point out, you know, that distributed ownership has these great benefits. Make a scale, as Carola suggested. It also allows for a lot of risk sharing, because you no longer own your firm and are under pressure from the firm, you have multiple stakes. But the main issue is the one identified by Carola, which is the separation of ownership and control. And it is indeed a serious problem, and it deserves to be emphasized here.
That is, the debate is now about the extent to which the problem should be resolved. And by the collective action problem, I mean, “Well, now we have separate owners. Who’s going to look at the management?” And that’s the beginning of it all, there is, what we would call the problem of corporate governance today. That is, how do I make sure that the people I’ve appointed to do the job will do the job correctly?
And that kind of really shows up, especially in the ’50s and ’60s, you know, as Lynn suggested, maybe it settled down, for some. The nature of economic activity began to change and we saw the rise of conglomerates. One of the responses to the separation of ownership and control and the decentralization of ownership is, to some extent, an increase in administrative power.
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And that is evident in these large institutions, which are truly remarkable by today’s standards. You know, we have forgotten about them, but things like ITT, and the Gulf and the West, which used the distribution of ownership to create small empires. ITT would like to start with a telecommunications base, but then branch out into Wonder Bread, and rental cars, and hotels. It’s all because the bottom line is that these managers knew what they were doing, and they were able to control the general capital of their shareholders, and their shareholders were spread out enough, that they really couldn’t stop them. So, that sets the stage for the response of people who are worried that shareholders are not being served.
ADI IGNATIUS: Well, I want to get to that answer in a second. But Carola, if I could take you back. You know, there is this sense, this idea, maybe, the idea that companies exist, [that] they were more successful than they would be later. Companies used to be company towns, and people think about stakeholders, too, as Lynn said without actually using that.
