This is a fascinating article on how the business of business is no longer about the product or the customer, but the share price and, often, nothing but the share price.

In today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called “the dumbest idea in the world”, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.
[…]
“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

In fact, a CEO has little choice but to pay careful attention to the expectations market, because if the stock price falls markedly, the application of accounting rules (regulation FASB 142) classify it as a “goodwill impairment”. Auditors may then force the write-down of real assets based on the company’s share price in the expectations market. As a result, executives must concern themselves with managing expectations if they want to avoid write-downs of their capital.



  1. So what says:

    OK, who’s been living under a rock for so long, that this is a surprise?

  2. moss says:

    The topic is interesting. FORBES is rarely.

  3. Dallas says:

    There’s always been enormous pressure on CEO’s to deliver shareholder value – most of it short term.

    Unfortunately this leads to poor decisions, short term thinking and forgetting what’s best for the company to be successful. This is classic TeaPublican mind set.

    Compare this to Apple, led to greatness by a liberal icon and master strategists.

    • msbpodcast says:

      I may buy Apple products because they are great quality*, but I would never have called Jobs a liberal icon or a master strategist.

      Jobs was in the mould of a tyrant, but he commanded great loyalty because he kept trying to make great products. In the past he would have been a robber baron.

      He failed more often than he succeeded, but when he did, those were great successes and could carry the failures…

      Jobs was not a nice man, but he could sway people.

      *) On my desktop right now is a vintage 2002 titanium PowerBook G4 which is still working and serving up music all over the house. How many PC have I thrown away one after the other over the same time period? 4. That’s the difference between buying cheap disposable junk and an Apple product.

      • Luc says:

        I have two PCs, one I bought in 2003, the other in 2006. Both working fine and dandy, no upgrades except larger hard disks. Apple schmapple.

  4. Skeptic: Post # ≥1 says:

    Damned if you do and damned if you don’t. Time for a complete country shutdown and restart in safe mode.

    BTW, Happy New Year to all US citizens from Canada. I’d shake your hand too, but I have oil sand all over them.

    • What? says:

      Why does Canadia send more oil to the US than She anually uses?

      • Skeptic: Post # ≥1 says:

        Why do you say that? You will eventually use everything we sell…. and then you’ll want more and there won’t be any more, so we’ll use the giant gaping black hole for a garbage dump, and you’ll pay us to take all your garbages away (only compostable items like dead people, animals, garden waste, old tar shingles etc please). Then in 100 million years we can sell you oil again, only this time it will be sustainable… we’ll only siphon off the bottom what we can add to the top.

        A Canadian plan for the future, eh? We call this Carboniferous Period 2.

        • What? says:

          A Canadian told me the reason Canadia sells the majority of its annual production to the US is because its political leaders are in the pocket of Big US Oil and US Politics.

          How’s that working out for you again?

          • Skeptic: Post # ≥1 says:

            It’s working out fine, thank you. We’re not giving it away you know.

      • So what says:

        Lubrication.

  5. What? says:

    Great article.

    Unfortunately, the toilet has already started flushing, and idiot CEOs are happily swirling around the bowl unaware they are about to slide down the drain.

  6. #17--bobbo, the pragmatic existential evangelical anti-theist says:

    As usual, I can’t follow the ins and outs of big business. I thought share price aka shareholder value was nominally related to profitability? ie–market price somewhat tied to market performance? The “feel” of this issue though is that the price can be elevated above the performance? I don’t get it.

    You gotta dumb this WAY down for me – or skip me if everyone has this crystal clear in their mind.

    Shareholders certainly have a valid interest in seeing companies do well. Does Society? Workers? ==== I’ve posted this before, so apologies to anyone that has refused to answer this before, there would be much value all around the block to pay/compensate top management only as some multiple of what the employees are paid. Lots of benefits to this==no downside. You think people are going to stop putting their heart and soul into being “THE CEO” just because they are only paid 10 Million per year?

    BIG LIE #4–even capitalist pigs are maximally motivated by money. TRUTH: after “enough” everything is a free ride. Take it if it is offered, but no one really needs or cares about it, not past the saying they do. Its WINNING!!!!!!! that matters.

    Silly Hoomans.

    • So what says:

      Here it is as simple as can be said. If I as the CEO get paid 10 million but I quietly rape the company in such a way as to make it appear that it is way more profitable then its reality. I can get a job for another company for 20 million. The best part is that when company A tanks they blame it on the current CEO. Simply put in five words, people lie, people are greedy.

      • What? says:

        You forgot to mention that CEOs can be punished for not hitting the projection exactly (+\- a few pennies per share) because that shows they are unable to control their business with precision.

        Of course that kind of precision is impossible to achieve unless you’re lying or your customer is the US Government.

  7. Schleprock says:

    If the CEO of my company (14mil/yr) gets fired for incompetence, the idea that he only made 280 times the average salary of a 20 year employee performing the critical functions of the business will make me feel better. Then, he’ll get hired by another large corporation with whom he has a friend on the board of directors.

  8. What? says:

    We didn’t learn anything from the Dot Con bubble.

    If a company goes public, then it must have no plan for the future, and is trying to cash out before it even has the chance to grow organically or experience total collapse.

    If I had a great sustainable business, why would I give it up to public ownership, and hassel of dealing with stockholders who no knownothing about running a business?

  9. spsffan says:

    This should not be a surprise to anyone who with above average intelligence, including those making the money.

    It has been a big pyramid scheme for decades now. Heck, one look at how the stock market goes up $200 one day, down $230 the next, then up, up, down, etc. Wild fluctuations based on whether Merkel has spinach in her teeth or some arab spits on the sidewalk, or any other number of silly reasons that are given in the press.

    “Quality of Product is essential for continuing success.” An old Lucky Strike slogan from the 1940s. Can you imagine a company using that today???????

    • ubiquitous talking head says:

      Stock prices going up and down day by day? You’re behind the times. (To quote several other people on here.)

      The big big big money is in buying and selling on the scale of microseconds. I read a story the other day (don’t remember where sorry) that said that if the computing power used by wall street continues to grow at its current pace that in the very near future it will be the largest consumer of energy in the world.

      Buying and selling… are becoming obscenities.

  10. McCullough says:

    I agree, I once had a client, a day trader who averaged $35,000.00 in profit every day, yet he held nothing at the end of the day.

    He cared nothing about the products of his “companies”, only about the numbers. he was just a skimmer. Something of a parasite, really.

    Sounds like a BS story, I know…but I assure you it is not.

    • WmDE says:

      Your client bought something with his own money and sold it for a profit. Sounds okay to me.

      The parasite is the holder of stock demanding “increasing share value” or else.

      “I made my money by selling too soon.” Bernard Baruch

      Bernard also said “During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.”

  11. orchidcup says:

    High-speed computer trading has already triggered more than one market meltdown.

    It is a matter of time before automatic trades trigger a massive meltdown.

  12. Uncle Dave says:

    I wonder how many stock brokers, bankers, etc know the Ferengi Rules of Acquisition by heart.

    http://sjtrek.com/trek/rules/

  13. Glenn E. says:

    Anyone else notice that Mr. Martin started referring to less prudent CEOs as “she” and “her”? What? Guys didn’t invent all this “expectation market” thinking? Some gals lead us to it? I don’t think so. I think Mr. Martin has a thing against having female bosses. Cause he subconsciously blames them for all the screw ups in big business. Or he just wants us not to trust female CEOs. Keep your money out of those female run companies. Yeah, that’ll influence the stock prices.

  14. Dr Spearmint Fur says:

    Chatted with an MBA I work with the other day. He thought any project or initiative focused on customer satisfaction was a waste of time since the investors wouldn’t see a direct benefit.

    I asked where he learned that. He said MBA school, of course.

    Actually it wasn’t even a discussion. It was like talking to someone with a deeply held religious belief.


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