WELCH’S MARVELOUS TRANSFORMATION

Shareholder value is a dumb idea. One made rich through this idea sees its inanity

By Mario Muller

[This article published in: Frankfurter Rundschau 3/15/2009 is translated from the German on the World Wide Web, www.fr-online.de/. Mario Muller is a free author in Germany.]

It is like the pope doubting the Immaculate Conception or Ursula von der Leyen admitting she cannot stand children. Jack Webb, once described as the “toughest manager of the world” because of his unscrupulous methods, sees pure profit maximization benefiting shareholders as a wrong way. More exactly, “shareholder value is the dumbest idea of the world,” the former CEO of General Electric (GE) told the Financial Times.

The discovery comes a little late. The nonsense by which Welch and his many admirers oriented themselves for decades has done incalculable damage. Nearly all the excesses summarized under the terms turbo- or casino-capitalism are based on the ideology of shareholder value: the rule of financial markets over the real economy, the short-term- and short-sightedness of shareholders, the excessive salaries of managers, the waves of rationalizations in the factories, the enormously different incomes, the merger mania or fusionitis and the plague of locusts. The basic cause of the world economy’s present depression can be found in the disastrous mixture of these phenomena.

Welch does not understand all the excitement triggered by his remark. He always said shareholder value was a result, not a strategy, the pensioner explains on his Internet page. His disciples obviously cannot make such fine differentiations. They saw how Welch gave the boot to a hundred thousand GE employees, forced up the stock price of the company and amassed gigantic private assets. They made the result into a strategy and could count on the active support of academics and politicians. They justified shareholder value as the motor for general prosperity, expanded shareholder rights and liberalized the financial markets.

From the start, marked or counterfeit cards were played. According to the ideas of its prophets first formulated in the 1980s, shareholder value should force lame managers to make businesses “more valuable” in the interest of shareholders. The stock price was the only standard. This approach is extremely dubious. Firstly, it starts from the false assumption that capital markets are always efficient and always reflect the “true” value of a firm. Secondly, it rests on the belief that managers with monetary incentives would agree with shareholders. Executives design compensation models where they earn golden parachutes when businesses post losses.

The ideology only sees the shareholder as a legitimate claimant. However the efficiency of the enterprise depends on other “participants” like employees, customers, suppliers and public institutions. These “stakeholders” and not only the shareholders invest in a firm and take necessary risks.

Escaping old ideas is harder than finding new ideas, John Maynard Keynes recognized 70 years ago. Unfortunately the dumbest ideas seem to have the longest shelf life.

RELATED LINKS:

“Capitalism Hits the Fan” by Richard Wolff:
www.capitalismhitsthefan.com

“Disarm the Markets!” Attac Basis Text:
portland.indymedia.org/en/2009/04/390375.shtml

“Attac Catalogue on Democratizing the Financial Markets”:
portland.indymedia.org/en/2009/05/391310.shtml

“The Foxes Guard the Henhouse” by Susan George:
portland.indymedia.org/en/2009/04/390766.shtml

“Shareholder Value” by Isabelle Pivert:
portland.indymedia.org/en/2009/05/391130.shtml

“The New Economy and its Illusions”:by Fredmund Malik:
portland.indymedia.org/en/2002/09/21910.shtml

“The Vacuum of World Trade Breaks Down” by Elmar Altvater:
portland.indymedia.org/en/2009/04/390960.shtml

“From Bubbles to Living Economies” by Jakob von Uexkull:
www.worldfuturecouncil.org/fileadmin/user_upload/PDF/From_Bubbles_to_Living_Economies_JvUexkullApril_2009.pdf