When Will We Stop Pretending that Shareholder Value is All that Matters?

Even back at the dawn of time, when I was in business school, there were plenty of voices arguing that "shareholder value" should be one of management's goals, but not the only one.

Up the road from the University of Chicago, Kellogg professor Gene Lavengood spoke up forcefully for "stakeholder value": the need to maximize value for all those with a stake in the corporation -- shareholders, of course, but also employees, customers, residents of the communities in which the corporation operated, etc.

Still, shareholder value was the rallying cry through the go-go years. Jack Welch, in his General Electric days, was one of the loudest voices in its favor -- although even he later repudiated it, telling the Financial Times in March 2009, "On the face of it, shareholder value is the dumbest idea in the world... Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products." (FT article here)

The banks have apparently decided that their main concern should be salary value.

"Ailing banks favor salaries over shareholders" reports today's New York Times (article by Eric Dash here).

Oh, no, you're thinking: another boring rant about overpaid bankers. Doesn't she know that banks need to pay outrageously high salaries and bonuses in order to attract and keep the best talent?

Well, no, I don't know that. Especially in the current economy, with jobs disappearing right and left -- still -- I think that there are plenty of enormously talented people out there who would work just as hard and just as smartly (maybe more so, given the mess the banks got us into) for a lot less than Wall Street seems to think essential.

But even I was surprised by how little relationship there seems to be between pay and profit (and profit, after all, is supposed to be what shareholders care about, and, remember, corporations are supposed to be all about maximizing shareholder value, right?).

If bankers are paid for profit, then explain this example from Dash's article: "In 2005... Morgan Stanley made a pretax profit of $7.4 billion. That year, compensation at the bank averaged $212,000 for each employee. Last year, Morgan Stanley made about $857 million before taxes. But compensation averaged $235,000 for each employee. In other words, Morgan Stanley employees collected roughly 61 cents out of every dollar the bank made in 2005, and about 94 cents of every dollar last year."

Sounds to me like, Heads I win, tails you lose.

Dash qoutes John Bogle, founder of mutual fund company Vanguard Group: "The investor in America sits at the bottom of the food chain... The financial industry gets paid before their clients, and we get paid whether times are good or bad."

Isn't it time to reexamine the fundamental "truths" that underlie the system: Is shareholder value really what we should care about? And, is price (or salary) really the only way to measure value?