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Real Growth and Real Shareholder Value

February 1, 2013 3 minute Read by John Prestbo

Government laws and policies aren’t the only things that need changing if U.S. economic growth is to be accelerated to 4% annually. The way many U.S. companies pay their managers can use some adjustment, too. According to Jeff Ubben, CEO of ValueAct Capital, an investment fund, “corporate America has become far too cautious when it comes to growth.” In part, this trend is a reaction to swashbuckling risk-taking that prevailed a decade or so ago. “At the turn of the century, speculators were hyperventilating in favor of absolute growth, and company managements and boards fell into line,” Ubben wrote recently in The Wall Street Journal. “This ‘new economy’ era saw a tremendous misallocation of resources as firms built paper empires, not sustainable value.” Ubben’s antidote is to change management incentives. Their bonuses and stock options ought to depend on achieving long-term growth goals above a specified hurdle, he advocates. While he acknowledges the criticism that stock-option awards contribute to myopic focus on short-term stock-price moves, Ubben believes that “if hurdles are set high enough and required holding periods are long enough, CEOs won't be rewarded for temporary stock-price increases. They will ‘own’ the long-term outcome of risky investments.” A related line of thinking shows up in a book published earlier this year entitled, “The Shareholder Value Myth.” The author, Lynn A. Stout, a Cornell University law professor, makes a case that the widely cited corporate management goal of “increasing shareholder value” — as measured by the stock price — is myth because: (1) it is not required by law; (2) it doesn’t square with how companies really are structured and operate; and (3) companies that declare they pursue this goal don’t perform any better than others. Stout notes that public companies’ shareholders are a diverse lot with varying and often-conflicting interests. Using the stock price as the sole measure of “value” plays into the hands only of the most speculative and short-term investors at the cost of holders with longer-term interests. “Stock options and other compensation schemes that tie executive or director pay primarily to share price undermine corporate managers’ motivation to pursue more authentic visions of shareholder value,” she writes. This is heavy-duty stuff, admittedly, but it’s important. Achieving and sustaining 4% growth requires our companies to be run by managers who have the proper incentives to plan and execute for the long term. You can’t write your congressman about this issue, but you can enlighten any corporate directors you know.


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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