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By Luke Johnson

It seems every profession has a small circle of characters who basically commands things. In most industries, you can fit them round a table. After all, in mature economies most markets are dominated by a handful of operators – if you assemble the owners, founders and heads of those companies, it would often be fewer than 20 people.

In the final instalment of our debate between Colin Mayer and Henry Mintzberg on shareholder value – is it, as Jack Welch recently suggested, a “dumb idea”? – Prof Mintzberg responds:

I share Colin Mayer’s concerns, but not how he believes they should be addressed. Yes, we have issues that have yet to be dealt with by the public and private sectors. And yes, we need to open up our institutional designs. But Prof Mayer’s proposals are too narrow for me. These are all rooted in ownership of one kind or another, in “the context of the modern corporation”.

Beside the public sector, which cannot be dismissed (is not Oxford University a state institution?), there is a third sector, which gets ignored – in good part because of this very label for it. I prefer to call it the “social sector,” and see it as one of three legs of the stool on which a balanced society has to sit.

The social sector comprises organisations that are either cooperatively owned (Prof Mayer does mention mutual organisations, but seems to see them in the context of the corporation – I don’t), or else they are non-owned. Examples of the latter are Greenpeace (to use ones from the environment) and perhaps the hospitals that are being shifted to trust status in England (to use one from healthcare).

At their limits, governments can be crude and markets can be crass. (Downsizing, for example, often amounts to an effort to maintain shareholder’s earnings at the expense of workers’ livelihoods. By the way, I have never met a “poor investor”.) One or other may be fine for certain activities (raising taxes, trading cotton), but not for many others. Indeed, the very policy issues Prof Mayer cites – environment, health care, and poverty – are precisely where the social sector is the most useful. I don’t want my healthcare delivered by a business, no matter how “modern”, any more than by a government. I appreciate funding by the latter, for the sake of equality, and often supplying by the former, for the sake of efficiency. I just prefer that my healthcare be delivered by the social sector, for the sake of quality. Indeed, it is no coincidence that the vast majority of hospitals in the United States are non-owned.

And since we are opening up the variety of organization, let’s also open up their internal workings. Dean Mayer wants to “re-establish confidence in those who are charged with leading and running our organizations.” Fair enough, but nor far enough. In fact, I think leadership is now the problem: too much of it is narcissistic, and we are overly obsessed with this one element of organizing. As I have earlier (FT, October 23, 2006), we desperately need more “communityship” in all our organisations, especially in the private sector.

So, using Prof Mayer’s own phrases, there is in fact a great deal to stop the modern corporation, with any structure, new or old, from dealing with many of our greatest concerns. And shareholder value will never be aligned with the wide range of true human values in any decent society, because there is a great deal more to us as human beings than ownership.

So: one cheer for the private sector. Another cheer for the public sector. And finally, one clear cheer – but please, a little louder – for the social sector.

Colin Mayer responds to Henry Mintzberg in our online discussion of shareholder value

The environment, healthcare and poverty are some of the main policy issues of the 21st century. Neither the public nor the private sector have to date been adequate to the task. The failure of financial institutions and the subsequent revelations of executive pay have seriously undermined public trust in financial institutions and corporations. What is required is a new approach that will re-establish confidence in those who are charged with leading and running our major organisations.

Institutional design will be critical to this. One of the lessons of history is the rich variety of forms that corporate structures have taken at different times. Anglo-American capitalism has been quite different from that in continental Europe and the Far East. In large part this is attributable to differences in the ownership of corporations. The emphasis placed on employees, on communities and on customers relative to individual investors varies depending on the ownership and control structure of firms.

I will give two illustrations. Japanese corporations in the period after the Second World War placed much less emphasis on dividend payments to shareholders than UK and US corporations, primarily because of their different forms of ownership. The rights of employees in German corporations in postwar Germany have been much greater than those in UK firms. All of these are shareholder-driven corporations in which shareholder value is the ultimate controlling factor but where the interests of owners differ from those in Anglo-American corporations.

None of these structures has adequately addressed current social challenges. They require still different ownership and control structures that place greater control in the hands of young than old generations, and on poor rather than rich investors. There is nothing to stop the emergence of such new structures within the context of the modern corporation through imaginative share and board arrangements. The rise of the mutual organisations was an illustration of the way in which the 19th century coped with its problems of, for example, providing local communities with access to insurance and housing markets.

It is vital that these institutional innovations occur so that shareholder value can once again be realigned with the values of the societies within which they operate. The problem is not the pursuit of shareholder value but which shareholders are being valued. With the right ones, shareholder value is a powerful way of realising social rather than self-interested goals.

Henry Mintzberg responds to Colin Mayer, in an exchange of views for this blog on whether shareholder value is a “dumb idea”.

Henry Mintzberg: On the face of it, this will not be much of a debate. Who’s to argue with shareholder value seen as 300 years of capitalism (let alone contemplating 800 years of Oxford, which back then meant cattle crossing)? On the other hand, what we see on the face of shareholder value is not what lies beneath it. There have been some developments in capitalism over the centuries, and especially the last few years, as you may have noticed. In fact, on its way to the market, capitalism has actually metamorphosed into shareholder value – a very peculiar interpretation of it – and economies around the world are now collapsing as a consequence.

Jack Welch is a good place for me to start, too. In his Business Week clarification of his “dumb idea” comment in the FT, he remarked that if companies can just get their long- and short-term acts together, then alongside shareholders, “you’ll see everyone win. Employees will benefit from job security and better rewards. Customers will benefit from better products or services. Communities will benefit because successful companies and their employees give back.” Win-win promises in the face of a win-lose reality.

In 1997, this same Jack Welch signed, and reportedly championed, a Statement on Corporate Governance by the Business Roundtable (made up of CEOs of Americans most prominent corporations). It concluded that “the paramount duty of management and of boards is to the corporation’s stockholders”, dismissing “the notion that the board must somehow balance” the interest of various constituencies as “fundamentally misconstrue[ing]” its role. Indeed, this was referred to as “an unworkable notion because it would leave the board with no criterion for resolving conflicts” among the different interests.

How about judgment? It is quite remarkable that by their own account, the “leaders” of the American corporate world had by 1997 lost their capacity for judgment. So shareholder value was convenient: capitalism without judgment. And this sheds light on why the focus on short-term performance (let alone directly on the current crisis itself).

Shareholder “value” is not about any basic human values; it is about maximising the material wealth of the people who own shares in a corporation, that’s all, and everyone else be damned – the workers, the communities, the environment, etc. And that maximisation requires measurement. Let the numbers do the talking (and the judging).

But how to measure performance in the long run? After all, did not so many of those AIG and banking executives perform fine not very long ago, at last according to the numbers? So the long-run was dismissed too, as shareholder value reduced to driving up the price of a company’s stock as quickly as possible. Three hundred years of capitalism, and now this.

Employee burnout, environmental degradation, even the sustainability of the corporation itself, let alone basic human decency, cannot be so readily measured, nor quite so easily attributed to their source. As a result, their negative consequences have been handed off to the rest of society as “externalities”, to use that convenient term provided by economists. We are now loaded with externalities. In effect, an unholy alliance of economic dogma with financial greed has taken hold of society, and it is destroying us.

How are we to get out of this mess? First, we are told we must get straight back to consumption. The trouble is that this time we may be consuming ourselves. Second, we are told that we have to “renew” capitalism. I thought capitalism was a way to raise money for business activities, not the be-all and end-all of human existence. How about renewing society, judgment, democracy, decency?

Lord Keynes famously claimed that in the long run, we are all dead. He was being a good economist, referring to individuals, not communities or societies. Thanks to shareholder value, among other nonsense, the good Lord may soon prove to have been more correct than he ever imagined.

Henry Mintzberg ( is Cleghorn Professor of Management Studies at McGill University in Montreal, and a founding partner of

A few days ago Jack Welch, a former chief executive of General Electric, told the FT: “On the face of it, shareholder value is the dumbest idea in the world.”

Although Mr Welch later elaborated on his views, saying “shareholder value is an outcome, not a strategy…I’ve always felt that way”, the remark triggered a flurry of discussion and debate – in the blogosphere and on the Letters page of the FT.

So what’s the bottom line? The FT’s management blog has invited Colin Mayer, dean of the Said business school at the university of Oxford, and Henry Mintzberg, Cleghorn professor of management studies at McGill university, Montreal, to discuss whether shareholder value is discredited.

Opening the discussion is Colin Mayer; Henry Mintzberg will respond later this week. You can post a comment on their conversation below.


Colin Mayer: If, as Jack Welch has stated, shareholder value is “the dumbest idea in the world”, it is a dumb idea with a remarkably long, approximately 300-year, history. If only we had some bright ideas with such durability, the world would be a better place. Coming from the oldest English-speaking University with an 800-year history, I believe that longevity reveals something about the merits of governance arrangements, even if they appear puzzling to the modern eye.

Shareholder interests are currently under threat and will inevitably be reined in by strengthened regulation. Virtually every financial crisis since the South Sea Bubble (1720) has been marked by governments and regulators acting in haste and repenting at leisure. The risks are now of excessive not under-regulation and, despite its apparent failings, shareholder value should continue to play an important role going forward. Why?

One answer is that its significance is overstated. Shareholders are a dispersed group of generally uncoordinated individuals and institutions who face substantial costs in trying to intervene in corporate affairs. Corporate law deliberately limits their power to do so and where there are disputes between shareholders and directors then courts of law in general find in favour of the judgment of directors. The prevailing view is that far from there being too much shareholder interference in the running of companies, there is too little, and shareholders should be more not less actively involved in corporate governance.

Nevertheless, directors do have a fiduciary duty of loyalty and care to their shareholders. In the case of the UK and US, shareholdings are dispersed among a large number of investors whose interests are focused on financial returns. To the extent that share prices reflect future earnings then they are interested in long as well as short-run performance. But if share prices are inaccurate, fail to reflect future benefits or are subject to manipulation then the value that they place on the future is distorted.

Companies can do something about this. In many countries, ownership is much more concentrated in the hands of a small number of investors, in particular in families. These have interests in factors beyond pure financial performance, for example in the family name, their status in their local communities, and their ability to transfer the business to future generations. This has costs as well as benefits but it does mean that their time horizons and breadth of interests are generally greater than those of UK and US firms.

The main argument for the corporation is its remarkable flexibility in balancing the interests of different parties and emphasizing both non-financial as well as financial interests. In the UK and the US we have chosen a version that places particular emphasis on financial performance. But it need not, and in future is unlikely, to be so as we move away from the dispersed share structures that have created it. Far from being on its last legs, shareholder value will undergo further mutations which will reinforce rather than undermine its significance. It is a dumb idea with a great future and a distinguished past.

About the authors

Stefan Stern writes a column on Tuesdays on management. He is winner of the 2010 Towers Watson award for excellence in HR journalism, and has previously won awards from the Work Foundation and the Management Consultancies Association.

Ravi Mattu is the editor of Business Life, the FT's management features section, and a former editor of the Mastering Management series. He joined the FT in 2000 from Prospect magazine

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