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The Origin Of 'The World's Dumbest Idea': Milton Friedman


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While this is over the top and sensationalist, I agree with their basic premise. Markets are only looking for very short term returns, and don't grasp the fact that the company's assets do not belong to shareholders, but to the firm itself. Especially when it comes to firms that are sitting on a lot of cash.

 

 

The Origin Of 'The World's Dumbest Idea': Milton Friedman

http://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/

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The company's assets belong to the company which belongs to the shareholders.  That's like saying your marital assets don't belong to you nor your wife, only to the organization of your marriage.  This has got to be one of the worlds dumbest articles.  The owners don't own it, the management doesn't own it, the board of directors doesn't own it, the fictional "organization" does?  Huh?  And he goes around calling others stupid.

 

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So the corporation owns the assets, and shareholders own the corporation, but shareholder's don't own the assets?

 

Not sure how I follow that logic. If I own 100% of a company (and for simplicity let's assume no debt covenants), can't I go sell the company's assets if I want?

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He says in the article that management does not work for the shareholders.  If the shareholders own the corporation then management does work for the shareholders.  I know there is a legal fiction called a corporation, but it is a fiction, there is no consciousness that can make decisions there are only people.  If I tell you that you work for a unicorn that I own, but you do not work for me, it doesn't make it so.  Something needs to actually exist in reality to make a decision about what to do with assets.

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But that's the point. the corporation as an entity is totally separate from the shareholder body. The shareholder base only has the right to elect the directors and possibly management of the firm, but should have zero direct say on how the management utilizes those assets. Best example is when firms sit on cash or use it to run projects that shareholders don't like. I think they have that right.

 

The corporation is hardly legal fiction.

 

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He says in the article that management does not work for the shareholders.  If the shareholders own the corporation then management does work for the shareholders.  I know there is a legal fiction called a corporation, but it is a fiction, there is no consciousness that can make decisions there are only people.  If I tell you that you work for a unicorn that I own, but you do not work for me, it doesn't make it so.  Something needs to actually exist in reality to make a decision about what to do with assets.

 

Actually, the board works for the shareholders, but the management works for the company.  You as a shareholder cannot go hire the management, but you can vote and set the board.  At the same time, management's compensation often is decided by shareholder's when you have a vote on compensation, so in certain respects, shareholders have some control over management.

 

I think clearly the author doesn't like Friedman.  While the assets belong to the corporate entity, cumulatively with their share ownership, the shareholders can decide how the assets are utilized.  That may not always be the correct path for the company, but ultimately they control what happens.  Cheers!

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It's not a dumb article, although the writer uses hyperbole. If you measure "ownership" by distribution of wealth as an indicator of effective control then you can see where he is coming from. The principal-agent problem shows the limits of law-based ownership. Agents can divert wealth if, for example, equipped with an information advantage and facing a diffusely incentivised shareholder base. Or there might be situations, like in some buyouts, where shareholders can't trust each other, so you have the potential for intermediaries to control assets. Or there could be a union with major political clout, or a shareholder with special voting rights.

 

Martin Whitman controlled for this absence of control by valuing companies from the perspective of an outside passive minority investor. It's a good way of cutting through the semantics, and focusing on what you get for what you pay.

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The critique depends on the assumption that maximizing shareholder value means crossing ethical lines and Welchian short-term manipulation of earnings. Not that I agree with Friedman, but it's pretty unreasonable to blame him for that.

 

My theory is that opposition to the theory of shareholder value creation exists because management is constantly trying to justify paying themselves more. When they discover that they aren't creating much value, they find a consultant (i.e. Steve Denning) who will invent fuzzy theories about radical management.

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I hate articles like this, because they don't accomplish anything. There is nothing said here that doesn't qualify as pedantic tripe. Of course the shareholders don't own the assets directly, the corporation does.

 

But the shareholders have a right to elect the BoD and do what they like with the assets, so they indirectly control them. Then there's your typical conscious capitalism argument about how other companies are creating shareholder value by focusing on customers or employees or whatever else. Guess what, folks, there's more than one way to skin a cat. Whether you put customers first or shareholders first in your theoretical hierarchy doesn't matter if the result is the same.

 

The fact that there is a whole industry shilling this stuff is almost incomprehensible to me. 2 * 4 = 8 no matter which way you arrange the 2 and 4. "Delighting customers profitably" is creating shareholder value.

 

If treating your customers well ends up creating a ton of value for shareholders, great. If you can get away with not investing in your cable systems because you have a monopoly and no one can do anything about it, great. At the end of the day, if shareholders make money, who cares what philosophy is used to get there so long as it's +EV in principle?

 

These philosophical types really do irritate me. They are not adding anything of value, what-so-ever. The extent of their contribution to business theory is taking what amounts to a commutative equation, flipping the numbers around, and then acting as though they're disrupting generally accepted business principles. But what they're really doing is being jackasses, pandering to the uninformed.

 

I want to apologize to any members who found this post to be overly venomous, but these sort of pseudo intellectuals are more annoying to me than just about any other kind of person. In any case, I'm sorry if you found this offensive.

 

Please have a nice evening.

 

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I hate articles like this, because they don't accomplish anything. There is nothing said here that doesn't qualify as pedantic tripe. Of course the shareholders don't own the assets directly, the corporation does.

 

But the shareholders have a right to elect the BoD and do what they like with the assets, so they indirectly control them. Then there's your typical conscious capitalism argument about how other companies are creating shareholder value by focusing on customers or employees or whatever else. Guess what, folks, there's more than one way to skin a cat. Whether you put customers first or shareholders first in your theoretical hierarchy doesn't matter if the result is the same.

 

The fact that there is a whole industry shilling this stuff is almost incomprehensible to me. 2 * 4 = 8 no matter which way you arrange the 2 and 4. "Delighting customers profitably" is creating shareholder value.

 

If treating your customers well ends up creating a ton of value for shareholders, great. If you can get away with not investing in your cable systems because you have a monopoly and no one can do anything about it, great. At the end of the day, if shareholders make money, who cares what philosophy is used to get there so long as it's +EV in principle?

 

These philosophical types really do irritate me. They are not adding anything of value, what-so-ever. The extent of their contribution to business theory is taking what amounts to a commutative equation, flipping the numbers around, and then acting as though they're disrupting generally accepted business principles. But what they're really doing is being jackasses, pandering to the uninformed.

 

I want to apologize to any members who found this post to be overly venomous, but these sort of pseudo intellectuals are more annoying to me than just about any other kind of person. In any case, I'm sorry if you found this offensive.

 

Please have a nice evening.

 

+1!

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I hate articles like this, because they don't accomplish anything. There is nothing said here that doesn't qualify as pedantic tripe. Of course the shareholders don't own the assets directly, the corporation does.

 

But the shareholders have a right to elect the BoD and do what they like with the assets, so they indirectly control them. Then there's your typical conscious capitalism argument about how other companies are creating shareholder value by focusing on customers or employees or whatever else. Guess what, folks, there's more than one way to skin a cat. Whether you put customers first or shareholders first in your theoretical hierarchy doesn't matter if the result is the same.

 

The fact that there is a whole industry shilling this stuff is almost incomprehensible to me. 2 * 4 = 8 no matter which way you arrange the 2 and 4. "Delighting customers profitably" is creating shareholder value.

 

If treating your customers well ends up creating a ton of value for shareholders, great. If you can get away with not investing in your cable systems because you have a monopoly and no one can do anything about it, great. At the end of the day, if shareholders make money, who cares what philosophy is used to get there so long as it's +EV in principle?

 

These philosophical types really do irritate me. They are not adding anything of value, what-so-ever. The extent of their contribution to business theory is taking what amounts to a commutative equation, flipping the numbers around, and then acting as though they're disrupting generally accepted business principles. But what they're really doing is being jackasses, pandering to the uninformed.

 

I want to apologize to any members who found this post to be overly venomous, but these sort of pseudo intellectuals are more annoying to me than just about any other kind of person. In any case, I'm sorry if you found this offensive.

 

Please have a nice evening.

 

+1!

 

+1!  Cheers!

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These philosophical types really do irritate me. They are not adding anything of value, what-so-ever. The extent of their contribution to business theory is taking what amounts to a commutative equation, flipping the numbers around, and then acting as though they're disrupting generally accepted business principles. But what they're really doing is being jackasses, pandering to the uninformed.

 

That was fantastic

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  • 11 months later...

Did anyone understand this graph? It doesn't line up with my understanding of ROA and ROIC levels and trends at all.

 

http://b-i.forbesimg.com/stevedenning/files/2013/07/Shift-Index-ROA13.jpg

 

Compare: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/roe.html

 

I guess the difference could be "economy-wide" versus public companies?

 

Does this chart not imply that the general economy has generated returns below the cost of capital since the 1960s? Seems rather nonsensical.

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