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Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cashflow. ” Second, companies need to adopt a set of policies that encourage behaviors consistent with the governing objective.
If they do, as many CEOs believe, this is a serious indictment of current corporate governance arrangements and has important policy implications. It finds that companies that take a long-term view perform better on many metrics, such as employment growth and shareholder return. I am not sure what to believe in this area.
In the five years since the advent of Dodd-Frank regulation, corporate governance groups, with their policies requiring at least half of long-term incentives to be “performance-based,” have pushed companies to replace options with multi-year, performance plans. How could anyone object to such an effort?
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The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year’s projected “forward earnings” should be used as a sufficient statistic for long-term cashflows and equity market valuation without any further reflection.
After all, “short-termism” does not correspond to any single quantifiable metric. Our belief is that the earnings of long-term companies will rely less on accounting decisions and more on underlying cashflow than other companies. With this metric, the gap between long-term companies and the rest is even bigger.
Initially, I spent all my time trying to memorize what the normal ranges were for each of those metrics (which varies based on whether the patient is an adult, child, or infant). With faster blood flow, all of that de-oxygenated blood needs more oxygen. Certain patterns of metrics prompt suspicion of certain kinds of injury.
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