Simon’s Blog

The job of a CEO has, for decades, been framed in one way - to maximise shareholder value. However, times have changed, and shareholders ain’t what they used to be. So what’s a CEO to do? In his recent interview with Business Week, talking largely about Apple, Clayton Christensen made the following comment:

Today, 10% of all shares are owned by hedge funds, and do you know what their average holding period is? It’s just 60 days! And another 85% of the equities are owned by mutual funds and pension funds, and the average tenure there is 10 months.

Their time horizon is shorter than even that of even the shortest-term managers. So I don’t think it’s right to think of [these investors] as shareholders of your company. They’re investors who temporarily own securities in your company at a particular point in time. They’re responsible for maximizing the stock value of their investments.

So, the point is: today, does it make sense to talk about maximising shareholder value in the conventional sense? Should CEOs of public companies pay attention to what these investors say, in terms of the directions their companies take? Christensen argues for the answer to be no; because these investors have no interest in the long-term health of the company.

Interestingly, this kind of ultra-short-term thinking is affecting some private companies too. I know of a couple of privately held companies who have hedge funds or hedge fund owners as major investors. These are not happy companies - in fact, they look like they’re going down. And they’re going down because of the way their investors are behaving. Super short-term thinking is not compatible with even medium term company health.

My view is that today, the job of the CEO is best framed as “maximising the success of the company”. Historically, the best way to do this has been to align the interests of all the major stakeholders: investors and employees alike. Today, however, for many companies that’s simply an impossible task. Something has to give… and the consequence is that it’s no longer always possible for everyone to win. The winners and losers will vary from company to company.

That’s a shame, I think. But there’s nothing new here: VCs have always taken the view that it’s impossible to align everyone’s interests. So they don’t bother to try. Here’s the problem the VCs have: they’re charged by those that own their funds with making huge returns. It’s not easy to do. And, in almost all cases, it isn’t possible to create a big enough pie that everyone can make a lot of money. So what gives here? In this case, it’s the employees that don’t make any money: the only employee in a typical VC-backed company that can expect to make any serious money is the CEO.

Call me old-fashioned, but I think this is a actually a bit of bleak picture. If you’re anything like me, you won’t be happy with it. I would much prefer it if all the stakeholders can win. And I think there is a way to do it:

1) Make sure the pie you’re building is big enough that everyone can make what, to them, is a significant amount of money

2) Choose your shareholders with care

3) Time investments, and how much investment you take, with care

and, most importantly… have fun building the business!