Good Friday morning.
Take some time this weekend to read this interesting new piece in the Harvard Business Review entitled “The Error at the Heart of Corporate Leadership,” by professors Joseph Bower and Lynn Paine. They argue that the concept of shareholders as “owners” of the corporation—which they trace back to the 1976 article on The Theory of the Firm by Michael Jensen and William Meckling—is legally confused, fundamentally wrong, and damaging to society. Shareholders have no legal duty to protect or serve the companies whose shares they own, they are shielded from legal responsibility for corporate misdeeds, and they often hold shares for only days or even minutes—so how can they be expected to act as true owners? Yet over the last four decades, we have developed a system of corporate governance that makes “maximizing shareholder value” an outsized goal.
To demonstrate the damage this approach has done to the corporation, the authors harken back to the classic Boston Consulting Group growth matrix, which divided divisions of the company into “cash cows,” “stars,” “dogs,” and “bright prospects.” Good corporate management meant a careful combination of maintaining the cash cows, funding the stars, pruning the dogs, and choosing a limited number of bright prospects to invest in for the future.
But today’s shareholder focus has led to a new approach, championed by activist shareholders, where the goal has been to sell off the dogs, defund the bright prospects, cut long-term R&D and thus dramatically increase short-term earnings—often at the expense of long-term growth. This puts the focus not on “value creation,” they argue, but rather “value transfer”—from future shareholders to present. “The potential damage to the company and future shareholders, not to mention society more broadly, can easily go unnoticed.”
How can the system be fixed? Bower and Paine argue for staggered board terms—criticized by some as a tool for protecting entrenched management—as a means of ensuring continuity and limiting the excesses of shareholder democracy. They also say boards need to become more active in succession planning and long-term strategy. And they argue for a new approach to corporate compensation, that’s less directly tied to share prices and more connected to strategic goals.
I’m sure plenty of CEO Daily readers will find fault with Bower and Paine’s analysis. But at a time when capitalism is increasingly under attack, it’s worth asking whether the system has taken a fundamentally wrong turn.
• J.P. Morgan’s Jamie Dimon: Trump forecaster
Wall Street appears to be putting greater emphasis on what J.P. Morgan CEO Jamie Dimon thinks President Donald Trump will do next, or at least that’s how Wall Street analysts handled their Q&A with the executive during the bank’s first-quarter results when they took the opportunity to ask him to prognosticate about the next chapter of Trump’s presidency. The bank’s first-quarter results were good—but the question on investors’ minds is if Trump’s promised economic reforms will kick in soon enough to sustain the market’s recent rally. “I don’t want to put odds on it,” Dimon told reporters on the call. He called the nine months after the 100 days the “sausage-making period,” adding “there will be ups and downs, wins and losses, stuff like that. But it is a pro-growth agenda—tax, infrastructure, regulatory reform—and that is a good thing, all things being equal, and we think if that took place it would help all Americans.” Fortune
• Yext enjoys strong IPO debut
Shares of New York-based Yext, an enterprise-software firm, surged in the company’s trading debut on the New York Stock Exchange on Thursday—in the process lifting venture investor spirits about bringing a company to the public markets. Shares for Yext started trading at $14.03 a share, nearly 30% above the offer price, and closed at $13.32 to put the company’s market cap at over $1 billion. Yext—which offers businesses online data and mapping services—is the latest in a series of enterprise software firms that have gained traction amid a friendly climate for new IPOs. Others that have been well received are MuleSoft, Okta, and Alteryx. Yext and Alteryx both had pre-IPO valuations under $1 billion in the private markets. The Wall Street Journal (subscription required)
• Abbott, Alere agree to lower price
Abbott Laboratories has agreed to buy Alere at a lower price than previously offered, a move that will end a legal battle between the firms over a merger that would unite two U.S.-based health-care companies. On Friday, Abbott said it would buy Alere for $51 per share in a transaction that values Alere’s equity at $5.3 billion. That’s 8.6% less than its initial offer. The firms now expect the deal will close by the end of the third quarter. So where did things go awry? Abbott had sued to break up its initial $5.8 billion takeover of the medical-device maker, as it argued the takeover target hid material information about legal and regulatory problems. The transaction was put on hold for more than a year as Alere restated earnings and recalled products—eventually resulting in the lawsuit that was filed by Abbott late last year. Friday’s agreement indicates the parties are back on the same page. Bloomberg
• GM adds jobs to self-driving unit
General Motors will add more than 1,100 jobs in California over five years to the company’s Cruise Automation unit, as the automaker aims to boost its self-driving efforts after receiving $8 million in state tax credits. The nation’s largest auto company is planning to invest $14 million in a new research and development facility in San Francisco that will more than double its current space. GM had paid $1 billion last year to acquire Cruise Automation to help kick start the company’s efforts to build autonomous vehicles. Traditional auto firms, like GM, have been making major investments in tech and ride-sharing companies as the industry worries the business of building and selling cars that people drive themselves may shift in the coming years. Reuters
• J.C. Penney postpones some store closures
The department store chain has postponed the liquidation sales and closings of 138 J.C. Penney stores by a few weeks after shopper traffic and sales picked up at those locations. The retailer admitted that the better-than-expected sales and traffic at those locations were likely a “temporary surge,” meaning the stores will still close, just later than planned. Penney, which suffered from stalling sales last year, is intending to focus on stores with greater potential to see a jolt from new initiatives like expanding Sephora beauty shops and remodeling its hair salons. Fortune
Around the Water Cooler
• Nintendo stops making NES Classic
The video game giant will stop making the NES Classic Edition console—a retro gaming device that reprised older games like Super Mario Bros. and The Legend of Zelda—which Nintendo says wasn’t ever intended to be a long-term product. The decision is surprising because the $60 device was considered a hit for the company and retailers have had trouble keeping it in stock. But some speculate that Nintendo was worried NES: Classic could be cannibalizing sales for the company’s higher-priced systems, most notably the new Nintendo Switch. Fortune
• Tesla to unveil first semi truck
Tesla CEO Elon Musk has announced that the electric car company will unveil its first semi truck in September, followed by a pickup truck model in close to two years’ time. Plans for an electric transport vehicle have been anticipated since Musk revealed the second part of his “master plan” for the automaker in July last year. At that time, Musk wrote in his blog that Tesla would step beyond the car market and begin work on self-driving semis, pickup trucks, and buses. Fortune
Summaries by John Kell; email@example.com