Maximizing shareholder returns: the “world’s dumbest idea” (without the proper time horizon)
This Is The Best Theory We’ve Heard Of Why CEO’s Are Turning Over Like Crazy (SPY, SPX)
In his paper, Montier addresses a number of side effects seen in corporate behavior as a result of this paradigm shift towards shareholder returns over all else. Among these consequences is faster turnover both at the top of the world’s biggest companies.
Montier notes that since the 1970s, the average length of time a company stays in the S&P 500 has fallen from nearly 30 years to around 15 years. The tenure of CEOs has also fallen dramatically, from over a decade to less than four years.
And so given this trend, Montier writes, “[i]t is little wonder that CEOs may be incentivized to extract maximum rent in the minimum time possible given the shrinkage of their time horizons.”
Executive compensation over the last twenty years has more and more come to be comprised of stock and stock options rather than cash, which Montier argues gives executives motivation to goose share prices rather than invest in the business.