A Critical Flaw in Theory

The FT ran an article this past week entitled "Welch condemns share price focus" decisively identifying a key component of capitalistic theory that underlies the core of the problems facing our financial system today.

We are coming to an end of an era when publicly listed companies and their corporate executives shift their attention from sustaining share prices to actually running a sound and solid business. The past few decades, especially, have proven that the Western approach to management has by and large been extensively focused on maintaining short term growth targeting share prices. Executives have had every incentive to base their business decisions directly on the day to day stock quotes. This has been proven to be a fallacy.

Jack Welch declared in an interview for the FT's series on the future of capitalism that "[the idea that shareholder value is a strategy] is a dumb idea." As the preeminent father-figure for the "shareholder value" movement, his words come as a telling sign of the end of an era fraught with mismanagement and corruption.

The purpose of operating a business in order to make profit depends upon focusing on long term, sustainable growth. Share prices are evaluative statistics used to measure success relative to competition and the rest of the market. Just like in any other performance-based activity, statistics are a distraction for the performers. The goal is continued, long-term success.

Things might be looking up for America after all.