It has led to “bad profits” that have destroyed customer loyalty.
It is responsible for massive offshoring of manufacturing, thereby destroying major segments of the US economy.
It has even undermined US capacity to compete in international markets.
The Financial Times reports that the short-term shareholder value theory has a new feather in its cap: it is responsible for killing the economic recovery that should have occurred after the financial meltdown of 2008.
In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?
In standard economic theory, this makes no sense. When profits go up, companies should be seizing investment opportunities to lay the groundwork for even more profits in future. In turn, that investment should create jobs, generate more capital goods and lead to higher wages.
The reasons listed below are proven false
* tax policy
* fear of another financial crisis
Private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent
The difference is the private companies are not maximizing quarterly profits. They have the same regulations, taxes and other factors.
Adding value for customers should be the goal
Public companies like Amazon [AMZN], Whole Foods [WFM] and Costco [COST] have successfully pursued customer value, despite the pressures of Wall Street. So isn’t it about time we stop compensating corporate leaders for meeting their quarterly numbers and instead shift the focus of business to its true goal of adding value to customers?
Successful firms in the Creative Economy are tightly focused on delighting customers by mobilizing whole ecosystems that deliver continuous innovation and mass customization. In this economy, hierarchical bureaucracy doesn’t cut it. The Creative Economy requires a different, more agile, and more demanding kind of leadership and management. Because the Creative Economy is in sync with today’s marketplace, it is hugely profitable: great fortunes are created in extraordinarily short periods of time, e.g. Facebook [FB]. The productivity gains of the Creative Economy are genuine: innovations in the Creative Economy have shifted the production frontier of what is possible. The Creative Economy represents the future.
The approach for a country should not be hitting short term GDP numbers but adding value to citizens
Long term value maximization should also be used to guide how cities and countries are managed and governed.
Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
Known for identifying cutting edge technologies, he is currently a Co-Founder of a startup and fundraiser for high potential early-stage companies. He is the Head of Research for Allocations for deep technology investments and an Angel Investor at Space Angels.
A frequent speaker at corporations, he has been a TEDx speaker, a Singularity University speaker and guest at numerous interviews for radio and podcasts. He is open to public speaking and advising engagements.