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Schumpeter: Taking the long view | The Economist

December 2, 2012 Leave a comment Go to comments

HE IS the chief executive of a multinational corporation, but Paul Polman sometimes sounds more like a spokesman for Occupy Wall Street. The boss of Unilever (an Anglo-Dutch consumer-goods firm with brands ranging from Timotei shampoo to Ben & Jerry’s ice cream) agonises about unemployment, global warming and baby-boomer greed. He puts some of the blame for these ills on the most influential management theory of the past three decades: the idea that companies should aim above all else to maximise returns to shareholders.

He appears to mean it. Since taking charge in 2009, Mr Polman has stopped Unilever from publishing full financial results every quarter. He refuses to offer earnings guidance to equity analysts. He has introduced a lengthy “sustainable living plan” and attracted a new cadre of long-term investors, particularly in emerging markets. He even told an audience in Davos that hedge-fund managers would sell their own grandmothers to make a profit.

In this section

Collectors, artists and lawyers

A Wall Street brawl

Fallen idols

Of corner offices and cribs

Fiery food, boring beer

Foreigners beware

The new maker rules

Poking Walmart, choking Twinkies

»Taking the long view

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Peter Drucker

Mr Polman was one of several titans to decry the cult of shareholder value at the Peter Drucker Forum (an annual gathering of admirers of the late Austrian-born management guru) in Vienna on November 15th and 16th. Roger Martin, the dean of the Rotman School of Management at the University of Toronto, called it a “crummy principle that is undermining American capitalism”. Georg Kapsch of the Federation of Austrian Industries urged the world to abandon it. Rick Wartzman, the director of the Drucker Institute, said its critics were gaining momentum.

The cult has certainly yielded perverse results. The fashion for linking pay to share prices has spurred some bosses to manipulate those prices. For example, a manager with share options gets nothing if the share price misses its target, so he may take unwise risks to hit it. Short-termism is rife on Wall Street: the average time that people hold a stock on the New York Stock Exchange has tumbled from eight years in 1960 to four months in 2010. The emphasis on short-term results has tempted some firms to skimp on research and innovation, robbing the future to flatter this year’s profits. “Long-term results cannot be achieved by piling short-term results on short-term results,” Drucker once remarked.

One study shows that listed companies have invested only 4% of their total assets, compared with 10% for “observably similar” privately held companies. A second shows that 80% of managers are willing to reduce spending on R&D or advertising to hit the numbers. John Kay, a British economist (and author of a government report on short-termism) argues that the pursuit of short-term profit may have undermined two of Britain’s greatest companies, ICI and GEC.

via Schumpeter: Taking the long view | The Economist.

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