Asness Versus Montier On Shareholder Value


According to Clifford S. Asness, founder and managing partner of hedge fund AQR, “shareholder value is undervalued.” In his January 6th installment of Cliff’s Perspective, Asness comes to the defense of the concept of shareholder value, and argues that despite Wall Street and media claims otherwise, the management of public firms does have a primary responsibility to create shareholder value.

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Shareholder value as the “world’s dumbest idea”

The pursuit of shareholder value has been vilified over the last few years. James Montier of the well-known money manager Grantham, Mayo, Van Otterloo & Co., in voicing the perspective of numerous critics, wrote an article calling shareholder value “The World’s Dumbest Idea.” Many criticisms of the idea have appeared in major media outlets recently, as well.

Long-term vs short-term perspective

Critics nearly always argue that those who favor corporate management seeking to create shareholder value have a “short-term perspective” and don’t really care about the long-term health of the enterprise. The problem with this argument is that, like it or not, the markets and market participants have undeniably become more and more short-term focused over the last few years.

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Asness notes: “Anyway, if the problem one has with the concept of maximizing shareholder value is that markets are too short-term, then it seems exhorting, cajoling and educating us all to be more long-term in setting prices would be a better solution than attacking the goal of maximizing shareholder value.”


Debunking the “focusing on the stock price Is not a strategy” argument

The statement “maximizing shareholder value is not a strategy but the result of a strategy” is undeniably true. One clearly does not enhance shareholder value by meditating on the stock price or drawing charts and graphs about where it would be if x or y.

You create value by making something new, better or more efficient. The exact details of the process of value creation vary greatly from firm to firm, but typically involve a combination of innovative, in-demand products, a mission that benefits the world, highly satisfied customers and a team of savvy, motivated employees.

Asness explains his argument: “Those who think they’ve made a trenchant, telling critique by pointing out that “maximize shareholder value is not a strategy” are not wrong, but they must tell us what and who exactly they are criticizing. Who thinks it’s a strategy unto itself and not the result of a good strategy? Maximizing shareholder value is an objective. Of course you still need a strategy to get there!”

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