An Open Letter to Laura Martin of Soleil Securities regarding your comments in the NY Times
In probably one of the most offensive statements I have ever read in print, Laura Martin, a Securities analyst from Soleil Securities, sums up the whole Yahoo Microsoft deal like this:
Ms. Martin also had harsh words for Yahoo’s management’s “unbelievable” actions. “This is management putting its employees and its job security ahead of current Yahoo shareholders’ interest,” she told the news service. She also told Reuters that she expects several shareholders lawsuits to be filed against the company on Monday. Source: NY Times
Lets put a little bit of perspective on this puppy.
Dear Ms. Martin,
It is with due consideration of your comment “This is management putting its employees and its job security ahead of current Yahoo shareholders’ interest,” that we need to call something to your attention.
It is the employees, and their belief in their job security that helps make great products. Management might fund projects, and they might come up with some form of vision that is banal, generic, and probably meaningless, but if you give an employee who is talented, cares, and is happy in their job a task like “go make a advertising super machine to make money” the employee will most likely execute well on that if they are given the management support to do so.
You will notice that the words “share holder” or “stock holder” does not come up in that, realistically, shareholders are in a semi-parasitic relationship to the organization, they buy the stock and play the game based on the relationship between management, the board and employees.
Shareholders, especially activist shareholders do not necessarily represent the best interests of the company, looking at the last few “don’t do business in china because they censor” calls with Google and with Cisco. This kind of action is not in the best interests of the company, shareholders wanted something that would have materially harmed the company. Shareholders are not a fount of wisdom, nor are they necessarily the most important people in the food chain.
Kaplan and Norton point out that “the key to executing your strategy is to have people in your organization understand it” Share holders are not mentioned.
Hillman and Keim noted that:
We test the relationship between shareholder value, stakeholder management, and social issue participation. Building better relations with primary stakeholders like employees, customers, suppliers, and communities could lead to increased shareholder wealth by helping firms develop intangible, valuable assets which can be sources of competitive advantage. Source: Wiley
Coombs and Gilley noted that:
Specifically, we found a significant, negative main effect of stakeholder management on CEO salaries. Further, we found that stakeholder management typically reduces the rewards CEOs may get for increasing levels of financial performance. In tandem, these results indicate that CEOs may jeopardize their personal wealth by pursuing stakeholder-related initiatives Source: Wiley
Add to this mix Gospel and Pendleton work that shows a direct negative influence that being shareholders managed and the statement that you make “This is management putting its employees and its job security ahead of current Yahoo shareholders’ interest,” needs to be relegated to the dust bin of horrifically poor management standards and practices.
A company sells stock to raise additional capital, but at some point all companies go through a “middle age” process where gaining additional value to shareholders becomes problematic because they are so huge, this is a business 101 issue. It is double digit growth to go from 100,000 dollars a month to 200,000 dollars a month, this number and growth curve becomes more problematic the larger the company. When the company is valued in billions, an additional 100,000 in growth is meaningless. If shareholders want double digit growth every year, there are 210 startups, 170 game companies, and who knows how many other smaller companies in the Seattle area that would welcome the investment.
Frankly, darn strait, if Yahoo is to execute on a strategy, they need their best employees, if the employees are fearful of their jobs, their future, and their prospects, it is the best ones who are the first to go seeking some form of stability in the work place. Your comments show a complete lack of disregard for business lessons 102 – support your employees and enable them to do good things. This is not about stock holders directly, that is an indirect relationship to the employee.
Your complete lack to read on modern or even semi modern principles of Corporate Governance is a shame. It is about the employees, and it is about the employees being enabled by management to go forth and do good things. That is what will increase shareholder value, that is what will make Yahoo or any other company tempting to a shareholder, or a stock buyer. Not a Malthusian reference to “stock holders being all”. They are not.
Keywords: Laura Martin, Soleil Securities, corporate governance, shareholder, shareholders, stock, yahoo, microsoft, money
Shareholders have a semi-parasitic relation to the organization. This is a very strange thing to say about the owners of the organization.
Academic studies like those of Hillman and Keim show that well run companies will benefit the interests of both the employees and the shareholders. However, a correlation should not be confused with cause. Countries like Germany and Japan — where the goal is to maximize stakeholder value — had had much worse problems than the US. There is much more research that shows that maximizing stockholder value leads to positive results for stakeholders than the other way around.
Secondly, Coombs and Gilley actually support Laura Martin’s point. Managers who act against the interests of the owners should not be compensated for their actions.
It is you, not Laura Martin, who does not understand current research regarding corporate governance.
If you want evidence of this, look at companies like Interco back in the late 1980s. Look at companies like GM and Ford today. Seeing that you get the causality backwards, you also show a lack of knowledge about logic.
You owe Laura Martin an apology.
Dr. Taranto,
Interesting, there is just and has continued to be something intrinsically wrong with the whole Yahoo/Microsoft deal when this was written. While history will castigate Jerry Yang, in the end he made the decision, for what ever reason, all this falls on Jerry’s shoulders.
What was the saddest thing about the whole thing is that there was an absolute focus on the idea of shareholder value. The saddest epitaph for a person is “they added shareholder value”.
I disagree that I owe anyone an apology, this was written at a time and place before the melt down of the markets, people, companies, and the complete devastation of the economy by those very same people who believe that share holder value is the end of and be all of business.
Business must also be in business to survive, they must produce a quality product, that people want to purchase. Yahoo still does that, while the Microsoft deal might have been good, it also might have been very bad taking a look at aQuantive, and other deals that Microsoft has engaged in.
Yahoo still makes a quality product, but based on what I know they have not been trying to deliver value for a long time. Value, product, service, leads to bigger profits and bigger market share. With a long term view to that end point. Plus Jerry was put in place after the company was looted by the previous CEO of Yahoo.
That should be the reason why the company exists, not as a way for CEO’s and others to loot the company in favor of short term gains, that drive the stock price up, that makes it more attractive to the shareholder.
If we were really truly interested in driving shareholder value, as a partnership or even as a way to preserve the some 73% decrease in the value of stocks I own based on short term gains, rather than long term business management, then I might apologize to Laura Martin.
What struck me the most about the whole thing was just how out of touch she seemed in the journal article that was quoted, business must be in business for more than increasing shareholder value.
We have seen the outcome of that business model, and we currently reside in the shambles of wall street, banking, investment banking, home loans, car companies, school loans, and the rest of it.
My 2 cents.