Steve Jobs and the Purpose of the Corporation(blogs.hbr.org)
blogs.hbr.org
Steve Jobs and the Purpose of the Corporation
http://blogs.hbr.org/cs/2011/10/steve_jobs_and_the_purpose_of.html
8 comments
Although I agree with this article, I would take it one step further and say that the reason for a corporation to exist should be to improve society as a whole. Society grants corporations certain expanded rights and protections (more now than ever) because we believe it is a net improvement to the world. We should therefore expect certain behavior. If a corporation damages the public at large for the benefit of a few shareholders what have we gained?
The entire idea of the free market is that, once externalities are internalized and the market is properly governed, the best way for a corporation to improve society as a whole is to increase its own profits. It turns out that improving society as a whole is a vaguely defined and difficult goal, while increasing profits is directly measurable. The market works by taking something vague and difficult for anyone to set out to do on their own (improve the well-being of society) and turning it into a direct, self-interested, measurable goal (increasing profit).
There are other systems that work a similar way. For instance, the adversarial system in criminal justice works by throwing together two opposing lawyers, each of whom wants only to win the case, and as a result does a pretty decent job of both enforcing the law and protecting civil rights.
There are other systems that work a similar way. For instance, the adversarial system in criminal justice works by throwing together two opposing lawyers, each of whom wants only to win the case, and as a result does a pretty decent job of both enforcing the law and protecting civil rights.
You're absolutely right about how that should work in theory.
once externalities are internalized and the market is properly governed
If a company chasing down profits hurts the general public it is a failure of the market, not the company. However, for this to work in practice, there needs to be a strong firewall between the companies competing, the regulators defining the market and even the media informing the public about what is going on.
We're watching a rigged game where the coaches have paid off the referees and the sports reporters have realized there's more money in becoming promoters.
once externalities are internalized and the market is properly governed
If a company chasing down profits hurts the general public it is a failure of the market, not the company. However, for this to work in practice, there needs to be a strong firewall between the companies competing, the regulators defining the market and even the media informing the public about what is going on.
We're watching a rigged game where the coaches have paid off the referees and the sports reporters have realized there's more money in becoming promoters.
So the market only partially works. Perfection is an unattainable goal. Fine.
As you run a business, it should be pretty obvious to you whether you're profiting by exploiting flaws in the system. If you're not exploiting flaws in the system and you're still profiting, I don't think you need to worry a great deal about whether you're actually benefiting society. Most businesses do a small, dull, unexciting part of benefiting society, and that's fine.
As you run a business, it should be pretty obvious to you whether you're profiting by exploiting flaws in the system. If you're not exploiting flaws in the system and you're still profiting, I don't think you need to worry a great deal about whether you're actually benefiting society. Most businesses do a small, dull, unexciting part of benefiting society, and that's fine.
once externalities are internalized and the market is properly governed
That is the problem though, we are nowhere near the point where externalities are internalized or markets are properly governed. Presently any externality which can be ignored is ignored in the interests of maximizing shareholder value. This becomes doubly true when a company is really feeling the squeeze from the market. Every industry and business has externalities which are not being paid for at the moment. One is the environmental costs of manufacturing, infrastructure and energy. Another is dealing with repressive regimes. These are costs to society.
Regulation and enforcement are always met with market hostility because someone has to pay the cost (and whoever is paying usually doesn't want to). Self-regulation rarely works, honest companies may play by the rules for a while but eventually someone will decide they can make more money working around the rules.
Free market ideals are great and they all work on paper. I think it's a fine goal but an unlikely reality. Here in the present we are not moving towards a free market. Most moves to open markets are not making them freer they are merely giving greater power to the entrenched players. Until the market is truly free there is real damage being done to people and the planet.
That is the problem though, we are nowhere near the point where externalities are internalized or markets are properly governed. Presently any externality which can be ignored is ignored in the interests of maximizing shareholder value. This becomes doubly true when a company is really feeling the squeeze from the market. Every industry and business has externalities which are not being paid for at the moment. One is the environmental costs of manufacturing, infrastructure and energy. Another is dealing with repressive regimes. These are costs to society.
Regulation and enforcement are always met with market hostility because someone has to pay the cost (and whoever is paying usually doesn't want to). Self-regulation rarely works, honest companies may play by the rules for a while but eventually someone will decide they can make more money working around the rules.
Free market ideals are great and they all work on paper. I think it's a fine goal but an unlikely reality. Here in the present we are not moving towards a free market. Most moves to open markets are not making them freer they are merely giving greater power to the entrenched players. Until the market is truly free there is real damage being done to people and the planet.
In theory, theory and practice are the same.
> Society grants corporations certain expanded rights and protections (more now than ever)
What can a corporation do that I or a group of people can't do? What can that group do as a corporation that it can't do otherwise?
Be precise. And, for the purposes of this discussion, assume that I'm rich.
Suppose that the answer is "a corporatioin can do exactly the same as any other group of people". I suspect that you feel a corporation should be more restricted than a group of people. Why?
What can a corporation do that I or a group of people can't do? What can that group do as a corporation that it can't do otherwise?
Be precise. And, for the purposes of this discussion, assume that I'm rich.
Suppose that the answer is "a corporatioin can do exactly the same as any other group of people". I suspect that you feel a corporation should be more restricted than a group of people. Why?
If you're interested in how this works in practise, I recommend reading "Let My People Go Surfing" by Yvon Chouinard, who founded Patagonia, which is run along these lines.
Publicly held corporations usually side with the shareholders' wants and needs first. That's one of the reasons Apple was so remarkable.
Steve Jobs realized that if you give people stuff they'll love, they'll fork over their hard earned money, and that is ultimately what shareholders want so they let him do it over and over.
Have people at all levels with vision, commitment, and passion for the work they do. They must be cross-disciplined and most importantly they must understand that their actions and decisions connect directly to the success of the company as a whole.
Then you will have some of the magic of Apple.
Steve Jobs realized that if you give people stuff they'll love, they'll fork over their hard earned money, and that is ultimately what shareholders want so they let him do it over and over.
Have people at all levels with vision, commitment, and passion for the work they do. They must be cross-disciplined and most importantly they must understand that their actions and decisions connect directly to the success of the company as a whole.
Then you will have some of the magic of Apple.
This seems like markets 101 (and I mean that as no dis to above commenter, but as amazement that so few companies get this).
Apple worked like markets are supposed to work. That Apple was exceptional means that there is still a lot of cruft to be cleared out.
Apple worked like markets are supposed to work. That Apple was exceptional means that there is still a lot of cruft to be cleared out.
The key is again the temporal timeframe: shareholder value NEXT QUARTER? or shareholder value two decades from now? The American car companies, for example, always look for the former (hence pushing trucks and whatever'll sell this season through marketing expenditures rather than innovation)
No dis taken. :)
> [Shareholder pressures] have led many business leaders to manage to the "expectations market" of the public stock exchanges. This in turn has led to narrow short-termism, accounting manipulation, cutting of ethical and legal corners, failures to invest in the long-term, and to the financial crisis.
I've actually heard from a salesperson at a big SaaS company that it's normal to delay sales to the next quarter once your sales quota is fulfilled for this quarter.
This surprised me because it's obviously worse for the company as a whole to not capture that revenue as soon as possible (and to put it at risk entirely) and potentially worse for the customer. However, it's better for the salesperson to have an easy win next quarter, and easier for the management to show nice quarter-over-quarter growth. I think this is a good example of putting short-term gain before the interests of the company, and it seems to be quite common.
I've actually heard from a salesperson at a big SaaS company that it's normal to delay sales to the next quarter once your sales quota is fulfilled for this quarter.
This surprised me because it's obviously worse for the company as a whole to not capture that revenue as soon as possible (and to put it at risk entirely) and potentially worse for the customer. However, it's better for the salesperson to have an easy win next quarter, and easier for the management to show nice quarter-over-quarter growth. I think this is a good example of putting short-term gain before the interests of the company, and it seems to be quite common.
Look at how Apple's stock price got a short pounding this week because they "didn't meet analyst expectations", citing a fall in iPhone sales.
People were waiting for the new phone to launch. Apple moved nearly USD $3,000,000,000 in product in a single weekend just after the quarter ended and before the earnings report. And still, the stock got sold off.
I've heard that Apple tends to underestimate their earnings, and I'm starting to wonder if Jobs played the 4S launch date just to screw with market analysts even more.
People were waiting for the new phone to launch. Apple moved nearly USD $3,000,000,000 in product in a single weekend just after the quarter ended and before the earnings report. And still, the stock got sold off.
I've heard that Apple tends to underestimate their earnings, and I'm starting to wonder if Jobs played the 4S launch date just to screw with market analysts even more.
I wonder if it is by trading machines running algorithms.
too expensive for most HFTs to play with
If there was a stock trading tax of X cents per share, would it wipe out HFT? What would X have to be?
The reason why AAPL is so expensive is because of the TAF (a tax assessed by the SEC). Currently its 19$ / million dollars sold. Note that this fee is proportional to dollars sold, not per share (other transaction costs are per-share).
Let's say you received $.0020/sh for adding liquidity and paid a commission of $.0001/sh. The tax would be, assuming aapl is $400/sh, $.0076/sh. This is much larger than the rebates, which means you need to buy at least one cent below your sell price on every trade.
Now look at bank of america. It's been hovering around 6.50 for the past week. The tax there is .000114, so in fact it's possible to buy and sell BAC at the same price and make money!
But getting back to your question, blind market making loses money when the tax exceeds the returns. For the larger players, they make .00295/sh before commissions (and ostensibly they are free because larger shops have their own clearing divisions), so X would have to be close to .29. For alpha-based (generating a predictive signal) trading, most HF signals have an amortized edge of .2 cents per share after fees, so I would say something like X=.2 would wipe out HFT
Let's say you received $.0020/sh for adding liquidity and paid a commission of $.0001/sh. The tax would be, assuming aapl is $400/sh, $.0076/sh. This is much larger than the rebates, which means you need to buy at least one cent below your sell price on every trade.
Now look at bank of america. It's been hovering around 6.50 for the past week. The tax there is .000114, so in fact it's possible to buy and sell BAC at the same price and make money!
But getting back to your question, blind market making loses money when the tax exceeds the returns. For the larger players, they make .00295/sh before commissions (and ostensibly they are free because larger shops have their own clearing divisions), so X would have to be close to .29. For alpha-based (generating a predictive signal) trading, most HF signals have an amortized edge of .2 cents per share after fees, so I would say something like X=.2 would wipe out HFT
Yes. You'd also increase the bid/ask spread by at least X, which is not a good thing.
Yea, personally I have been thinking instead of motivating salespeople with quotas or commissions, how about having them letting them cooperate with engineering to improve the product.
Perhaps it's only obvious to me, but unless a corporation has great products that customers want to buy, the long-term shareholder value can only fall. Customers buying a corporation's products is a prerequisite to profits at said corporation. Isn't that what shareholders want?
If a company goes bankrupt, pays penalties, has bad press, etc because executives can't take a long-term view, how is that good for shareholders?
If a company goes bankrupt, pays penalties, has bad press, etc because executives can't take a long-term view, how is that good for shareholders?
Nobody ever created a business with the goal of 'maximizing shareholder value'. That is a mission of companies who have lost their purpose and passion.
If you ever start your own company - trust me, you'll be extremely interested in maximizing shareholder value. You may also want to satisfy customers and build amazing experiences but as the owner of the company, you will also care very much about the value of your shares.
I have started two companies. I'm not suggesting that the value of the company isn't important, but I've seen many times where the quality of the product drops due to a focus on shareholder value, resulting in a drop in that very value they were trying to protect.
There's definitely a cognitive indirectness here, in the same way that it's in one's long term self interest to act unselfishly, but it's rather incoherent to say that it's wrong to focus on shareholder value because it damages shareholder value. If you want to maximize shareholder value and you're smart enough to realize that focusing on product quality is the way to do that, you'll focus on product quality.
Yea, the problem is that "shareholder value" is defined as stock price, which is flawed.
What other metric do you use? A warm fuzzy feelings index?
The problem is "shareholder value" is defined using a measure of TODAY's stock price, which is highly volatile and subject to really minor changes in quarterly reports. So companies tend to spend an inordinate amount of resources trying to level out the volatility of their short term stock price by doing whatever they can to meet quarterly expectations, which leads to misallocation of capital.
A better measure might be the potential value of a stock some number of years out, which can be roughly measured using stock options trading if the options markets have access to enough data. That type of data would include things like customer satisfaction metrics, R&D spending, etc. (ie the types of things Steve Jobs optimized for).
The problem is "shareholder value" is defined using a measure of TODAY's stock price, which is highly volatile and subject to really minor changes in quarterly reports. So companies tend to spend an inordinate amount of resources trying to level out the volatility of their short term stock price by doing whatever they can to meet quarterly expectations, which leads to misallocation of capital.
A better measure might be the potential value of a stock some number of years out, which can be roughly measured using stock options trading if the options markets have access to enough data. That type of data would include things like customer satisfaction metrics, R&D spending, etc. (ie the types of things Steve Jobs optimized for).
Yea, this is exactly what I mean.
Warren Buffet?
EDIT: No, I mean as a counterexample. I think Warren Buffet's actual goal is to maximize the long-term shareholder value of Berkshire Hathaway.
EDIT: No, I mean as a counterexample. I think Warren Buffet's actual goal is to maximize the long-term shareholder value of Berkshire Hathaway.
The purpose of a corporation is not to maximize shareholder value, per se. It’s to allow a group of people to work together under a legal framework, which includes things like public offerings of stock. Shareholders can buy into that for whatever reason they want.
(Also, this article makes business theory sound frighteningly simplistic and divorced from markets. I hope I am wrong.)
(Also, this article makes business theory sound frighteningly simplistic and divorced from markets. I hope I am wrong.)
..a legal framework whereby the owners of the company have limited liability for the company's financial obligations
There's not much of a story here. If a corporation delivers great products - profits and increased shareholder value will follow. If not, or if they stop doing so, profits and shareholder value will drop.
They can get gimmicky all they want for a short while, but eventually they will drop.
The only exception to this would be the banking/finance industries - which pretty much create nothing yet historically for the most part generate enormous profits for themselves.
The only exception to this would be the banking/finance industries - which pretty much create nothing yet historically for the most part generate enormous profits for themselves.
I am wondering what good does Apple do to customers when it forbids users from using software not paying to Apple or buying content that has nothing to do with Apple without paying Apple.
Good, quality, affordable software, of course. Have you seen how easy it is to buy a high quality 79c game and play with it in a few minutes?