The End of Shareholder Value.

• Author: SEELY, MICHAEL
• Position: Review

Allan A. Kennedy

Published by Perseus Publishing, Cambridge, Mass., 237 pages, $26.00

ALLAN KENNEDY has written an important and timely book. He has also revealed himself to be an insightful student of business history -- and a compellingly good describer of it.

This is an important book because its point of view is so rare, and it is a timely book because shareholder value is very much a theme associated with the Old Economy -- at a time when many managers and investors are drawing a sharp line between Old and New.

Kennedy, a management consultant who made a name for himself in the 1980s with his book Corporate Cultures, argues that the business community confronts a crisis -- one we might christen the "Mother Hubbard" syndrome. U.S. corporations, having pursued a "boost the stock price" mandate at all costs, have little in the cupboard to nourish their futures.

He shows great courage in using General Electric and Jack Welch as his prime example of the "short-termism" he decries. Noting that Welch laid off over 100,000 employees, while flattening R&D and spending heavily on stock buybacks, he asks that we "pity his poor successor, who will have to find a new way to run the business in order to maintain GE's successful track record. What kind of legacy is that?"

A page later, answering his own question, the author argues that GE's stock price is vastly overvalued. GE's shareholders have enjoyed superb returns under Welch's regime, a legacy that will certainly be hard for his successor to trump. But, as the saying goes, that's why he or she will get the big bucks -- or a swift boot if he fails. (Kennedy does acknowledge the high CEO mortality rate in recent years.)

Kennedy has, in this reader's view, unfortunately drawn the wrong conclusion. There is little objective evidence that value-focused companies' efforts to boost returns and valuations have mortgaged their futures. In fact, many academic studies show that reinvestment is increased, productivity is pushed higher, and the pace of innovation in fact accelerates. And these results were achieved for a very simple reason -- managers have increasingly used capital more efficiently and they have done so in a period when capital costs have declined with the waning of inflation and other factors.

But Kennedy is certainly correct about the human toll of corporate restructuring (though the current low rate of unemployment suggests the downsized have found other jobs). And his cynicism about the...