Saturday, August 8, 2009

Absolute Value

One of the first lessons in economics 101 in regards to the theory of the firm speaks like a mantra. The professor asks, "What is the purpose of the firm?" The reply without thought is a resounding, "To maximize shareholder value". In reality, however, this service to the shareholder presents many well studied principle agent problems. Managers are tempted to inflate earnings or deflate costs in a myriad of accounting witchcraft. Likewise, shareholders don't necessarily hold the firms best interest in mind as well. They are likewise interested in short term gains to push up their equity returns. So it begs the question, why do we gather in this thing called the firm? To what do we owe our efforts?

We find commonly that the daily humdrum employee thinks nothing of the shareholder and everything about their manager; quite possibly there is too much regard for their manager. Personal performance is self-judged by their manager's reaction. And so there is this chain of performance self-judgement up the chain of the corporate command. There is no effort to maximize shareholder value. The effort typically is to please the boss and nothing more. Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job. Such tendencies are common in cost centers.

To what value, therefore, should we strive? If maximizing shareholder value leads to all the manifold principle agent problems we face, to whom shall we measure value? Some would answer that it is value to the customer toward whom we should strive. But does the customer necessarily know what is valuable? In fact this is the power of many brands that attract such a customer following. The customer covets but doesn't know why. They are drawn to the brand's mystique. There is something about all of the product or service's emergent properties that almost cannot be put into words. All that to say - the customer isn't rationale.

All of these prior attempts of value pursuits strive for what I might humbly submit is relative value. They are coupled by the estimation of an individual or setting. The value of an output is dependent on their existence. Our efforts to maximize shareholder value depends on the existence of the shareholder. Our efforts to maximize customer value, depend on characteristics of a customer that are prone to change.

A value to which we should strive is an absolute value. This value deems the product or service intrinsically valuable. It is valuable no matter who or at what age or time esteems it. It doesn't depend on who consumes or uses it for other production efforts. It is customizable and flexible. Over time consumers find new ways of using it and innovating from it. While such value is almost impossible to achieve, it is something one should strive.

7 comments:

Innocent Smith said...

Very interesting site you got here. I found it randomly while looking through fans of Hayek on blogger. I am a grad student in Chicago and an aspiring writer with a blog of my own (rjmoeller.com). Check it out some time. Take care.

Candice said...

Very interesting topic of absolute value

Yes indeed, every firm advocates maximizing the shareholder value by acting the best interests for shareholders, so shareholders delegate managers to perform for them, this is we called the agency relationship. The agency theory attempts to deal with two areas, first, is that the goals of the principal and agent are not in conflict (agency problem); second, the principal and agent reconcile different tolerances for risk. However, this is very difficult to balance between shareholders and mangers, as conflict interests between the shareholders and mangers always exist, as shareholders more often likely focus in pursuing their short term returns rather than long-term rewards, however, to achieve such gains, it makes that most managers are tempted to boost up earnings or deflate costs by manipulating accounting in many ways, accounting policy is one of the loopholes for managers to manipulate their accounting. By inflating earnings or deflating costs can temporarily achieve the short term earnings while this scarifies firm’s long-term rewards.

I do agree you said, “Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job.” It is a typical way for most employees, particular for those who have adapted the old way to do their jobs, they fear to lose their jobs and refuse to innovate or change which is a barrier and hurt company’s development and interests.

If customers are rationale, agency problem may be, to some extent, reduced to minimum. Maximizing customer value is always a one way for managers to tend to be more aggressive and please their customers’ satisfaction.

I like your last paragraph of a definition of absolute value.

Candice

Candice said...

Very interesting topic of absolute value

Yes indeed, every firm advocates maximizing the shareholder value by acting the best interests for shareholders, so shareholders delegate managers to perform for them, this is we called the agency relationship. The agency theory attempts to deal with two areas, first, is that the goals of the principal and agent are not in conflict (agency problem); second, the principal and agent reconcile different tolerances for risk. However, this is very difficult to balance between shareholders and mangers, as conflict interests between the shareholders and mangers always exist, as shareholders more often likely focus in pursuing their short term returns rather than long-term rewards, however, to achieve such gains, it makes that most managers are tempted to boost up earnings or deflate costs by manipulating accounting in many ways, accounting policy is one of the loopholes for managers to manipulate their accounting. By inflating earnings or deflating costs can temporarily achieve the short term earnings while this scarifies firm’s long-term rewards.

I do agree you said, “Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job.” It is a typical way for most employees, particular for those who have adapted the old way to do their jobs, they fear to lose their jobs and refuse to innovate or change which is a barrier and hurt company’s development and interests.

If customers are rationale, agency problem may be, to some extent, reduced to minimum. Maximizing customer value is always a one way for managers to tend to be more aggressive and please their customers’ satisfaction.

I like your last paragraph of a definition of absolute value.

Anonymous said...

Very interesting topic of absolute value

Yes indeed, every firm advocates maximizing the shareholder value by acting the best interests for shareholders, so shareholders delegate managers to perform for them, this is we called the agency relationship. The agency theory attempts to deal with two areas, first, is that the goals of the principal and agent are not in conflict (agency problem); second, the principal and agent reconcile different tolerances for risk. However, this is very difficult to balance between shareholders and mangers, as conflict interests between the shareholders and mangers always exist, as shareholders more often likely focus in pursuing their short term returns rather than long-term rewards, however, to achieve such gains, it makes that most managers are tempted to boost up earnings or deflate costs by manipulating accounting in many ways, accounting policy is one of the loopholes for managers to manipulate their accounting. By inflating earnings or deflating costs can temporarily achieve the short term earnings while this scarifies firm’s long-term rewards.

I do agree you said, “Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job.” It is a typical way for most employees, particular for those who have adapted the old way to do their jobs, they fear to lose their jobs and refuse to innovate or change which is a barrier and hurt company’s development and interests.

If customers are rationale, agency problem may be, to some extent, reduced to minimum. Maximizing customer value is always a one way for managers to tend to be more aggressive and please their customers’ satisfaction.

I like your last paragraph of a definition of absolute value.

Candice

candice said...

Very interesting topic of absolute value. Indeed, every firm advocates maximizing the shareholder value by acting the best interests for shareholders, so shareholders delegate managers to perform for them, this is we called the agency relationship. The agency theory attempts to deal with two areas, first, is that the goals of the principal and agent are not in conflict (agency problem); second, the principal and agent reconcile different tolerances for risk. However, this is very difficult to balance between shareholders and mangers, as conflict interests between the shareholders and mangers always exist, as shareholders more often likely focus in pursuing their short term returns rather than long-term rewards, however, to achieve such gains, it makes that most managers are tempted to boost up earnings or deflate costs by manipulating accounting in many ways, accounting policy is one of the loopholes for managers to manipulate their accounting. By inflating earnings or deflating costs can temporarily achieve the short term earnings while this scarifies firm’s long-term rewards. I do agree you said, “Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job.” It is a typical way for most employees, particular for those who have adapted the old way to do their jobs, they fear to lose their jobs and refuse to innovate or change which is a barrier and hurt company’s development and interests. If customers are rationale, agency problem may be, to some extent, reduced to minimum. Maximizing customer value is always a one way for managers to tend to be more aggressive and please their customers’ satisfaction.I like your last paragraph of a definition of absolute value. Candice

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