Montier explores the various flaws associated with the concept of shareholder value maximisation (SVM) and the underlying causes that relate to it. Theoretically, SVM may have been conceptualised in the work of Arrow- Debreu, which he states that with perfect competition and complete markets, an optimal outcome will result.

Montier states that by 1977, corporations at large had adopted a focus on SVM. However, it is revealed that the underlying returns have fallen significantly under SVM, while under era of managerialism, have produced slightly higher returns. He expresses that during the era of managerialism, the vast majority of CEO compensation has been through bonus stocks and options and that in the last two decades, there has been an increase in stock-related compensation. In addition, Montier has found through the collected evidence of incentives psychology that when incentives are too high, people tend to obsess over them, diverting their attention from focusing on completing the task on hand. This was proven through an experiment by Dan Ariely and co-authors to test the powers of incentives.

Montier examines the contrast between IBM and Johnson & Johnson. While IBM target SVM, Johnson & Johnson thought shareholders should get a “fair return”. This has led to Johnson & Johnson gaining a significantly higher returns than IBM in the same time period. According to Montier, this can be attributed to the pay of CEO’s being increasingly stock -related pay in recent decades. The lifespan of the company and the tenure of CEOs also has an impact which both has been significantly shortened. This has resulted in many mangers sacrificing long- term value for short- term gain.

There have been many significant implications due to effect of SVM throughout the years. These include the decline and low rates of business investment, rising inequality and a low labour share of GDP. However, Montier is also quick to mention that it isn’t SVM alone with has contributed to these issues, but other broader policies which have magnified the effect. Further evidence in a recent study by Asker el at comparing the investment rates of public (listed) and private (unlisted) companies, has shown that “the average investment rate among private firms is nearly twice as high as among public firms, at 6.8% versus 3.7% of total
assets per year.”

Overall, three conclusions can be drawn from this: SVM has failed to deliver any noticeable returns to its shareholders, a narrow focus on returns can be detrimental and consideration of broader polices like SVM must be greatly scrutinised.

1. This research is relevant to finance as it explores the shortcomings of SVM and how we should learn from past mistakes. The various detrimental effects on the economy has been explored by Montier and we as shareholders should consider a different option to maximise our returns.
2. From a theoretical perspective, SVM has started from the work of Arrow-Debreu. He stated that in the presence of perfect competition and complete markets, optimal outcome will result in which all stakeholders will pursue their own interests.
3. In 1970s, Friedman argues "there is only one and one social responsibility of a business - to use its resources and engage in activities designed to increase its profits. He further aruges that corporates are not "persons" and he assumes that shareholders will want to maximise profits.
4. The idea of focus on maximising shareholder's wealth can be traced back to Adam Smith, in which he states that under an "efficient" market the current share price is the best indicator of estimate of future cash flows. Thus by combing efficient market hypothesis, it can be considered as maximising the shareholder's wealth.
5. By 1977, these ideas had led to a increasing focus on SVM. A comparison between IBM which targeted SVM and Johnson & Johnson which focused on shareholder's getting a "fair return" resulted in Johnson & Johnson delivering more returns compared to IBM.
6. In a wider perspectives a comparison between the returns achieved by shareholders in he era of managerialism with those achieved in the era of SVM has resulted in the underlying return generation from companies has fallen significantly under SVM.
7. A study by Bakija, Cole, and Heim has shown the rise in incomes of the top 1% has been driven largely by executives and those in finance
8. Montier states that the issues were caused by the increasing dominance of total CEO compensation coming from salary and bonus over the last few years. He He backs up his claims though the collection of evidence on the psychology of incentives, which have revealed that when incentives get too high, people tend to obsess over them, rather than focus on the task at hand.
9. Another reason Montier presents is the correlation between CEO tenure and the lifespan of the company, which has both shortened considerably in comparison between the era of managerialism and SVM.
10. Study by Saez & Zucman shows that 90% have a savings rate of effectively 0%, whilst the top 1% have a savings rate of 40%.