> It probably doesn't mean maximizing profitability a lot of the time as shareholders are not single dimensional characters.
If you look at any shareholder lawsuits - it's pretty clear what the obligation means, what you get sued for, and what you'll lose a lawsuit over.
The vast majority of Apple shares outstanding aren't owned by people who want to turn it into the world police or a charity. They want a return on their investment - not to turn their investment into a charitable donation to make the world a better place.
If you wanted to invest in charities - there's better options than owning stocks...
> Also when you buy a share of Apple you are not a part owner of the company.
This is totally wrong.
> as a shareholder you're entitled to very little and do not have legal rights to demand profitability.
Only if you are an isolated minority shareholder. If shareholders group together form a quorum (+ 50% of total ownership), they can demand anything from their company - including replacing the entire board and taking operational control of the company.
> It does if they willingly sell their shares to Apple
Why would they do that? That's literally just giving away money. I still think you're failing to understand the principle at work here. You can "control" a public company with a 50.1% share, that doesn't allow you to steal from the remaining shareholders. That's what shareholder lawsuits are about: the shareholders collectively feel that the company is not acting in the interests of its owners and sue.
Now, sure, often this is abused. Often the suits are baseless and mostly just attempts by law firms to squeeze some dollars out of the process. But the actions described in this subthread are exactly why they are allowed in the first place. You can't do that.
> Nobody benefits from a company growing indefinite wealth without distributing it to actual people.
Isn't this exactly what companies like Apple etc. are doing? As it accumulates wealth, the stock price (which is supposed to reflect the value of the company) goes up as well. And thus the shareholders benefit.
>> if the company can create more value than shareholders, then removing cash from the company via a share buyback should reduce share price.
Since Apple is simply hoarding the cash, we've already ruled this out -- Apple themselves admits they do not have any way to deploy the cash that would produce more returns than just stashing it in a 0.07% interest bearing account. The question then just comes down to how they disburse the cash (keep vs buyback vs dividends)
> that have mountains of their own money to burn (rather than investors')
I totally agree with everything you're saying. But I'm going to quibble with your phrasing. Apple's cash reserves belong to the shareholders just as much as Uber's funding rounds.
Too many CEOs operate under the mistaken belief that retained earnings is "play money" in the way that paid-in-capital is not. For investors, retained earnings are subject to the same opportunity cost of capital as funds raised by equity or debt.
Its management's responsibility to deliver returns exceeding the firm's weighted-average cost of capital. If they can't do that, then they should return capital to the shareholders, who can then use it an alternative higher-returning venture.
> dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere
this is exactly what they're trying to signal because its true. what's wrong with that? they've been extremely profitable while not spending the $45 billion they're giving back to shareholders, and they can continue to be profitable without it.
> In reality Apple could probably just become a private company by buying back most/all the public shares
no it couldn't. it's market cap is 550B. it's cash reserve is 100B.
more generally, a company cannot buy itself because the shareholders actually own the cash the company holds. generally, if a company has $X dollars of cash reserves, then the market cap on that company would be > $X.
> No, you buy them because you want to support good, non-nefarious companies with sound business models.
No, you really are buying the company stock because of current and future profit prospects. None of this supporting thing... a shareholder is just the owner of the share, nothing more.
> Because the board members have a fiduciary duty towards their shareholders.
Which isn't an issue if the board believes this cash pile is a good tool to maximize long-term shareholder value in the long run, they're in the clear.
> If the company literally has more cash than it knows what to do with
You're deeply misreading Cook's statement. He said Apple does not need its cash reserves for its operations, meaning for day-to-day expenses and management.
That does not even remotely come close to meaning they have more cash than they know what to do with.
> This I've never understood -- if a stock is detached from company earnings, then what drives the value of a stock, beyond the meaningless "someone else is willing to pay for it" -- why are they willing? It's not at all clear to me why my apple stock should have greater value, if apple does better as a company (or is predicted to do better).
It seems like it's a similar collective fiction to the one that gives money its value, but a fiction that provides far less social utility than money.
Random thought: owning stocks gives you two things: voting rights and dividends. Take the dividends away, and you're left with voting rights. Those are typically pretty much worthless unless you own a billionaire's amount of shares (and sometimes not even then, if some other billionaire has super-voting shares). The collective fiction that small shareholdings have value without dividends mainly serve to create buy-in for a system that creates greater fools for those people.
A shareholder once berated Tim Cook for doimg things for reasons other than profit.
Tim Cook's response:
> When we work on making our devices accessible by the blind, I don’t consider the bloody ROI [return on investment]. When I think about doing the right thing, I don’t think about an ROI.”
If you want me to do things only for ROI reasons, you should get out of this stock.
> If a company doesn't show growth, it is quickly labelled as "in trouble" or "dead". Why? Why can't we have an Apple that is the size it is now, but concentrates on making better products?
The company is owned by shareholders who want growth or a massive dividend. If AAPL can't grow then return profits to shareholders through stock buybacks or increased dividends.
> I run my own business and growth is not my #1 goal.
If you own your own business then do what you think is right for you. As an AAPL shareholder all I want is increased value in my shares.
>If you take a dollar from every four dollars of corporate profits, corporations (meaning the compact created between shareholders) will have less money to invest with.
But since they're currently sitting on record high stacks of cash (Apple alone has ~1/4 of a trillion dollars), I wouldn't be too worried about that.
>The shareholders will also have less incentive to reinvest their dividends
They're currently sitting on record high stacks of cash because they have little incentive to reinvest. It's not about tax though, it's about a lack of demand (see original points one and two for how to fix that).
> It matters some but a very large private company still needs to organize and make money even if there's probably somewhat less immediacy.
For a company like Google, it's exactly the same. Even after going public, the founders still control the majority of stock voting rights. And there's no obligation in corporate law that you have to maximize profits.
It's just that you have a fiduciary duty to the shareholders; maximizing profits is one things shareholders can want, but it's not the only thing they are allowed to ask for.
> Activism has been a big problem for drug companies
Forgive me if I'm wrong, but isn't it kinda up to the shareholders?
If shareholders value something other than the "long term value" you speak of (I guess share price and dividends) then that's their prerogative surely? If I want to buy a controlling stake in a company but my idea of value is, say, sacrificing profit at the expense of employee perks and charitable efforts, then this is my "shareholder value" and isn't it then the responsibility of the company to provide that?
Likewise, if I buy shares in a company and then want that company fire all the highly paid people so profits go up to enable me to flip my shares for more money, that's my value and isn't it therefore up to the company to do that?
In summary, if the value of a company is measured by what the shareholders want, then it can't be a problem if the company does the thing that the shareholders want, even if that's destroying what you see as the "long term value" of the company.
It might not be what you want as a founder or CEO when you IPO, but those are the rules, those are the risks and you have to take them if you want to play the system?
> It's difficult to make an index fund of products.
Well, that's what I said, companies are vehicles.
> It's difficult to retire on "product dividends.
But you can retire on corporate dividends. And when a companies shares are acquired you either get money or shares in the acquiring company.
> Companies exist as an attempt to get all the money in the world
How do you square that with 'it is hard to retire on product dividends'? Companies pay out dividends to their shareholders.
Companies clearly do not exist to 'get all the money in the world' because then the economy would grind to a halt.
> and most fail that goal.
All companies fail that goal. They fail every time they buy new resources, pay out salaries, rent offices, pay out dividends and so on.
In fact, the worst thing for a company is to have a whole pile of cash and nothing to do with it, that's money that is not currently working for the company in a meaningful way. That's why companies tend to manage their liquid reserves very carefully.
> Apple is pretty close.
Close to getting all the money in the world? No, not even remotely close. And even all that money that Apple has is indirectly owned by the shareholders of Apple. Either Apple will have to spend it or they will have to pay out. Having it sit there does them no good.
> Refusal to acknowledge failure as failure is pathological insanity.
Are you calling me insane in a roundabout way?
> Getting paid to fail (or to "soft land" and save face on an outright failure) doesn't mean the fail didn't happen.
Oh, that happens. But it's pretty rare. But better than chapter 11 if that's the alternative.
> And not just short-term value, but the amortized value of the company in perpuitity.
But this is what they characteristically fail at, or are given strong incentives not to do.
For example, one of the best things a stable, mature company can do is to just keep operating its business, making profits and returning the profits to the shareholders. Then the shareholders can use the money for whatever is most efficient, e.g. investing it in other companies with better growth potential. But the tax laws in the US punish that severely as compared with wasteful empire building or subsidiary shell games that warehouse cash in foreign subsidiaries in lower tax jurisdictions. Returning profits to shareholders gets taxed twice. Hoarding or wastefully/inefficiently spending the money doesn't get taxed at all. So they do the dumb stuff, and Apple holds onto a pile of cash the size of a mountain even though they're not actually doing anything productive with it.
You also have all kinds of problems with time frames. There are many things you can do to a company that will increase quarterly profits, like raising prices on customers that require a long lead time to switch to a competitor. Things like that may increase profits for years as the locked-in customers pay the price for as long as it takes them to transition to another vendor. But then the business starts to implode as the customers gradually all leave, and the same long lead time that kept them from quickly switching away (plus the damage you've done to your reputation) keeps them from quickly switching back. You can see this in, for example, Oracle's share of the database market slowly descending down a cliff.
And in general there are just information problems. Shareholders make decisions based on public information, but there is so much more involved in a company's operations than is described in those statements that it's easy for bad managers to waste or steal resources or otherwise make short-sighted decisions without ever getting held to account, and many incentives for them to do so, particularly when their current bonuses are tied to current-term numbers and not long-term numbers.
> As an employee it sucks, but an IPO was never a guarantee, and it's not grounds for a suit.
Why not? Returns in any company are not a guarantee. Yet, you are allowed to sue as a shareholder. Owning shares in a company when it is private does come with less privileges, but certainly does not prevent a shareholder from suing the company.
If you look at any shareholder lawsuits - it's pretty clear what the obligation means, what you get sued for, and what you'll lose a lawsuit over.
The vast majority of Apple shares outstanding aren't owned by people who want to turn it into the world police or a charity. They want a return on their investment - not to turn their investment into a charitable donation to make the world a better place.
If you wanted to invest in charities - there's better options than owning stocks...
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