> 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.
In other words, as mruts said, the government steps in to mess everything up.
> You also have all kinds of problems with time frames.
> And in general there are just information problems.
Yes, but those problems can't be fixed by making the market less free. They can only be fixed by shareholders having a long time horizon and being willing to be involved in corporate governance. The biggest issue with that nowadays is that most "shareholders" are not individuals but mutual funds, which shortens the effective time horizon for everybody (even though funds are holding the retirement accounts of people who will be working for the next 30 years, they still compete on short-term returns) and means no effective shareholder governance (mutual funds don't care how individual companies compensate their management, they'll just trade to another stock if one company has problems).
Isn't the rise of index funds an example of rational choices in a free market leading to suboptimal outcomes?
You contend that the success of corporations maximizing shareholder value relies on active shareholder governance. Yet the rational choice for an individual in an efficient market is to simply diversify their portfolio and minimize fees through passive investments. How would a freer market fix the time frames issue that both of you agree is a problem and you suggest active long-term shareholder pressure is necessary to solve?
> Isn't the rise of index funds an example of rational choices in a free market leading to suboptimal outcomes?
To the extent that it creates problems with time horizon and corporate governance, yes.
However, that does not mean that making the market less free will improve outcomes.
> How would a freer market fix the time frames issue
Who said anything about a "freer market"? You just said (and I agreed) that the rise of index funds is an example of rational choices in a free market. So there is no "freer" market that can fix it.
What I said was that government interference does not fix anything; it makes things worse. (US tax laws being an example.)
> In other words, as mruts said, the government steps in to mess everything up.
Certainly. But it still actually happens under existing law to existing public companies, and happens less to companies that aren't public corporations (C corps.) and correspondingly don't have the same tax treatment. And having companies owned by smaller numbers of people also addresses the issue of ownership being so diluted that nobody has sufficient incentive to pay attention to corporate governance.
> Yes, but those problems can't be fixed by making the market less free.
The "[some regulation] vs. lack thereof" debate is uninteresting in the abstract. Most regulations make things worse as a general rule, but if we don't evaluate them each individually then we wouldn't even have laws against theft or murder etc.
I agree that having companies owned by smaller numbers of people (and having more of them be privately owned) would help, yes. However, that's also subject to the free market. Right now the free market appears to be producing lots of IPOs driven by the needs of venture capital. I hope that's a temporary phenomenon that will correct eventually.
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.