Much of capitalist finance theory is based upon the concept of “maximizing shareholder value.” Without a doubt, I believe in decision-making based upon increasing the value of the firm, whether public or private. However, this concept is abused in its use and assumption. There are times when investors are comforted by the assumption that management’s decisions are “in the best interest of shareholders.” Whenever they hear that a decision is going to “maximize shareholder value” or that it’s “in the best interest of shareholders” - they really should be concerned.

Jerry Yang and David Filo tried pulling that line when the played hard to get with Microsoft. A few big investors even jumped on board and applauded them for trying to maximize shareholder value. Now some of those people may have a different view of that concept. As for the Yahoo board, they are still believing their own bullshit. Just consider their letter responding to Carl Icahn’s attempt to replace them. Here are some excerpts including the magical words (I highlighted):

Unfortunately, your letter reflects a significant misunderstanding of the facts about the Microsoft proposal and the diligence with which our board evaluated and responded to that proposal. A fair-minded review of the factual record leads to one conclusion: that Yahoo!’s ten-member board, comprised of nine independent directors along with Yahoo! CEO Jerry Yang, remains the best and most qualified group to maximize value for all Yahoo! stockholders.

Conversely, we do not believe it is in the best interests of Yahoo! stockholders to allow you and your hand-picked nominees to take control of Yahoo! for the express purpose of trying to force a sale of Yahoo! to a formerly interested buyer who has publicly stated that they have moved on. …

From the beginning of the process with Microsoft, Yahoo!’s independent directors focused on one central goal: how best to maximize stockholder value.

It concludes:

In short, Yahoo!’s board was at every point in this process prepared to enter into a transaction with Microsoft that would maximize stockholder value — and included certainty of value and closing. What Yahoo!’s independent board refused to do was to allow control of this company to be acquired for less than its full value.

Just saying those phrases does not make it true.

Companies make many decisions that are said to be done to maximize shareholder value. Just consider the acquisition strategies of AT&T in the late 1990’s when they bought TCI and MediaOne cable at ridiculous prices with too much debt. At the time, CEO Armstrong said

“And as I said before, the third reason is that we believe that we have announced the foundation and the path for the creation of long term shareholder value that will enable these companies to be even more performance marketed, customer focused, faster in response times, more competitive in their offerings.”

I guess splitting AT&T back into pieces and selling them off was also done in the best interest of shareholders. AT&T was one example. But you can pull up almost any announcement of an M&A transaction and find these statements of the obvious in the overly-optimistic words of management. Sometimes they turn out to be great and the decisions were truly in the best interests. Other times….not so much.

Buybacks are another common place to hear that management is looking out for investors. Countrywide Financial proudly announced the 4th quarter 2006 multi-billion dollar repurchase program and other optimistic promises in its press release. Here is a snippet:

“While we expect the continuation of a transitional environment in the near term, we are bullish on the positive long-term growth prospects for the mortgage lending industry and Countrywide in particular, as a result of the proven power of our business model and our strategic positioning. We believe Countrywide’s core strategies of profitable market share expansion, growth in our mortgage loan investment portfolio and associated spread income, continued synergistic diversification, and ongoing capital optimization will continue to deliver long-term shareholder value.”

Okay. I got the message.

Almost every major decision that management makes is announced with the assurance that it is “in the best interests of shareholders” and will “maximize shareholder value.” After all, you would never feel good if they did something stupid and said “This decision is in the best interests of management and the board of directors and may turn out to maximize our shareholder value while destroying yours.”

As a shareholder, you must expect that management is acting in your best interests. Do you really need to hear these phrases every time they do something big? Are they comforting? Not to me. Whenever someone goes out of their way to assure me of something I thought we both understood already, I get suspicious.