Earlier this week, Grantham Mayo Van Otterloo & Co., LLC (GMO) posted a white paper on the front page of its website titled, “The World’s Dumbest Idea”, in which author and GMO strategist James Montier tears down the practice of Shareholder Value Maximization.
Shareholder Value Maximization (SVM) – the notion that the executive management team and board of directors of publicly traded companies have a fiduciary responsibility to maximize shareholder value (or total stock return) over the long-term – is likely the first thing a business major learns in Investments 101. So what exactly is GMO’s problem with the practice?
Montier lists several.
He makes arguments against SVM by analyzing total shareholder return, CEO pay and tenure, company life span, and business investment, among other metrics. And throughout the paper, Montier makes some pretty valid points that may have you questioning your Finance textbooks.
However, the paper had Ipreo asking another (more answerable) question: Does the $146 billion investment firm actually practice what it’s preaching?
In simply looking at GMO’s top equity holdings (Phillip Morris, Express Scripts, Microsoft and Oracle), you cannot infer that the firm maintains an anti-SVM investment approach, as all of those companies have employed some type of share repurchase over the last four quarters.
However, the argument can be made that GMO is moving in the direction of an anti-SVM investment approach.
- During 3Q’14, GMO’s largest equity purchase was a $1.3 billion investment in Amazon, the anti-SVM company. Amazon has reported two consecutive quarters of earnings losses, after deciding to invest in new businesses over returning capital to shareholders. Additionally, Amazon has not repurchased any stock over the past four quarters.
- On the flip side, GMO’s largest quarterly sell-downs during 3Q’14 were IBM, J.P. Morgan, Medtronic, Cisco Systems and Chevron Corporation. All of those names repurchased stock in the billions of dollars over the past four reporting periods.
- Furthermore, all ten companies that GMO sold the most of during 3Q’14 repurchased their own stock over the last four reporting periods, totaling $67.3 billion. Conversely, of the top ten companies that GMO purchased the most of during 3Q’14, only six bought back stock over the four prior reporting periods, which accounted for $15.1 billion.
While GMO’s white paper points out that the practice of SVM may be in need of additional debate among corporate executives, portfolio managers and academics, the firm has taken its discussion a step further.
GMO appears to be removing invested capital from companies that are displaying a traditional measure of SVM and reinvesting in companies that are at least less active in that measure. Which is a good indication that while he was being a little hard on “the world’s dumbest idea,” Mr. Montier was not speaking out of turn.
According to Ipreo’s data, GMO is indeed practicing what they preach.