ITHACA, N.Y.

--Over the past three decades, public companies have shifted their focus from promoting long-term growth to maximizing "shareholder value" (a euphemism for share price) in the short term. The federal government has embraced this religion.

In 1993, Congress changed the tax code to require companies to link executive pay to "performance" (typically, stock price). The Securities and Exchange Commission over the last two decades has adopted rules to make corporate directors ever more "accountable" to shareholders. Hedge funds have used these rules to harass companies into selling assets, cutting expenses, and paying out large dividends to "unlock shareholder value."

How has this worked out for American investors and the American economy? Not well.

In the name of increasing shareholder value, public companies have sold key assets (Kodak's patents), outsourced jobs (Apple), cut back on customer service (Sears), and research and development (Motorola), cut safety corners (BP), showered CEOs with stock options (Citibank), lobbied Congress for corporate tax loopholes (GE), and drained cash reserves to repurchase shares until companies teetered on the brink of insolvency (much of the financial industry).

Some corporations even used accounting fraud to raise share price (Enron and WorldCom). Public companies employed these strategies even though many executives and directors felt uneasy about them, sensing that a single-minded pursuit of higher share prices did not serve the interests of society, the company, or shareholders themselves.

It's now become clear, however, that a relentless focus on share price can hurt not only employees, taxpayers, and society, but shareholders, too. Managers who are pressured to raise stock prices quickly often resort to tricks--selling assets, cutting payroll and investment, draining cash through dividends, and share repurchase programs--to bump up stock prices for a year or two. But such strategies often hurt a company's long-term ability to grow and prosper.

PERVERSE REWARDS

Economists sometimes argue that if this managerial short-termism were really a problem, then the stock market would punish the companies that engage in it with falling stock prices. But the old "efficient markets" theory that stock markets will always price shares appropriately has long been discredited.

Shareholder-value thinking means short-term thinking in today's market of high-frequency trading, where the shares of public companies change hands, on average, every four months. This may explain why the approach has produced more than a decade of the worst investor returns since the Great Depression.