If you grab your favorite marketing book and boil away process diagrams, statistics, and literary fluff, just two words will remain: create value. Easy-sounding advice, but for most executives, it’s wicked hard. An ideal place for opportunists to step in and promote simple answers and quick remedies.
Business leaders have an insatiable appetite for how-to’s on value creation. And they get a nonstop barrage of erudition from practitioners, self-anointed experts, and academics who cobble salads of trendy verbs, nouns, adjectives and industry jargon, producing inscrutable sentences to solve the insoluble. Maximize/Optimize/Leverage [fill in words]! Measure this! Control that! Be laser-focused on [name of thing]!
Some recommendations show great insight. But others are obvious admonitions and bland platitudes hawked as panaceas, hacks, and fixes for whatever strategic impediment wanders into a CXO’s crosshairs. Useful or not, many are shamelessly aimed at a goal few have dared to question: maximizing shareholder value.
Until now. People have started to recognize that maximizing shareholder value has a central role in harming other stakeholders. The problem is growing. In the name of maximizing shareholder value, crucial employee benefits are being slashed, workers and contractors are hired and churned at whim, and producers with sketchy labor and supply chain practices are awarded contracts – as long as they maintain the highest quality at the lowest cost. Who cares if the widget was made in a firetrap factory by laborers required to work 80-hour weeks, with no overtime pay differential? Magnanimity and fairness, once emblems of corporate pride, have been expunged from C-Suite vocabulary. Hey, stock prices don’t increase without trade-offs!
Customers are suffering, too – mentally, physically, and financially. Faulty product designs cause injury or death, as we saw recently with GM and Takata. Companies weaken customer service, often under the guise of improving it. “As part of our commitment to our loyal customers, we are now automating . . .” Every customer support rep I’ve spoken to this year has dutifully reminded me that I can take care of my transaction or inquiry through a website. “I can step you through setting up a profile, if you like . . .” Part of the script, I suppose, but what a humiliation to be required to pull the rug out from under your own job, one conversation at a time!
With public trust in corporations waning, a new type of social-media superhero has emerged: the “disaster specialist,” to rush in post-debacle and patch things up with aggrieved customers. They bring “field-tested industry best practices.” Reassuring to know, if you’re prone to repeating widely-publicized mistakes. And when employee morale tanks, a different group of consultants waits at the door, promoting “surefire” ways to rekindle worker passion. Meanwhile, in the executive office, all’s well. Why worry, when your stock price streaks on a heavenly trajectory? There’s a hefty bag of bonus money waiting at the end of the rainbow.
This is a perverse system, in every sense of the word. In the name of maximizing shareholder value, companies routinely decimate their vital infrastructure and brand equity, then pay steeply to repair and rebuild. Some companies complete this circuit more than once. “The non-investor stakeholders? Let them eat cake!”
Maybe if we humanized those likeliest to get hurt, things could improve. For starters, we should stop calling investors, employees, customers, and vendors stakeholders, and instead refer to them as people. “It would be a funnier story if it weren’t for the tragic aspects of American capitalism in the 21st century,” wrote Matthew Stewart in a Wall Street Journal review of Duff McDonald’s book about Harvard Business School, titled The Golden Passport (Schools of Mismanagement: a Modern Business Education Provides Theories and Metrics But No Moral Center, April 22, 2017).
How did this happen? Stewart writes that in the 1980’s, Harvard Business School “suddenly embraced the notion that managers are just a shareholder’s idea of roadkill – and that it is positively bad for shareholders to possess anything resembling a moral conscience. If there is a villain painted in a single shade of black in Mr. McDonald’s version of history, it is Michael Jensen, the economist and Harvard Business School professor who supplied the intellectual rationalizations for the leveraged buyout boom, the CEO compensation boondoggle, and the rampant financialization of the economy. In Mr. McDonald’s tale, Mr. Jensen shows up ‘spewing out ridiculous blanket claims such as . . . “shareholders gain when golden parachutes are adopted.”’ Forty years ago, I drank the same Kool-Aid as an undergraduate business student.
For his part, Jensen was influenced by an op-ed article by Milton Friedman that appeared in The New York Times Magazine on September 13, 1970 (A Friedman Doctrine – The Social Responsibility of Business is to Increase Its Profits) that has become “the most read, misread, and referenced article ever written by a Nobel Laureate economist.” wrote James Heskett (Should Management be Primarily Responsible to Shareholders?, Harvard Business Review, May 9, 2017). “And It’s still being argued today. Friedman argued that the best way for managers to contribute to the social good was by maintaining a single-minded focus on profit, acting as agents for shareholders who put their capital at risk investing in their companies . . . Of greater importance than the issue posed in the article’s title was the proposition that followed: Because shareholders are owners of a corporation, professional managers and directors are their agents, primarily responsible for carrying out their wishes and creating value for them.”
According to Stewart, Harvard Business School produced “magic sticks that promised to answer every human need with a handy spreadsheet. In the more recent chapters of the history, the scariest parts are where the faculty take the spreadsheets off campus.” Among the locations Stewart is referring to is the customer-facing side of business. The retail sales floor. The Point-of-Sale terminal at Target, Home Depot, and Walmart. Online commerce. B2C, B2B and B2G. Neighborhoods monitored hundreds or thousands of miles away by wonky marketers and data scientists using predictive analytics dashboards.
Friedman’s and Jensen’s ideas have permeated into a “river of self-love that is America’s management-ideology complex,” as Stewart describes it. Every day, putrid bubbles of pomposity rise up from the sediment: United Airlines drags a paying passenger from one of its planes, initially defending its action. Wells Fargo systemically exploits its customers and employees so its president and senior managers can receive multi-million dollar bonuses tied to stock price. Theranos coerces its employees into silence to conceal the dangerous technology flaws in its widely-installed blood assay equipment. This is Mr. Friedman’s “single-minded focus on profit” at work. If he were alive today, Friedman would object to my characterization. “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud,” he wrote. It took society nearly fifty years to fully recognize that Friedman’s view had great potential for harm. Today, many people simply ignore every word he wrote after profits. No doubt, some believe his sentence ends with that word.
In the 1990’s, the privately-held company I worked for was acquired by a firm traded on the NASDAQ, and a massive cultural shift overtook the sales organization almost immediately. Some salespeople who regularly provided great support for their customers became pariahs for not making goal. They were flushed, to use the indelicate vernacular of the profession, meaning they were fired. “Everything’s changed,” we were regularly reminded at our monthly sales pep talks. “Investment analysts are looking closely at our revenue performance, and it’s imperative that we hit our number every quarter.” Did our buyout and concomitant obsession with satisfying the analysts’ revenue expectations increase customer satisfaction? Did it motivate the company to invest more in customer support? Did it improve morale? It’s a fallacy to believe that on-target revenue production means employees and customers are happy, or that “top revenue producers” have delighted customers.
Should we replace maximizing shareholder value as management’s objective? If so, what goes in its place? The core issue is allegiance. “Harvard Business School Professors Joseph Bower and Lynn Paine propose that the primary allegiance of managers and their boards should be to the health of the corporation, not the maximization of shareholder value [emphasis, mine]. The rationale for this includes the arguments that managers can be held legally accountable while shareholders ‘have no legal duty to protect or serve the companies whose shares they own,’” writes James Heskett. And it’s immaterial whether investors have morals or personal integrity. Under maximize shareholder value, governance is not automatically granted a role in how companies are managed. In fact, governance can threaten shareholder value. In business, there’s no such thing as an immutable truth. Even the notion of shareholders as owners of a company has been called into question.
The widespread practice of prioritizing shareholder value maximization seems odd, given the ambiguity over their role and rights in the development and implementation of corporate strategies and tactics. This becomes especially problematic when ensuring high returns to shareholders exacts heavy costs on others who are similarly vital for creating value. For example, decisions that benefit shareholders, such as increasing short-term profitability through downsizing, can be catastrophic not only for customers and employees, but for the communities and the ecosystems of enterprises that depend on them to thrive. To make financial ratios more attractive, companies often reduce or eliminate essential long-term investments in research and development. In some cases, a company’s most valuable assets can be sold or leveraged to provide investors with immediate, substantial financial returns, while jeopardizing a company’s overall vitality. Few could argue that outcomes for customers, employees, and suppliers are fairly protected under this system.
If maximize shareholder value is so bad, why have so many companies embraced the idea? First, companies need investment capital to launch, grow, and fund new development. Those who put their money at risk deserve to be rewarded – and should be. Second, according to Heskett, “One reason the theory has predominated is that it is simple and straightforward. Shareholder value is easy to measure. Agency theory [the idea that a company’s managers and directors are responsible for carrying out the wishes of an organization’s owners and shareholders] simplifies the mission for managers; they need only serve one primary master [emphasis, mine].”
The problem is, converting to another corporate edict – one that is ostensibly healthier, more egalitarian, and more long-term focused – is complicated, as this passage from NCR Corporation’s annual report, excerpted from an article, Two points of view: The Point of Shareholder Wealth Maximization, illustrates:
“. . . board of directors no longer believe that shareholders is [sic] the only constituent to whom they are responsible”. (Wang, Jia and Dewhirst, H. Dudley, 1992). Explicitly, shareholder value maximization is not the only goal of the company, a company can’t do well without caring the interests of customers, suppliers, employees, or government environment . . . Stakeholders are constituencies who play an important role in the fortunes of the company. Their primary mission is to create value for stakeholders.”
That can work when the activities involved in value creation for all stakeholders are harmonious and aligned. But they are not. A point that Michael Jensen picks on:
“Stakeholder theory effectively leaves managers and directors unaccountable for their stewardship of the firm’s resources . . . plays into the hands of managers by allowing them to pursue their own interest at the expense of the firm’s financial claimants and society at large. It allows managers and directors to devote the firm’s resources to their own favorite causes – the environment, arts, cities, medical research – without being held accountable.”
I think his worry that managers will pursue disparate goals like aiding environmental causes or solving world hunger is overblown. Isn’t that the role of leadership – to keep everyone in the organization on the same page, so to speak? Here, Jensen backpedals, and provides a tiny concession:
“But . . . No company can create great value for its shareholders without stable growth of revenue, which comes from the relationship with customers, suppliers, bankers or government and so on.”
I agree with this last point. But I also recognize that with diminishing consumer trust, growing wealth inequality, and information power skewing back to corporations, Jensen and I are looking at business through the same rose-colored glasses.
Society cannot assume that by focusing on fulfilling the interests of shareholders we will produce consistently benign outcomes for others. We need something better than maximizing shareholder value as a managerial marching order. I’m just not sure exactly what it should be.