Long Term Strategy Creates More Shareholder Wealth Than Short Term Results


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To Create more Shareholder Wealth, would you Focus on the Short Term?

The CEO has to think whether Value Creation is a flawed concept, particularly as it places the customer and employees ahead of the shareholder.

This concept implies that doing good things for employees and customers not only makes excellent common sense but also creates more long term value for the company and ensures its longevity.

Fortunately many CEO leaders are supporting the Value Creation belief through thinking about Conscious Capitalism.

Recently thought leaders are questioning the concept that has been drilled into CEO’s minds that value creation for shareholders is their goal. Not only that, this goal has to be achieved in the short term, and long term thinking has to take second place in the CEO’s thinking.

Many people have come out against this thinking.

These include Lynn Stout, Professor of Corporate and Business Law at the Clarke Business Law Institute at Cornell Law School, John Mckay once CEO of Whole Foods and Paul Polman, the Chief Executive Officer of Unilever.

John McKay coined the phrase conscious capitalism.

He states that while it is essential to make money, the company has a higher purpose, and this purpose goes beyond profit. The purpose could be creating value for society, and the company’s stakeholders: ‘They understand that their role is to serve the purpose of the organization, to support the people within the organization and to create value for the all of the organization’s stakeholders’.

Yaz Ishitaka, formerly with Toyo Seikan in Japan, said when you ask whom does the company work for, one of the answers will be for society (as tax payer), for customers who provides the means of life, and for employees. Need not to hurry but conclusively, the most important key is who provides the source of wealth to sustain corporate and individual life, customer is it.

Paul Polson, talks about today’s capitalism and how it has to be flawed, when it cannot be inclusive, when the poorest 3.5 billion people make less money than the richest 85 people, 1 billion people go hungry and we use 1.5 times the resource availability in the world. Do we wonder about sustainability?

Lynn Stout talks about value destruction for employees, taxpayers and society, but shareholders too through a relentless focus on share price which can hurt not only the shareholder but also the enterprise. Instead of thinking the purpose of a corporation is to create and delight customers, it seems CEO’s think the purpose of a customer is to increase shareholder wealth.

Lynn calls this “shareholder capitalism” which is robbery.

She says companies have to think of enterprise prosperity versus profit of shareholders. Hence customers have to be nurtured and must be at the center of the firm for the sake of the enterprise!

Conscious business is similar in thinking: Conscious Businesses focus on their whole business ecosystem, creating and optimizing value for all of their stakeholders, understanding that strong and engaged stakeholders lead to a healthy, sustainable, resilient business.

They recognize that, without employees, customers, suppliers, funders, supportive communities and a life-sustaining ecosystem, there is no business. Conscious Business is a win-win-win proposition, which includes a healthy return to shareholders.

During the last century as capitalism concepts grew, for the most part the professional manager viewed himself as a caretaker responsible for taking large public enterprises towards crating benefits for shareholders, employees, customers and society.

Unfortunately linking managerial wealth to short term profits has changed some of this thinking.

Lynn Stout talks of short term gains that have harmed companies. She cites that 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.

Thus short termism harms shareholders!

In fact corporations are legal entities, with shareholders having a contract with the corporation as owning share of the stock.

The corporation must fulfill its higher value creating purpose. And for this they need a Conscious Culture that fosters love and care and builds trust between a company’s team members and its other stakeholders.

Conscious Culture is an energizing and unifying force that truly brings a Conscious Business to life. Polman talks about the change in the shareholders as Unilever moved towards long termism. Stock price volatility reduced, and long term prices increased.

Lynn Stout states that it is time to recognize that the philosophy of “maximize shareholder value” is just such a defunct economist’s idea. Let’s throw off our intellectual chains so our corporate sector can do a better job for shareholders — and the rest of us too.

This according to Polman requires different leaders requiring skills such as the ability to focus on the long term, to be purpose driven, to think systemically, and to work much more transparently and effectively in partnerships.

He reiterates that long term thinking gives increased profits, and it also means you have to work to annual goals and meet them over the long term.

Sustainability, like not buying products from companies that rely on de-forestation to produce edible oils is a stand taken by many companies.

This focus on sustainability is reaching a critical mass that will reduce deforestation and improve the eco-system.

This is an example of a higher purpose of an organization.

So the CEO has to decide whether his role is to make short term profit to the detriment of everything else.

He has to determine if his bonuses are more important than longevity.

He has to decide whether he is good enough and smart enough to create value for all stakeholders while expounding a purpose for the corporation leading to long term growth and wealth.

You have to create a company culture as Zappos did.

Culture is about purpose. Culture means that the employee and customers come first. It is about building a relationship with employees and a Like-Like experience for the customer (all positive).

Polman says people are proud to work for companies with a purpose and the culture that employees, customers and sustainability come first, and they love a company that is prepared to make a difference and improve the quality of life…

If it works for Zappos and they grew exponentially with the employee/customer culture, so can you.

Your comments are welcome!

Republished with author's permission from original post.

Gautam Mahajan
Gautam Mahajan, President of Customer Value Foundation is the leading global leader in Customer Value Management. Mr Mahajan worked for a Fortune 50 company in the USA for 17 years and had hand-on experience in consulting, training of leaders, professionals, managers and CEOs from numerous MNCs and local conglomerates like Tata, Birla and Godrej groups. He is also the author of widely acclaimed books "Customer Value Investment: Formula for Sustained Business Success" and "Total Customer Value Management: Transforming Business Thinking." He is Founder Editor of the Journal of Creating Value (jcv.sagepub.com) and runs the global conference on Creating Value (https://goo.gl/4f56PX).


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