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Managing for Shareholder Value – What Does THAT Mean?

March 29, 2011

When Michael Hammer, author of Reengineering the Corporation, died in 2008, the NYT reported that he once wrote: “I’m saddened and offended by the idea that companies exist to enrich their owners…. That is the very least of their roles; they are far more worthy, more honorable, and more important than that. Without the vital creative force of business, our world would be impoverished beyond reckoning.” (NYT, Sept. 4, 2008)

He and his co-author were reportedly deeply concerned about the misuse of their premise, as “reengineering” became instead “synonymous with less elegant forms of reorganization, notably downsizing, in which C.E.O.’s fire workers wholesale to make a company more ‘efficient’.” (Ibid.)  

This was part of a process in which all aspects of a business were analyzed and objectified.  With a focus on transaction costs, relationships were often reduced to deal of the day; resources considered only inputs, with a focus on reducing financial outlays to secure them; and people were mostly seen as costs, not resources or investments.  Jack Welch of GE was a leading cheerleader.  As reported in The Week (March 25, 2011), Welch “argued that public corporations owe their primary allegiance to stockholders, not employees.  Therefore…companies should seek to lower costs and maximize profits by moving operations wherever is cheapest.”  Welch’s GE even held “supplier migration seminars” encouraging them to “migrate or be out of business.”  Welch even advocated the ideal of having plants on barges “to move with currencies and changes in the economy.” (Ibid.)

In 2009, Bloomberg Businessweek (March 16, 2009) reported that  Welch had changed his tune, telling the Financial Times that the business emphasis on shareholder value – a.k.a earnings and stock price – was “misplaced.” “On the face of it shareholder value [as strategy] is the dumbest idea in the world.” Welch went on to say, “Any fool can just deliver in the short term by squeezing, squeezing, squeezing.”

Welch went on to explain that “shareholder value is a result, not a strategy…..Your main constituencies are your employees, your customers and your products….” (Ibid)   

Still, there are a considerable number of world corporations that believe shareholder value is still the grail, and have the compensation schemas to reinforce its value in their version of the world.    Wall Street reinforces their conclusions, with institutions comprising the largest percentage of equity ownership.  Institutions often have performance goals to meet that encourages more frequent trades.   Institutions include mutual funds and pensions, as well as insurance companies, banks and investment funds responding to competitive pressures to deliver returns….. often driven by folks like you and me who invest funds for retirement.   Conclusion:  Our society has created rewarding feedback loops for short term thinking which makes meaningful change challenging.

At this past World Economic Forum, there was conversation about developing two kinds of equity, similar to short and long term bonds rates.  One suggestion was that certain economic benefits, as an example, dividends, would not accrue to any but long term, such as five years, investors.

Socially responsible investing – defined as an investment strategy that seeks to maximize both financial return and social good such as environmental stewardship, social justice and corporate governance – also has strengthened, especially in the last 25 years.  

Indra Nooyi of Pepsico talks about Profit with a Purpose, which incorporates the concept of corporations exercising a “duty of care” to the societies in which they operate – this in exchange for the privilege of limited liability.    There is growing recognition that “no corporation is an island,” a la Welch’s corporate barge.  In the words of Porter and Kramer, “Any business that pursues its ends at the expense of the society in which it operates will find its success to be illusory and ultimately temporary.”  (HBR, Dec. 2006, Strategy and Society)

Getting from where we are to where we might like to be is no cakewalk.  Strategy as a management tool becomes more important in the CEO toolkit, as leadership determines priorities and opportunities.   Bottom line, managing for long term, generating sustainable shareholder and social value  is darned difficult.  It also means developing better peripheral vision and sensitivity to evolving science findings, black swans and systemic risks.  It requires leadership, a strong sense of values and developing high caliber talent.

No wonder so many choose to focus on short term earnings and stock price.  It’s a heck of a lot easier, and often transiently lucrative, especially if contributing genuine value is low on the personal priority list.

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