Does shareholder value rule business?

What is the purpose of a corporation?

It’s remarkable that after a century of management theorising, there is no agreed upon answer.

Common-sense tells us that the purpose of a business is to make money.
A conversation with almost any businessman or economist shows it to be so.
Why else would a company be in business? Many experts agree: The Economist has recently declared that the goal of maximizing shareholder value, i.e. making money for shareholders, is “the biggest idea in business.” Today, “shareholder value rules business.”

Yet two distinguished Harvard Business School professors – Joseph L. Bower and Lynn S. Paine – recently declared in Harvard Business Review that maximizing shareholder value is “the error at the heart of corporate leadership.”
It is “flawed in its assumptions, confused as a matter of law, and damaging in practice.”
Bower has long held this view: back in 1970, he told NPR that maximizing shareholder value was “pernicious nonsense.”

Jack Welch, who in his tenure as CEO of GE from 1981 to 2001 was seen as the uber-hero of maximizing shareholder value, has been even harsher.
In 2009, he famously declared that shareholder value is “the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products.

Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

But despite these denunciations, the “pernicious nonsense” of shareholder value has spread.
Shareholder value thinking, say Bower and Paine, “is now pervasive in the financial community and much of the business world. It has led to a set of behaviours by many actors on a wide range of topics, from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility.”

There are thus two opposing schools of thought: Shareholder value is either the best idea in business and the worst idea in the world. Which is it?

Corporate strategy on the other hand, is the overall plan of contemporary management practice, CEOs have been obsessed with diversification since the early 1960s, because almost no consensus exists about what corporate strategy is, much less about how a company should formulate it.

A diversified company has two levels of strategy: business unit (or competitive) strategy and corporate (or companywide) strategy.
Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes.
Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.

Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.
The track record of corporate strategies has been dismal.
A study of the diversification records of 33 large, prestigious U.S. companies over the 1950–1986 period, found that most of them had divested many more acquisitions than they had kept.
The corporate strategies of most companies have dissipated instead of created shareholder value.

The need to rethink corporate strategy could hardly be more urgent. By taking over companies and breaking them up, corporate raiders thrive on failed corporate strategy.
Fueled by junk bond financing and growing acceptability, raiders can expose any company to takeover, no matter how large or blue chip.

Recognising past diversification mistakes, some companies have initiated large-scale restructuring programs. Others have done nothing at all. Whatever the response, the strategic questions persist. Those who have restructured must decide what to do next to avoid repeating the past; those who have done nothing must awake to their vulnerability. To survive, companies must understand what good corporate strategy is.

Many post-Enron discussions about corporate governance have focused almost exclusively on the responsibilities of directors and the structure of boards and shareholders.
This is hardly surprising – after all, a company’s survival ultimately depends on the effectiveness of its board’s decision-making processes.
But boards don’t exist in a vacuum. Ultimately, board structures and decision-making cultures will depend on a company’s unique circumstances.
Large companies may also operate different levels of boards throughout their businesses. The complexity of large international organisations with many subsidiaries makes the issue of management information and decision-making more complex, and the need for directors of such vast organisations to have early-warning systems is a must.

The board of directors in any organisation is responsible for its operational, strategic and financial performance, as well as its conduct.
Boards exercise their responsibilities by clearly setting out the policy guidelines within which they expect the management to operate. They will set out the short- and long-term objectives of the organisation and a system for ensuring that the management acts in accordance with these directions.

They will also put procedures in place for measuring progress towards corporate objectives. There is therefore a clear difference between the main responsibilities of directors and managers.
In his recent book, “Corporate Governance and Chairmanship: A Personal View”, Sir Adrian Cadbury distinguishes between direction and management: “It is the job of the board to set the ends – that is to say, to define what the company is in business for – and it is the job of the executive to decide the means by which those ends are best achieved.”
They must do so, however, within rules of conduct and limits of risk that have been set by the board.

Can your board answer the following strategic questions:

· Who are our stakeholders?
· What are our stakeholders’ stakes?
· What opportunities and challenges do stakeholders present?
· What economic, legal, ethical, and social responsibilities does our organisation have towards our various stakeholders?
· What strategies or actions should we take to best manage stakeholder challenges and opportunities?
· Do you have a system for managing relationships with stakeholders?
· How do you measure results? What metrics do you use to assess and gauge stakeholder relationships?
· In a crisis how quickly can you communicate with your relevant stakeholders?
· Do you know the various methods to engage with stakeholders and when not to use it?
· Can you state how much you are spending on each stakeholder group and what your ROI is?
· Have you developed a set of rules and practices on how best to manage the process of building stakeholder reputation with each stakeholder group?

Once you have answered the above questions, then you should attempt these:

I. What strategies or actions should our firm take to best manage stakeholder challenges and opportunities?
II. Should we deal directly or indirectly with stakeholders?
III. Should we take the offense or the defence in dealing with stakeholders?
IV. Should we accommodate, negotiate, manipulate or resist stakeholder overtures?
V. Should we employ a combination of the above strategies or pursue a singular course of action?

Shareholder value: Has been called the driving force of 21st-century business.

What value do shareholders bring to the companies they invest in? Are most shareholders interested in what is best for the company, or are they in it only for the financial performance of the company’s shares?

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Adam Smith, the founder of capitalism, said that everyone should do what is best for themself.
However, Professor Nash, portrayed in the movie “A Beautiful Mind”, starring Russell Crowe, stated that “Adam Smith was wrong!”
Commercial organizations can only succeed if everybody is doing what is best for themselves while simultaneously doing what’s best for the whole group.

Beginning in the 1990s, we witnessed extreme egocentric behavior among public companies who were motivated solely by their own financial gains. Several studies prove that self-centered and egocentric companies perform poorly as compared to companies who focus on developing innovative products, delivering value for the customer, and motivating their employees to be more productive and successful.
How can these companies deliver value to their customers or suppliers if they are only looking at their own bottom line? Too much focus on shareholder value, measured by quarterly reports, is one of the primary reasons that public companies are not realizing their full potential and that the West has been in financial chaos for the past six years.
Companies that outperform the rest – over time – build their success on a performance-based culture, driven from the outside in.

Most executives agree that it’s important to create value for the customer. The problem is that despite the good intentions of the senior management team, this mindset often doesn’t travel farther than the company core values posted in the reception lobby of the corporate headquarters.
You know the classic four: honesty, engagement, customer focus, and collaboration.
If you exchanged one company’s value statement for the values posted in the lobby of the corporate headquarters across the street, would anyone notice? Or are the values posted in the lobby of the neighboring company the same four?

Professor Solow, winner of the Nobel Prize for his theory on economic growth, found that only a portion of financial growth in the world comes from companies making money out of money.
Instead, the majority of financial growth comes from companies actually producing a product, developing a new service, or changing the way we conduct business.
Corporate leaders need to do more than shuffle numbers on a balance sheet.
Consider Steve Job’s unrelenting focus on product innovation and what Apple was able to achieve by creating the iPad, iPhone, and iPod. As we know, iTunes has literally changed the entire music industry!

The obsession with maximizing shareholder value has also impacted the way that companies approach negotiations with their customers and suppliers.

To solve the world’s economic crisis, we need brave CEOs and leaders to step up and declare, “I don’t care what the share value will be for the next two years. We might not make a profit during this period. But we are going to focus all our resources on product research and development with the goal to create the best product the world has ever seen.
We’re here to change the world! We are fully committed to delivering value and a return on investment to our shareholders. Yet it may not be in the next 30 days or even the next three quarters. I am asking our investors to look at us with a long-term view. I am asking them to stand by us and risk a much larger return on their investment if they will agree to fund the innovation required to develop a market-changing product.”

If you left Sharpies under the statement of core values that hangs in the lobby of your company, what kind of graffiti would you find scribbled on your values statement? What would your customers and suppliers write? Your corporate values are better articulated by your employees, customers, and strategic partners than by your management team and board of directors.
If there is a disconnect between your formal statement of values and the graffiti, you have work to do.

If you can build a product that will truly change the world, like Steve Jobs did several times, your shareholder value will take care of itself. Your problems will be protecting your distribution channels, defending your intellectual property, and retaining your talent. Which set of problems would you prefer? I think the answer is obvious – to hell with shareholder value.

Experience tells us that listening to your stakeholders and strive to meet their expectations—difficult or not.
Ensuring they are feeling heard, valued, and appreciated grows trust, support and credibility. Building relationships and understanding motivation takes time and effort but will make your job easier in the long run. Companies are more successful when everyone is on board and on the same page!

A famous quote by Dennis Muilenburg:

 “As we continue to drive the benefits of integrating our enterprise skills, capabilities, and experience – what we call operating as ‘One Boeing’ – we will find new and better ways to engage and inspire employees, deliver innovation that drives customer success, and produce results to fuel future growth and prosperity for all our stakeholders.”