The headline in the New York Times reads, “Shareholder Value Is No Longer Everything, Top C.E.O.s Say.“
The article goes on to say, “Nearly 200 chief executives, including the leaders of Apple, Pepsi and Walmart, tried on Monday to redefine the role of business in society — and how companies are perceived by an increasingly skeptical public.”
“Breaking with decades of long-held corporate orthodoxy, the Business Roundtable issued a statement on “the purpose of a corporation,” arguing that companies should no longer advance only the interests of shareholders. Instead, the group said, they must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers.”
“Companies must also invest in their employees, deliver value to their customers and deal fairly and ethically with their suppliers, the group said.”
In 2012, I wrote a post titled, “Getting Value Creation in the Right Order,” suggesting that this idea was one of the reasons people are not passionate about business. It puts the ends above the means and focuses on outputs before inputs. In a YouTube video in 2017, I described this idea as “the most” ridiculous idea in business.
While these statements may be the result of our post-modern, sensitive-self emerging and producing a “more conscious” capitalism or a public relations campaign, I hope that it is a recognition of the sequence of value creation necessary to have a profitable and ethical enterprise.
Short Term Decision-Making
Imagine a small restaurant that sells soup. It is well recognized for its fantastic soup. The owner goes public and now has shareholders and institutional investors who are concerned with the business (this is a hypothetical, so go with me). The shareholders want an increase in the value of the enterprise, a higher stock price, and dividends (this is not hypothetical). To achieve these goals, the owner starts fiddling with the business.
First, the owner waters down the soup to cut costs and increase the profit. That not being enough to please the shareholders, he reduces the staff in the restaurant and is now understaffed. The Owner mistreats employees, and they subject their customers the same experience. The owner asks for concessions from his food suppliers, and he pays his bills late, and only after being asked for months.
The shareholder value is convex; it goes up for some time and then starts its decline as the customers and employees and suppliers all find something better to do with their time, as there is no end of competition. At some point, the owner of the restaurant starts cooking his books.
Inputs Before Outputs
The profitability of an enterprise is a byproduct of certain inputs. Drucker said that a business exists to create a customer, and many believe that the customer should come first. There are, however, inputs that you have to take care of before you can take care of customers.
- Employees: Who exactly is creating value for your customers? A business is made up of a group of people. The more effective a company is at building a place where people are engaged, growing, psychologically safe, and doing good work, the better the result for the customers.
- Suppliers: No business is an island. To a greater or lesser amount, there are things a business needs to create its products or services. The better and stronger those relationships (call it the supply chain), the better the results. In many businesses, the right partners are as important as good employees.
- Customers: Referring to Drucker’s statement, this is why you start a business in the first place, to serve customers. The more value you create for customers, the more you will have over time. The more customers you have, the more revenue and profit you generate.
If you treat the inputs like a means to an end, you may increase shareholder value and profitability for a short time, but it will be fleeting. If, however, you treat these inputs like they are the end themselves, you are likely to have a good and thriving enterprise.
Increasing the Value of the Enterprise
The value of the enterprise increases when you get the inputs right. Shareholder value increases when the enterprise thrives, when it grows, and when it generates a profit. These things don’t happen when the inputs are not taken care of, and when short-term decisions are made to maximize shareholder value.
I have heard leaders and managers touting the need to create value for their shareholders in meetings, that statement being the very first line of their mission statement. On a rare occasion, I have heard an employee parrot those words, maybe without really knowing what they were saying or why.
What I have never heard is someone say, “Look, we all have to work hard to make money for people who have a lot of money already, as well as the nameless, faceless investors who are counting on us making them rich.” A statement like this might do something less than inspire individuals to give themselves over to the cause.
If you think of business as a form of competition, those who do the best at taking care of employees tend to have a competitive advantage in markets. They tend to create more value for customers. Building great relationships with their suppliers also does a lot to provide certainty and the kind of partnerships that allows for greater value creation over time. Any money that shows up in the company coffers comes from customers who decide for themselves whether you deliver value.
Nature has a way of forcing one to obey its laws. Reality doesn’t bend to your wishes or preferences. True shareholder value is the natural byproduct of getting the inputs right.
Shareholder value has never been everything. The best leaders have always known and demonstrated they believe otherwise by focusing on the inputs and allowed the outputs to care of themselves. The scoreboard always reflects how well you are playing the game. Anything short of playing well is an attempt to cheat reality.
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