The Myth of Maximizing Shareholder Value

A while ago I was watching Bill Moyers interview Columbia professor and Nobel Memorial prize-winning economist Joe Stieglitz. Moyers was decrying Wall Street and the culprits of the 2008 financial meltdown, and in response to his question of how to remedy this, Stieglitz replied “we forgot that we make the rules.” He went on to say (I’m paraphrasing) that there isn’t and never was a ‘free market’, and that all markets, to serve society properly, require some degree of regulation. Fixing the problem, Stieglitz said, requires telling the politicians to change the rules. He also denounced the widely accepted idea that the real purpose of any business is to maximize shareholder value. In our business, I’ve come to understand the intense pressure that CEOs are under, not the least of which comes from meeting quarterly share price expectations. Yet I have never accepted that; instead believing that when a company values and grows it’s people, they in turn delight customers, innovate, create, and all stakeholders, including shareholders, win big. Shareholder return is a result, not an objective in itself, and when it becomes the overriding objective, we arrive at where we are now.
The link below is a review of Roger Martin’s book Fixing the Game, in Forbes magazine, back in November, 2011. Martin describes how a shift in the 1970′s to the notion that maximizing shareholder value was the true purpose of a business, led to the financial meltdown and the income distribution gap that, he contends (and I agree) is threatening the very system of American capitalism that originally strengthened democracy.
http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/
The takeaways for me are threefold:
1) that the majority of CEO’s are well-meaning and capable people, but they are handcuffed by the widely accepted “expectations market” that demands quarterly guidance, and compels a short-term focus and earnings management. This is both damaging to society, and unsustainable in the long run. To allow these leaders to revert to focusing on ‘delighting customers’, and building sustainable businesses that add tremendous value to society, we must shift away from the mindset that the purpose of a business is maximizing shareholder value. Further, regulatory policy must shape and enforce a corresponding behavioural shift.
2) Research continues to show that companies that prioritize employees, customers, and then shareholders (Martin cites J&J, P&G, and Apple) actually generate better (often significantly better) results than those that simply manage to expectations. This implies that reverting to a ‘real-market system’ yields a win/win result for all stakeholders. It takes a longer-term focus, and sometimes more work, but is sustainable and more stable.
3) The problem is much worse now. Four years after the article was written, investment banks are significantly larger than before the 2008 crisis, and Wall Street’s quarterly guidance system continues to reward irresponsible CEO behavior. Executive compensation at best reinforces short-term thinking, and in worst cases, creates moral hazard and self-serving decision-making.
While this story deals with the financial and business sector, the need for strong, authentic leadership in all sectors has never been greater. No one who reads the daily news would deny that the world is experiencing that proverbial ‘paradigm shift’ in not one, but many areas: business, geopolitical, science and technology, cultural, media and more. We are in a place where, as Marshall Goldsmith wrote, “what got you here, won’t get you there.” We need to reinvent a lot of things; discard old systems that no longer serve us well. That calls for deep transformation, and that, in turn calls for courageous, authentic leaders; leaders who remember that we make the rules.

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Values: Leaders Need to Know, Live, and Communicate Them

Daughter: “Mom, have you seen my green top anywhere?”
Mother: “Honey, you know that isn’t exactly my style.” Smiles thinly.
As the daughter runs off, mother dashes upstairs to rifle through her laundry basket, retrieve the stained top (to flashbacks of her out on the town with friends while wearing it) and quickly launders it with Tide’s newest product.
Pan to the daughter now wearing the top “hey mom, I found it; must’ve been hiding somewhere in my closet!” Mother smiles knowingly.
Some may think I am moralizing in criticizing this commercial, but I suggest there’s more going on here than meets the eye, especially the eye of Proctor & Gamble. This is surprising given the excellent job P&G has done for over 100 years to protect and manage it’s brand.
I imagine the ad agency was just trying to be cute: aging mother borrows daughter’s cool blouse to go out and have fun again as a youngster with her friends. This is completely innocuous. All of us middle-agers relate to the urge to do that. I’m wearing my son’s old Notre Dame fleece as I write this.
What P&G overlooked is the message that mother’s subtle lie sends to viewers.
First of all, don’t they realize that for a mother to be afraid or reluctant to tell her daughter the truth reflects an unhealthy family relationship? Quite the contrary, they try to portray this as cute and acceptable. Parents who lie to their children (directly or indirectly) quickly lose their children’s respect. Children played for fools quickly demonstrate to parents they’re anything but fools. This ad portrays as ‘normal’ exactly the dynamic that every family should work hard to avoid: deception and silence.
Second, from a marketing perspective, it is risky and dangerous. P&G has been a leader in (among other things) learning how to tap into and leverage the power of the internet and social media to build relationships that strengthen long-term buying. What I’m sure they quickly learned is that this new savvy audience cannot be easily zoomed; that they, more than ever before, demand transparency, authenticity and integrity, not just in products and services, but also in the companies that sell them. If P&G sanctions an ad celebrating family deception, why should the audience believe P&G doesn’t march to that same drummer? What ‘little white lies’ about P&G are they concealing?
Am I overreacting? Perhaps a tad. After all, it IS only a soap commercial. But the point is that for the pubic to understand and decide on a company’s values, (that is, should I buy from these guys?), that company must first clearly know what their values are, must walk that same talk, and must then ensure that every message sent out from their domain reinforces those values. Consider Hyundai’s ‘green’ car ads as perfectly aligned value statements.
Values, actions and messaging must be tightly aligned, especially among today’s buying public, where online conversations make or break product success. Judgments are swift, harsh, and viral.
Over the centuries (imagine that!) P&G has done a stellar job of crafting their solid image, so I think this ad is simply an oversight. That said, it is enough to make me decide not to buy that product, as the ad irritates me every time I see it. And lucky for them, my blog has yet to build a huge audience.
Values matter: know them, live them, and consistently communicate them.

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