We have seen many management mantras over the years: Total Quality Management; Just-In-Time Procurement; Six Sigma; Customer First; the Learning Organisation; Balanced Scorecard; and many more. But the most pervasive, insidious and dangerous is Shareholder Value.
In principle there’s no reason why shareholders shouldn’t derive benefit from the investments they make and risks they take, but the way the system is being manipulated threatens all stakeholders.
Gerald Davies, Professor of Sociology at the University of Michigan noted,“Shareholder Value puts shareholders above everyone and everything else in society including customers, employees and the public good”.
And the doctrine survives because it is enshrined in governance and the focus of hedge funds, private equity, and of course boards. Martin Wolf of the Financial Times said, “UK corporates are run not for long-term health, but for executive wealth, with bad results for the businesses themselves, and, still more for the entire economy”.
That has driven directors’ focus, leadership behaviour, and in many cases reductions in R&D spend, lack of staff development, and it has given rise to greater uncertainty about the security of employment. Little wonder then that companies struggle with real employee engagement levels.
All of this is based on a myth, as explained by Simon Caulkin in a recent edition of Professional Manager. Shareholders do not own the company. They own shares, which confer specific rights, but those rights do not include ownership or control. The company is an independent legal entity. The first duty of Directors is to the interests of the company – and that includes all of its stakeholders – agents of, or even acting on behalf of shareholders does not employ them. That is upheld in most jurisdictions. .
Focus on shareholder value and the distorted behaviours that encouraged gave us Enron, Tyco, WorldCom, of course 2008 and our own banking crisis.
Large companies are now making more profit from financial engineering than from providing goods and services. Apple, the world’s largest company (by value at the time of writing) borrowed $17bn. It didn’t need the money. It used it to buy back stock increasing dividends and boosting the share price. And it isn’t innovating any more.
Rana Foroohan, in her book, “Makers and Takers: How Wall Street Destroyed Main Street” explains how financialisation, the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate businesses, putting us on a collision course for another cataclysmic meltdown.
Banks aren’t serving the economy; they’re controlling the drivers of the economy and as a result have become a barrier to economic growth. Only about 15% of all the money in the market system actually ends up in the real economy – the rest stays within the closed loop of finance itself.
As a result, the system isn’t working for the majority of society. We have slower-than-average growth, higher income inequality, stagnant wages, greater market fragility, and the inability for people to get on the housing ladder or properly fund their retirement.
At their best, companies create wealth, and through jobs and wages for employees, payments to suppliers, and dividends to investors, that wealth is spread through society.
I always say when appropriate, if you focus only on the numbers, you will fail in your strategic intent and If we universally continue to focus on and reward shareholder value and the behaviours that it drives, we will shorten the lives of our corporate assets.
The ‘company’ is too important to society to be controlled by one constituent.
We need to open up the debate and find a way for companies (and the financial system) to play a positive role for society as a whole – and that’s an apolitical aspiration.