Shareholder value is failing as a mantra

Some two months ago, Unilever CEO Paul Polman stunned the markets by announcing that he wasn’t overly concerned with delivering shareholder value. “I do not work for the shareholder, to be honest; I work for the consumer. I am not driven and I don’t drive this business model by driving shareholder value,” he told Financial Times.

A year ago, Jack Welch made a similarly astonishing statement to the newspaper. “On the face of it, shareholder value is the dumbest idea in the world.” Is this Neutron Jack, the man who won high marks from Wall Street for delivering shareholder value when he was CEO of GE, speaking? Or is shareholder value suddenly becoming a bad word? In the post-Lehman, post-Goldman Sachs, post-Obama world, has profit become a dirty word again? Are company CEOs becoming politically correct and bowing to the wolves of Main Street rather than the bulls of Wall Street?

The answer is all of the above, but there is also a larger truth behind it all: you can’t achieve success by pursuing any one simplistic goal. As authors Jim Collins and Jerry Porras argue in Built to Last, “Instead of being oppressed by the tyranny of the “or”, highly visionary companies liberate themselves with the genius of the “and” — the ability to embrace both extremes of a number of dimensions at the same time.”

So when Polson says he’s not working for the shareholder, he can’t probably mean it. Ditto for Welch. What they are saying is that CEOs have to pursue several goals simultaneously — they have to deliver customer value, they have to motivate employees, and they have to serve society. In the process, they will take care of the shareholder.

Economist John Kay, who was interviewed in DNA on Saturday, June 19, makes much the same point. He argues that the most profitable companies are not necessarily the ones which focus exclusively on profits. By implication, this means Polson is also wrong in his other assertion that he is only working to deliver customer value, though nobody can object to the basic idea.

Vineet Nayyar of HCL Technologies, who has recently authored a book titled Employee First, Customer Second may also be on the wrong track. I have not read the book, but the title says it all and the case is overstated. If employees are always first, no enterprise can survive. You only have to look at government and public sector employees to know that little gets done when employees are put ahead of customers.

It’s possible that CEOs and management gurus deliberately take angular positions in order to sell their ideas. Putting one stakeholder first can be a short-term priority for companies that have ignored a constituency for long. If your company has fared well, but your employees have not, it is time to put employees first for a while. If your employees are happy but your customers are deserting you, it’s time to court customers.

If both employees and customers are fine, and shareholders are unhappy, you need to ensure that they get worthwhile returns. If all these constituencies have no issues, but society is unhappy because you are dumping toxic chemicals in the rivers or ruining the environment through unsustainable mining activities, you have to address these concerns.

A business enterprise has many stakeholders, and you cannot ignore any of them for long. This is why Gandhi advocated the trusteeship concept, where the owners of an enterprise try to maximise the welfare of all stakeholders, and not just themselves. The idea seems utopian, but Bill Gates would not disagree with it. Beyond the normal advantages of being rich, he is funnelling his immense wealth steadily into social causes all over the world. Exactly what Gandhi would do.

Many family-owned business houses in India have low credibility because they put shareholder value — that is themselves — above everything else. Very often they don’t even deliver that, as shareholder value also means taking the interests of minority shareholders into account. This they often don’t do.

The bottomline is this. If you put shareholders first, your society may lose out. If you put employees first, your customers may be shortchanged. If you put customers first, your employees may be neglected. And if you put society first — which is what government companies are supposed to do — you may end up destroying customer trust, losing employee loyalty, and decimating shareholder value.

This is what the government is doing with oil and telecom companies. The employees are unhappy, competitors are winning, taxpayer money is being wasted, and society is the ultimate loser.