Stakeholder value vs shareholder value

Yesterday I wrote some early thoughts on progressive business. I finished the post by wondering whether we are seeing the start of a trend towards doing business in a better way and how far those changes can go.

The change to progressive business is multi-faceted and whilst we can see that if something is to happen, the direction is towards authentic customer value driven organisations which truly value their employees and part of that is a shift to focusing on broad stakeholder value rather than shareholder value.

I started my working life as a management consultant in the mid 1990s and I clearly remember my first manager convincing me that the purpose of companies is to maximise value for their shareholders. Prior to that I had a fuzzy view that companies should have a responsibility to employees and society as well as shareholders. The killer arguments for me were that it was the shareholders who owned the company and as it was their property it should maximise value like they wanted it to, and that the companies who had pursued a simple shareholder value maxim over the previous 10-20 years had outperformed the rest. Besides, when shareholders do well, employees and other stakeholders generally do well to.

What’s interesting now is that those to killer arguments may no longer hold true. It could be that from c1970-2000 a simple focus on shareholder value was the best strategy, but that something broader is required now. This is how the argument runs (largely taken from an article on Forbes by Steve Denning):

  • prior to around 1970 companies were focused on multiple stakeholders resulting in confused priorities and poor decision making
  • a simple unifying focus on shareholder value allowed management to galvanise workforces and improve results
  • but that focus has now distorted business and the improved performance has now come to an end, as evidenced by poor stock market performance over the last ten years

Examples of distortions that come from focus on shareholder value are short term focus on the share price, excessive pay in the C-Suite, and and de-motivated employees. Read the Denning article for more details.

I’ve long thought that an analogy with a pendulum is the best way to understand change in many walks of life is. Change always starts with a move away from an undesirable state of affairs, but then usually swings too far and has to come back towards a desired equilibrium position, which it will usually overshoot, and so on. Changes in direction are generally facillitated by a shift in thinking or ideology and are painful for practitioners who face the choice of changing their heartfelt convictions or losing relevance. In this case the pendulum swung from companies having bad decision making and results because they had too many overlapping objectives to poor results because the focus on a single objective of shareholder value is too narrow, and might now swing back to a broader set of objectives. Or at least so the argument goes.

It isn’t just Denning who is saying this stuff either. In 2009 Jack Welch called maximising shareholder value ‘the dumbest idea in the world’ and CEOs of companies like Unilever, Amazon, Google and Facebook have adopted policies and in some case shareholder structures which are designed to deliver long term value creation in a broad sense and ignore the vagaries of the stock market.