The Long View: Why “Maximizing Shareholder Value” Is On Its Way Out

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In 1986, Peter Drucker warned of a severe threat to our “long-term economic future.”

“Corporate managements,” he wrote, “are being pushed into subordinating everything (even such long-range considerations as a company’s market standing, its technology, indeed its basic wealth-producing capacity) to immediate earnings and next week’s stock price.”

In the decades since Drucker sounded that alarm, the problem of short-termism hasn’t abated much, if at all. A recent global survey by the Canada Pension Plan Investment Board and McKinsey & Co. found that 63% of business leaders indicated that the pressure on their top executives to demonstrate strong short-term financial performance has increased in the past five years. Meanwhile, 55% of chief financial officers said that they would pass up an attractive capital investment project today if the investment led them to miss their quarterly earnings target, even by a little bit.

Still, amid this sorry state, one thing would surely gladden Drucker: The backlash against short-term corporate thinking is becoming more powerful all the time, thanks to the efforts of a broad range of individuals and organizations, including the Aspen Institute, Conscious Capitalism, the Stoos Network, the Management Innovation eXchange, the CFA Institute, the Purpose of the Corporation Project, the Sustainability Accounting Standards Board and many more.

Last week, 14 people who are passionate about making long-term thinking the new normal of business met in Claremont, Calif., at the Drucker Institute, the social enterprise that I run. Many in the room expressed that we’re getting closer to altering how capitalism operates. “The big challenge,” said Bill Densmore, coordinator of the Rules Change Project and one of the participants, “is how do we get to that inflection point quickly?”

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Our agenda was threefold: to learn what each other is doing to counter corporate myopia, to see where we might be able to form natural alliances and support each other’s work, and to determine whether our various actions might somehow add up into something much larger. It was this last notion—of sparking a social movement—that seemed to prompt the most excitement.

To help us better understand how movements are born, we brought in Marshall Ganz, a senior lecturer at Harvard’s Kennedy School of Government, who served as a key aide to Cesar Chavez at the United Farm Workers and is widely credited with forging the grassroots strategy that catapulted Barack Obama into the White House. Ganz urged us to begin by determining who cares the most about the perverse effects of corporate short-termism and to then zero in on the “dissonance” they feel—that is, points of tension resolvable only through action.

“Sometimes what’s required is to ratchet up the dissonance,” Ganz advised. As we continued our discussion, we identified at least two groups that are likely to be receptive to what Ganz described.

First, there are graduate students, many of whom are passionate about changing the world—and not just getting rich. The trouble is that all too many business and law schools undermine this spirit by teaching traditional classes that reinforce a short-term mindset. As Cornell law professor Lynn Stout, one of those at the Claremont gathering, has made abundantly clear, by the time these students hit the job market, they’ve come to falsely believe that the primary purpose of the corporation is to “maximize shareholder value.”

One way to ratchet up the dissonance, then, is to end-run the system. In fact, some of those in Claremont said they would try to launch a series of massive open online courses or other alternative training that will instill more of a long-term outlook.

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The second group where there’s dissonance can actually be found in the executive suite. Yeah, sure, some people will always be greedy and manipulate short-term financial results because it’s in their narrow self-interest. But to be cynical is to miss a major opportunity: Most people go into business because they’re eager to offer a product or service that provides customers—and, by extension, society as a whole—something of value. They hate the pressure, from Wall Street and elsewhere, to focus on short-term financial metrics.

With this in mind, several of us pledged to step up our attempts to devise unconventional, but highly credible, measures that give a more holistic picture of what a healthy company looks like—how such an enterprise is not only profitable, but also fosters customer satisfaction, treats its employees well, continually innovates and plans effectively for the future.

At the same time, we vowed to call even more attention to those corporations—like Unilever, for example—that are doing the right things. “People need to see that they’re not alone,” said the University of Toronto’s Roger Martin, a leading voice for long-termism who also took part in the event.

Our nascent movement—if I may be so bold to call it that—faces many hurdles. The damage from short-term thinking can seem distant and is difficult for the average person to discern (making our movement more akin to environmentalism than Civil Rights). Building a company to be sustainable, and assessing its progress toward that end, is complicated; “maximizing shareholder value” is, by contrast, seductive in its simplicity.

Despite all of this, I am confident that everyone in Claremont—and many, many others—will persevere. We are, after all, in it for the long-term.

4 comments
JBerce
JBerce

Indeed Rick Wartzman “Corporate managements are being pushed into subordinating everything to immediate earnings and next week’s stock price.” But why is so?

In my opinion the way the companies are dealing with this issue are wrong also due to incorrect measurement methods. Just to test one. All over the globe the GDP, Gross Domestic Product, is one of the indicators that is most used and regarded reflecting the country’s economic well-being and which is – a yardstick that measures the amount of money being spent in a country. Therefore, the more that is being spent, the higher the GDP and the better the ‘living standard’ is perceived to be. 

Let us use an imaginary profit-making company that is polluting the environment, and it does not have the external costs. In the process of cleaning up the pollution, some people get sick. If we use the impact on GDP, the work and costs for cleaning up the polluted environment is added to the GDP figure. So the core business of the company, the work generated by the pollution, that is the environment cleaning, the costs for the repairs and treatment of people, the infrastructure and the environment affected by pollution, all add up to the GDP growth. The GDP therefore does not necessarily reflect the quality of life, the health of the environment, the destruction of woodlands, or the exhaustion of water resources.

And there are other measures: EBIDTA, CAPEX, …


Jaro Berce author of “Leadership by Virtue”

http://leadershipbyvirtue.blogspot.com/

davidkhurst
davidkhurst

I agree with much of what Rick Wartzman and his colleagues are saying, especially about the pernicious long run effects of maximizing shareholder value and the need for a social movement. However, I see the emphasis on shareholder value as a symptom of much deeper systemic issues and it is at these that any social movement should be directed.

In his book, The Righteous Mind, psychologist Jonathan Haidt, likens the human mind to a rider (reason) on an elephant (intuition). Who rules? For all of the 20th Century it has been an article of faith in the social sciences that the rider was and ought to be in charge. In the 21st Century the evidence is growing from many quarters that the elephant is boss and that the rider spends much of his or her time rationalizing what it wants to do. I see the shareholder value argument as just such a rationalization.

Haidt picked the elephant as his analog for intuition because it is a large, social animal. Elephant behavior can be changed, but not by giving them lectures on shareholder value or ethics. One has to change the contexts in which they live to get them moving in roughly the right direction. So any social movement should be focused on this larger cause, campaigning for a very different view of what it is to be human. This would gather together maverick practitioners and fringe thinkers from the edges of many disciplines, which is where all radical (in the sense of going to the roots) social movements come from.

rstraub46
rstraub46

As one who is part of the group but could not participate in person in the Claremont meeting I would like to comment. We should not neglect to make the economic case for long-termism. There is ample evidence - Roger Martin has shown some of this and the recent HBR report on Family businesses made this point. However, more research would be required to further strengthen the case. Those who call the shots at the end of the day are the investors. Via the board they dismiss CEOs who are not performing to their requirements. Even though Paul Polman has refused quarterly earnings guidance and reporting he will get into troubles if he does not show continuous improvement in profitability and shareholder value year-by-year. And year-by-year is short term as well - isn't it? Why don't we try to pull all the economic evidence together that shows a better long term value for investors (and other stakeholders) than the pressure on short term results. Hand in hand with this would come a new code of ethics for investors (no - I am not talking about yet another sustainability movement to save the planet) where stewardship of investors is defined as a noble and deeply human duty. It basically says - you don't only have an economic entity in your hands, it is human lives and your are responsible to support the best route to create long term value - to the benefit of shareholders and the benefit of employees, partners, local communities etc.

Richard Straub, President Peter Drucker Society Europe - www.druckerforum.org

mlskanis2
mlskanis2

It never fails to amaze me how psychology and business strategy overlap. This is how a lot of therapies work - you assume our patient really wants change (following Ganz' first recommendation to find the person who cares the most) and then (at least in some modalities) you create an environment with them in which you encourage them to maximally feel that dissonance (Ganz' second recommendation) in order to help that person crystallize their choice to make change. Way to be, business brethren.