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.