Comments

The goal of maximizing shareholder value is, in and of itself, a good thing. Unfortunately, too many have taken it to be their excuse for breaking laws and/or taking actions that harm others. (Jack Welch comes to mind along with a boatload of others.)

Wall Street has business all messed up. No business can continuously deliver double-digit growth from Day 1 through the end of time. But Wall Street sets that expectation and some are foolish enough to allow analysts to distract them from what would be best for the company in the long term - and that's helping solve problems and fill needs for the broader society.

Remember, the business is in this for much longer than this quarter. No matter what Wall Street tells you.

Posted by patmcgraw at July 19, 2006 1:24 PM

John

What exactly is the current ROI for acting in the public interest? You know I am a diehard capitalist, but clearly the short term demands of the analysts kind of changes the lens. I the implications of profit is everything is potentially undermining our entire nations will to do good. Hope I am wrong John...

Posted by Mike Neiss at July 19, 2006 2:18 PM

I suspect we're all agreed that maximizing shareholder value is what it's all about. The problem seems to be about whether maximising shareholder value means you only focus on the next quarter and some analyst's expectation or whether you're brave (foolhardy?) enough to say, "I have a 3 plan and my numbers mightn't be what you'd like to see on the way but I believe this is in the interests of long-term investors." I may be in a minority here but I'd rather buy a stock where the business is managed to generate results that drive the share price than one where the business is managed to engineer results that drive the share price.

Posted by MarkJF at July 19, 2006 2:35 PM

John,

Hmmm, if I read this entry correctly, a supposition has been made that b-schools had a mission to teach stewardship over shareholder interest.

I don't believe that b-schools have it wrong. Public good (stewardship) is not under the auspices of the corporate entity. I see two possible primary motivations for business. 1) To accomplish a purpose and 2) To make money. Both of these drivers will satisfy shareholder interest because they are interdependent. I see public good as the responsibility of the government and the citizens that constitute the public.

What I see is not a problem with the focus of our b-schools, but rather a problem with our system of checks and balances and an erosion of what each individual in our society values. I will end with a few key concepts that are being violated: 1) equality in the distribution of income, 2) U.S.A., the country, number 1, 3) a fair and just society, 4) earned rewards and 5) adequate government oversight and restraint of special interests.

Posted by Matt Thevenot at July 19, 2006 3:12 PM

i think the broad definition of the business of business is to positively impact the lives of as many people as possible through the exchange of goods and services. limiting the definition to just 'maximizing shareholder value' elminiates many other ways that make a positive impact - employment, research & development, creative innovation, beauty/asthetics, etc.

as a current mba student i can attest to the fact that business schools are too focused on the quantitative (only that which can be measured). sure indicators and metrics are important (especially for wall street), but limiting the focus of leadership to the quantitative turns a blind eye to the broader, deeper, more long-term perspectives of business.

effect leadership and business requires a more than just metrics, it requires a dynamic spirit.

Posted by m_stoltz at July 19, 2006 3:13 PM

(1) I may well be mistaken, but I seem to recall that Khurana is "running for" dean at HBS.

(2) Remember a recent discussion about faulty "either-or" thinking? I think the two are in synch, especially in a world where we increasingly (a) sell intangibles and (b) need creative employees. Also, consider Wal*Mart, "social-consciousness crazy" in a blatant effort to get a tribe of clawing monkeys off their back--and get the share pricee moving North.

(3) B.School problems? My hard drive is not big enough to hold them all.

Posted by tom peters at July 19, 2006 3:19 PM

Matt, I think that public good is under the auspices of everyone, and the corporate entity is ultimately nothing more than a collection of the individuals who work there- the richest corporations are more powerful and influential than all but a few (the G8?)national governments.So corporate entities set the tone for a lot of the world's prevailing values, and therefore I think leaving it all to governments ias a luxury we can't afford.

I think Mark JF is right, that the focus on shareholder values leads to short-termism (which we also see in politics-for quick routes to shareholder bonanzas read quick gimmicks to win votes) There is a much bigger and longer-term picture that we can't ignore. If I'm making a pile of money as an investor in a company thats polluting the atmosphere and depleting natural resources, then great for me in the short-term, but do I think my grandchildren and great-grandchildren will thank me for it? I was re-reading last night Tom P's chapter on "Hand-on, Value-Driven" last night for my MBA thesis.I don't think b-schools should be imposing any values on students, but I do think it's healthy to encourage students to debate such premises as Tom's in "In Search...." that companies with strong values perform better than those with weak values or none at all.

Posted by tomjam at July 19, 2006 4:42 PM

As well as re-reading Tom P, I've also just read Brian Eno's essay The Big Here and The Long Now which encourages us to think outside our small world and our transient time, and the need for quick gains. Now, wouldn't these be great topics for an MBA, and aren't the 'ethical' companies (Body Shop?) already tuning into all this stuff?

"It’s ironic that, at a time when humankind is at a peak of its technical powers, able to create huge global changes that will echo down the centuries, most of our social systems seem geared to increasingly short nows. Huge industries feel pressure to plan for the bottom line and the next shareholders’ meeting. Politicians feel forced to perform for the next election or opinion poll. The media attract bigger audiences by spurring instant and heated reactions to ‘human interest’ stories while overlooking longer-term issues – the real human interest.

Meanwhile, we struggle to negotiate our way through an atmosphere of Utopian promises and dystopian threats, a minefield studded with pots of treasure. We face a future where almost anything could happen. Will we be crippled by global warming, weapons proliferation and species depletion, or liberated by space travel, world government and molecule-sized computers? We don’t even want to start thinking about it. This is our peculiar form of selfishness, a studied disregard of the future. Our astonishing success as a technical civilisation has led us to complacency – to expect that things will probably just keep getting better."

Posted by tomjam at July 19, 2006 5:14 PM

Is it all up to free enterprise? Suppose in the 80's the great comunicator ronald reagan took a suggestion from Jimmy Carter that Energy Independence was the moral equivalent of war - but redid it Reagon style - told the Big Three that it was un-american to say high mileage would hurt the economy - infact, long term, if we did it in a 'can do' all american way, it would enable us to beat the pants off of all comers - suppose RR imposed milage standards - 40 mpg average by the year 2000. Would GM still be in trouble? I think not.
Also, to get real far out - suppose this current president - instead of having the goal of going to Mars - set a goal of building a space elevator by 2020 - no one else on the planet has the economic resources but the U.S. to try this - IPOds and Starbucks (I'm there as I write this) and that reworked circus thing are all great, but America is about science and amazing engineering as much as anything - amazing enginnering goals need to be set by national leaders - a space elevator would leapfrog the U.S. ahead of the rest of the planet in a good way - space travel would become cheap enough put some starbucks in orbit.

Posted by pete stafford at July 19, 2006 10:05 PM

How can the overriding goal of business be to maximise share holder value when as we have observed in the previous thread the economy is mostly made up of smaller non publically quoted orgs.

What fascinates me (and maybe this should have been in the previoous thread on small vs large) is the types of people who work for a business as it grows (and goes public) many of the people (who are probably more entrepreneur in spirit) find their way of business doesn't work any more and they leave to be replaced by more "corporate" types. I have never been to business school but I would imagine that they churn out corporate types (is this too much of an assumption?) and yet the bulk of the economy is not made up of that type of company

We should be teaching business and leadership savvy at school (bigger impact on the economy) rather than relying on specialist Universities churning people out for really quite specialist roles in society

Posted by PaulH at July 20, 2006 2:37 AM

In my limited experience of the companies I have worked in the more that companies aim at shareholder value as a goal the more they tend to miss their target.

By concentrating their passion on their products, brand and above all their customers and employees - you stand more chance of hitting the shareholder value because you are doing good business.

Posted by PaulH at July 20, 2006 2:41 AM

I was in an interesting discussion last weekend that raised the same issues in a different context. I live in a smallish city where the local paper is still family-owned. Although the current owner pays lip service to the paper's mission statement (which includes becoming the primary news source in our part of the state), in practice it's all about the bottom line. So some things that staffers are trying to do to raise the paper's profile in the community are shot down because they cost money and don't bring in more advertising revenue -- even if, in the long run, they could increase readership, and thus make the paper more attractive to advertisers. Meanwhile, advertising and subscription revenue are down, and management's only response is to try to find yet another way to cut costs.

While "responsibility to the community" looms larger for a local newspaper than for (say) an auto manufacturer, the principle is the same. Focusing on the bottom line (be it shareholder value, revenue, etc.), and refusing to do anything that might impact the bottom line in the short term, is likely to have negative long-term results.

Posted by Paula at July 20, 2006 2:10 PM

In fact, there is tremendous ROI for businesses that act in the public interest (within the context of their own interests).

Anybody remember American Express trying to save the Statue of Liberty back in 1983? They opened up the project to their customers, offering to donate 1 penny of every dollar spent with an Amex card for a set time period. Not only did they raise $19 million for the campaign, by they also saw new cardmembers rise by 8% and number of transactions per cardholder shoot up 28%; I would expect based on later studies that they also saw brand value, employee morale, and even trade and press relations increase as well.

Community engagement offers a host of benefits in areas such as sales, brand image, stakeholder relations (customers , employees, vendors, regulators, media, etc.), and even HR.

The trick, I think, is to remember that ROI is not always a direct and immediate return on revenues: the indirect measures influenced by corporate social responsibility can provide a return that affects your short/long term numbers as well.

Posted by Brett Pawlowski at July 20, 2006 2:26 PM

These comments have stirred some old memories. I forgot that in my corporate days I used to bound out of bed every morning, enraptured by a single thought: "TODAY I get to maximize shareholder value!" Don't those words give you goose bumps?

Posted by John OLeary at July 20, 2006 9:38 PM

I think John has a very good point - if you are heading up a major corp and you are aiming at shareholder value - keep it to yourself - don't try to engage your people with this - It doesn't work. Nobody in your org cares.

I find it often the people at the bottom of the org chart who actually have a clearer view of the real purpose of the company and their bit of it than the snr managers. Perhaps their view is looked upon as too simplistic. The Tech support engineer "my job is to help the customer fix their systems so the software helps them to be successful" - The rest is just mgmt BS

Posted by PaulH at July 21, 2006 2:15 AM

Lets be realistic, the goals of a business are to make money, right? However, the goal of publicly traded businesses is further complicated by "having to make the quarterly number."
In the final weeks of a quarter, there is a tremendous amount of wasted, non-value added effort expended trying to close deals, at deep discounts, ship product, that may be of marginal quality, retool financial instruments, so cash flow and on hand meet the "streets" expectations, and etc. All in vain, “to make the number!” Whose number?
Everything I mentioned above detracts from the organization's real business and more importantly erodes from profitability. Resources (human, financial, etc) are sub-optimized in hunt of the number. Sell A/R (at a discount), we need to improve our cash statement, Ship that product (we need to book the revenue), we’ll fix it later. The customer doesn’t mind!
How is this good for business?
Who are the businesses real customers, especially publicly tradeded ones.

Posted by Dan Feliciano at July 21, 2006 6:20 AM

Personally, I've always favored Roddick's line:
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"In terms of power and influence, you can forget the church, forget politics. There is no more powerful institution in society than business, which is why I believe it is now more important than ever before for business to assume a moral leadership. The business of business should not be about money, it should be about responsibility. It should be about public good, not private greed."
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Hank Ford also understood:
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Business must be run at a profit, else it will die. but when anyone tries to run a business solely for profit... then also the business must die, for it no longer has a reason for existence.
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More recently, Bedbury's speaking wisely with:
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Prepare for the ‘Triple Bottomline’ which incorporates Profit, impact on society and innovation.
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In really good business, profit is not the objective - but simply the result of 'doing the cool stuff well'.

Posted by gulliver at July 21, 2006 7:54 AM

Hi Gulliver

'In really good business, profit is not the objective - but simply the result' - You are so right. I love that - thanks - simplicity rules :-)

Posted by Trevor Gay at July 21, 2006 8:06 AM

Dan - I think you are absolutely right. I have thought for a long time that individual sales people's target dates should actually be staggered throughout the qtr. This does a number of things - it evens out the strain on support staff. It reduces the negotiation weakness you have at Qtr end and it actually evans out your revenue prediction (predictability is the watch word of the market)

The down side is that it is harder for sales management to get everyone fired up for "one last push" - you shouldn't underestimate the impact of this to morale.

Another thought I had was working on a qtr to qtr basis in terms of targets is dumb it tends to get smaller deals more often because a large deal can take more work (not always the case). So why not scrap qtr targets and have the sales person's target to be an ever growing line on a graph. If she pulls in a big deal and gets above the trend line she actually buys a couple of qtrs leeway to go after another big deal. If she is below the line she knows what she has to do.

Posted by PaulH at July 21, 2006 9:08 AM

Kaplan's response to Khurana's thesis sounds like pure party line, including his blunt, dismissive tone. See No Evil apologists for unrestrained free markets react as reflexively to challenges to their theology as do knee-jerk liberals.

Posted by Ken at July 22, 2006 7:15 AM

I guess I don't understand the discussion here. Kaplan is correct in his general assessment. While a focus on social good can be a legitimate marketing strategy that leads to greater profit, pursuing social good for its own sake does not, on its own, result in the perpetuation of the firm--or in the aggregate, the market. Perpetuation takes profits. Without the firm/market, there is no economy, and social good falls below where it is now in the absence of excessive focus on "the public good" within corporations. Isn't that precisely the reason for our advanced social condition circa 2006: that the economy (production, trade) is organized around and optimized by companies; and that the "social good" is debated and organized by government and such institutions as the church? Khurana's point is made in the context of an HBS focus on management power: communications reflects "good public policy"; management and the firm look like responsible corporate citizens; management and the firm gain a certain degree of additional power over their environment; greater control over resources is achieved. In the end, this greater control is a tool that is yielded to achieve greater returns for shareholders. The view of an organizational behaivior specialist versus that of an economist. Not mutually exclusive points.

Posted by Greg M at July 25, 2006 3:06 PM