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When Profit and Shareholder Value Are the Mission
Submitted by Leslie Allan on February 19th, 2013
The Global Financial Crisis (GFC) and the ongoing stream of corporate collapses have generated a lot of debate on the long-term viability of companies that focus exclusively on profit and share price. As we have seen with the global meltdown of 2008, the survival of entire nation states may be at stake.
I don’t agree with commentators who want to relegate profit and shareholder value to the strategy dustbin. These are important lagging measures; even central for most for-profit organizations. However, as some analysts have pointed out, by focusing on these measures exclusively, company executives may be achieving a Pyrrhic victory. The biggest challenge for us is not that increasing profit and share price are evil objectives. It’s the short-termism many companies use in their planning and execution.
Astute commentators have noted that executives who focus on quarterly results – some even monthly – dramatically skew the long-term viability of their companies. We need new systems in place that take the spotlight off today’s share price and this quarter’s profit and start to put mission center stage.
Here are some questions business owners and board members need to ask:
- Why does this company exist?
- What social value does it generate?
- What value is it to its customers? –to its employees? –to wider society?
And yes, we do need to ask what value it holds for its shareholders. However, we need to appreciate that the company’s shareholders are but one group amongst other key stakeholder groups. You see, many shareholders don’t have an intrinsic interest in the company. Many are just betters. If the share price goes down, they’ll take their investment and bet elsewhere. And yet we place much of our companies’ futures in the hands of these short-term betters.
What of the other key stakeholders? To the mantra of satisfying customer wants, the last several years have seen a number of alarming examples of the unbridled pursuit of profit and shareholder value harming the very consumers of a company’s products. The promotion and sale of cigarettes has caused millions of deaths. Ballooning consumption of fast food is leading to an epidemic of obesity, heart disease and diabetes.
The social impacts of these companies’ objectives are also clear. Billions of dollars of increased health expenditure at a time when nations can least afford it and the reduction in size of the employment pool are notable examples. Global impacts are also being increasingly felt as the world warms up from overconsumption and pollution increases from overproduction. In these cases, we are worse off than playing a zero-sum game in which my winning means you losing. We are playing a negative-sum game in which my winning is an illusion. I get a short-term reward now with a kick further down the track.
Focusing exclusively on profit and shareholder value also disenfranchises another key stakeholder group. Have you noticed that most employees don’t get fired up about their company’s share price or quarterly profit figures? However, employees can care about bringing affordable communications technology to common people or saving more lives with new medicines or reducing greenhouse gas emissions, or whatever noble cause their company is pursuing.
Organizations need to find their socially-enhancing mission and get their people involved if they want to succeed in the long term. Creating real value and making people’s lives genuinely better is what really matters. This is what gets workers fired up to do their best for the company that employs them. Profits and improved shareholder value will then follow for the longer-term.
I put the case that customer satisfaction and employee engagement should figure in each company’s Key Performance Indicators (KPIs) as leading indicators. These, along with process capability, drive long-term financial success. I’ve long advocated Kaplan and Norton’s Balanced Scorecard and Haskell’s Service Profit Chain for this reason. Elkington’s Triple Bottom Line goes one step further. This method of measuring a company’s success puts a company’s financial results on the same pedestal as the company’s contributions to social and environmental capital. Now there’s an idea.>
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