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Why Focusing on Shareholder Value Is Wrong

Submitted by  on April 30th, 2011

Recognize This: Shareholder value will never guarantee customer satisfaction or an increase in their purchasing behavior.

Is your company a slave to the quarterly analyst call? Are you focused, before all else, on increasing shareholder value as the best marker of company success?

Even Jack Welch has denounced this as a dumb idea. More voices continue to chime in, most recently Roger Martin, dean of the Roman School of Management at the University of Toronto, Canada, as quoted in TLNT:

“Concentrating primarily on creating shareholder wealth is ultimately a loser’s game. The reason: the only sure way to increase shareholder value is to raise the market’s expectations about the organization’s future results. Unfortunately, executives simply can’t do that indefinitely.… Talented executives can grow market share and sales, increase margins, and use capital more efficiently, but no matter how good they are, they can’t increase shareholder value if expectations get out of line with reality.”

Instead, Towers Watson (authors of the article) suggest:

“Instead of training her gaze directly on shareholder returns, a high performing executive leader should pay attention to the performance of employees and the linkage of employee performance with customer satisfaction and purchase behavior.

If employees are focused on making customers happy such that they buy more, shareholder value is sure to increase. But there’s no guarantee with the reverse equation of shareholder value first, employees and customers a far-behind also-ran.

In fact, Gallup research found causation between employee engagement and financial success. Guess what? Working for a financially successful company does not necessarily make employees more engaged. But engaged employees do drive financial success.

One way to accomplish this is by including “customer satisfaction” as a reason for recognition in your strategic recognition and rewards program. Doing so reinforces for all employees the value the company places in focusing on the customer, and gives employees an opportunity to acknowledge each others’ efforts in making customers happy.

What does your company focus on at its key marker of success? Shareholder value? Customer satisfaction? Employee retention?

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