I recently found this very interesting article from the Washington Post outlining the case for the erosion of Shareholder value since the 1970s because of, ironically,the focus on the ‘Cult of Shareholder Value‘.
The precis is that the management ideal of running companies in a way that ‘maximises shareholder value” has done more harm than good when looking precisely at the very metric it seeks to enhance. I’m not sure if the variance in return over two different ‘ages’ of capitalism (managerial 7.6% vs shareholder 6.4%) is significant but it warrants a good read of the article and his reference articles.
All of this is not to say that shareholders should not expect to get a return on their investments, just that the focus on shareholders throws the management focus off what actually creates the best return for everyone. That this focus on shareholder value ignores a fundamental principle immortalised by Peter Drucker:
The purpose of business is to create and keep a customer
The article acknowledges the very complex landscape over the period of comparison, points to globalisation and deregulation as likely forces creating this new norm of Shareholder Value and points out that it is difficult to rapidly change an embedded norm.
He highlights a number of indicators which common sense tells you Shareholder Capitalism is creating a short-term focus at the expense of most stakeholders.
- CEO Tenure of Global Companies down from an Average of 10yrs to 3.5 yrs (this stat varies wildly depending timescales, listed exchange but ALL stats are declining)
- Executive Compensation : “the ratio of chief executive compensation to corporate profits increased eight-fold between 1980 and 2000. Almost all of that increase came from stock-based compensation”
- Expected Performance Timescales: “80 percent of top executives and directors reported feeling most pressured to demonstrate a strong financial performance over a period of two years or less, with only 7 percent feeling pressure to deliver a strong performance over a period of five years or more.”
and then goes on to suggest some structural changes to our political and market environment that might help establish a better norm.
I intuitively feel that short CEO tenure creates short-term thinking however there are HBR arguments that this is more about right CEO for the right phase of the company.
Executive Compensation could easily be seen as market dynamics in place – you pay for quality – however if shareholder value is actually eroding then it seems the metric isn’t working. We already know that we need a balance of metrics not just financial ones even at CEO level – so I think this actually goes deeper than actual CEO compensation
Of course there are some companies and CEOs who are just getting on and running their companies in a more long-term sustainable fashion – with an inherent focus on the customer – the article name checks Apple, Johnson&Johnson and Proctor & Gamble as some, there will be many more but the analysis is hard to make ‘from the outside’.
I think this is an interesting read, to be understood thoroughly, and is complementary to the studies that are showing Customer-Led organisations outstripping the returns of S&P500 companies without that culture. Two more articles to come on precisely that – I will link to them once they’re up.
In the meantime use this article as evidence wisely but use it as a discussion point freely – do you believe a focus on shareholders is actually eroding long-term sustainable value – do you think business should even care about long-term sustainable value?