“If you are the sole proprietor of a business, do you think that you can motivate your employees for maximum performance by encouraging them simply to make more money for you? Of course not. But that is effectively what an enterprise is saying when it states that its purpose is to maximize profit for its investors.”
These days, in fact, economies have been scrambling to explain the recent slowdown in the pace of innovation and the growth in worker productivity. Is it possible it might have something to do with the fact that American workers now know that any benefit from their ingenuity or increased efficiency is destined to go to shareholders and top executives?
The public, certainly, isn’t buying the shareholder-first ideology. Polls by the Gallup Organization show that people’s trust and respect in big corporations has been on a long, slow decline in recent decades — only Congress and health maintenance organizations are held in lower esteem. One of the rare corporate CEOs lionized on the cover of a newsweekly was the late Steve Jobs of Apple, who as it happened created more wealth for more shareholders than any corporate executive in history by putting shareholders near the bottom of his priorities.
The defense you usually hear of “maximizing shareholder value” from chief executives is that most of them don’t make the mistake of confusing this week’s stock price with shareholder value. They are quick to acknowledge that no enterprise can maximize long-term value for its shareholders without attracting great employees, producing great products and services and doing their part to support effective government and healthy communities. In short, they argue, over the long term there is no inherent conflict between the interests of shareholders and those of other stakeholders.
But if optimizing shareholder value requires taking care of customers, employees and communities, then by the same logic you could argue that “maximizing customer satisfaction” would, over the long term, require taking good care of shareholders, employees and communities. And, indeed, that is precisely the suggestion made long ago by Peter Drucker, the late, great management guru. “The purpose of business is to create and keep a customer,” Drucker wrote.
Martin argues it is no coincidence that companies that have maintained a strong customer focus — think Apple, Johnson & Johnson and Procter & Gamble — have consistently done better for their shareholders than companies which claim to put shareholders first. The reason is that customer focus minimizes undue risk taking and maximizes reinvestment over the long run, creating a larger pie from which everyone benefits.
The truth is that most executives would be thrilled if they could focus on customers rather than shareholders. In private, they chafe under the quarterly earnings regime forced on them by asset managers and the financial press. They fear and loathe “activist” investors who threaten them with takeovers. And they are disheartened by their low public esteem.