Jack Welch has called it “the dumbest idea in the world.”
Vinci Group Chairman and CEO Xavier Huillard has called it “totally idiotic.”
Alibaba CEO Jack Ma has said that “customers are number one; employees are number two and shareholders are number three.”
Paul Polman, CEO of
John Mackey at Whole Foods [WFM] has condemned businesses that “view their purpose as profit maximization and treat all participants in the system as means to that end.”
This week, Marc Benioff, Chairman and CEO of Salesforce [CRM] joined these CEOs and declared in an article in the Huffington Post that this still-pervasive business theory is “wrong. The business of business isn't just about creating profits for shareholders -- it's also about improving the state of the world and driving stakeholder value.”
“We have an imperative,” says Benioff, endorsing the vision of Professor Klaus Schwab, founder of the World Economic Forum “to shift from creating shareholder value to stakeholder value… corporate management isn't just accountable to shareholders… businesses must focus on serving the interests all stakeholders -- customers, employees, partners, suppliers, citizens, governments, the environment and any other entity impacted by its operations.”
“But we have to do more. We have to build radically higher levels of trust and transparency with all of our stakeholders. We need legions of ‘stakeholder activists’ who seek to hold companies accountable for all constituents, going beyond the role of investor activists, who focus on holding CEOs and boards of directors accountable in terms of share price. Ultimately, the most effective way to create shareholder value is to serve the interests of all stakeholders.”
"The competitive advantage you gain from being a caring and sharing company is significant," Benioff wrote in his 2004 book, Compassionate Capitalism. "It instills in your people a higher integrity level. In turn, stakeholders want to be associated with a company that has heart. Community service: You do it because it's the right thing to do, but it's also the profitable thing to do."
Benioff also cited Facebook CEO, Mark Zuckerberg who was questioned about his initiatives in less developed countries. "It matters to the kind of investors that we want to have, because we are really a mission-focused company. We wake up every day and make decisions because we want to help connect the world. That's what we're doing here." Zuckerberg said. "If we were only focused on making money we might put all of our energy on just increasing ads to people in the U.S. and the other most developed countries, but that's not the only thing that we care about here."
He might also have quoted Tim Cook, the CEO of Apple [AAPL], who, when asked to disclose the costs of Apple’s energy sustainability programs, and make a commitment to doing only those things that were profitable, Cook replied, “When we work on making our devices accessible by the blind,” he said, “I don’t consider the bloody ROI.” It was the same thing for environmental issues, worker safety, and other areas that don’t have an immediate profit. The company does “a lot of things for reasons besides profit motive. We want to leave the world better than we found it.”
The problems of shareholder value theory
These criticisms of the single-minded pursuit of shareholder value as measured by the current stock price are well-founded. The theory has contributed to:
- pervasive short-termism;
- diverted human and financial resources from needed investments in innovation;
- dispirited both employees and managers, leading to pervasive disengagement;
- generated “bad profits” that undermined customer loyalty;
- caused excessive “financialization” of the economy, making it vulnerable financial crashes;
- incentivized CEOs to become financial engineers and companies to lose their entrepreneurial mojo;
- led firms to pursue the extraction of value, rather than the creation of value;
- undermined the economic recovery from the Global Financial Crisis;
- drastically reduced rates of return on assets and on invested capital;
- appropriated gains that flowed from workers’ improvements in productivity; and
- led to secular economic stagnation and increasingly unsustainable economic inequality.
It turns out that privately held companies, which are freer from pressures of shareholder value theory, are better value creators than public companies, and invest more. The German and Austrian “mittelstands” (mid-sized companies) have prospered by relentless innovation.
Ironically, the pursuit of maximizing shareholder value as reflected in the stock price has done the opposite of what it set out to do. If anything, it has driven firms steadily further away from actually adding value to shareholders.
In 2010, Roger Martin wrote that maximizing shareholder value “is a tragically flawed premise, and it is time we abandoned it.”
By 2014, a report from the Aspen Institute showed that thought leaders were coming to the same conclusion. In a cross-section of business leaders, including both executives and academics, a majority, particularly corporate executives, agreed that the primary purpose of the corporation is not to maximize shareholder value, but rather “to serve customers’ interests.” In effect, the best way to serve shareholders’ interests is to deliver value to customers.
When will the rest of the CEOs see the light?
WATCH: Salesforce's Mike Lazerow on how weird is the new normal:
And read also:
The Dumbest Idea In The World: Maximizing Shareholder Value
Capitalism’s Future Is Already Here
The Origin Of ‘The Dumbest Idea In the World’
Why The World's Dumbest Idea Is Finally Dying
The five surprises of radical management
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Follow Steve Denning on Twitter at @stevedenning
