Is it time we fired our Shareholders? revisited
CNN’s Anderson Cooper ranked the consumer as first on the top 10 list of culprits for the collapse. Michael Useem writing in the Washington Post (The Officer Should Eat Last) places the blame on an absence of (corporate) leadership. Others point to the media as this watershed exchange between Jim Cramer (MadMoney) and Jon Stewart on The Daily Show – Thursday March 12,2009 (official clip, unedited clip)
In truth, the ultimate culprit IS us and our tendency to pursue short term solution paths because of our constrained ability to measure/predict beyond the near-term and perhaps impatience brought upon by the accelerating pace of change around us as illustrated by Ray Kurzweil.
Until we become better forecasters, the only ‘answer’ is a set of higher guiding principles as the logical pursuit of short-term can result in unintended consequences as illustrated in this seminal article (The Tragedy of the Commons) by Garrett Hardin.
Which ultimately raises the question of cause and effect – if we acted with one set of beliefs – then our assumptions for the future would be made easier because of our appreciation/understanding of those implicit underlying assumptions…believing in long-term allows us to better at long-term.
Peppers & Rogers call it Short-termism. (Rules to Break and Laws to Follow)
A condition so dire they rank it as their #1 rule to break for a company to succeed. It speaks to the pressure the stock market places on meeting short-term profits and expectations – sometimes culminating in truly tragic consequences as evidenced by; Enron and Arthur Anderson, the $300+Billion US sub-prime mortgage crisis and even reaching into allegations of fraud:
“SEC Commission charges that Adelphia, at the direction of the individual defendants: (1) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them in off-balance sheet affiliates; (2) falsified operations statistics and inflated Adelphia’s earnings to meet Wall Street’s expectations”
Ironically, the quest for trying to meet the short-term profit goals of the stock market (perhaps also spurred on by a desire to merit contracted bonus targets) actually wiped out more shareholder ‘value’ than ever would have happened otherwise had but a modicum of fiduciary responsibility prevailed.
“…But along with the goal of accountability, there’s an unintended consequence since it effectively tells CEOs that their continued employment depends on meeting short-term goals. That’s because Sarbanes-Oxley has made boards less hesitant to dismiss CEOs, and the boards themselves serve at the pleasure of shareholders and their institutional fund managers, who are increasingly looking at short-term results.” according to Jagdish Seth, Professor of Marketing at Emory University: Are U.S. Companies Doomed to Keep Planning for the Short Term?
While dramatic and extreme, these aren’t isolated cases. Consider Southwest Airlines, often sited as a leading customer-centric organization (Ranked #2 on Fortune’s 2003 Top 10 Most Admired Companies in America) and their fall from grace in 2007 as reported by CNN:
“Discount air carrier Southwest Airlines flew thousands of passengers on aircraft that federal inspectors said were “unsafe” as recently as last March, according to detailed congressional documents obtained by CNN.”
While the airline claimed flight safety was never an issue that message was not heard judging by responses to the story from readers.
“…..Once trust is broken, it is hard to hand over the lives of my family to a company that does not have our best interest and safety at heart.” Phil – March 10, 2008
“I’m a retired airplane mechanic.…Thank de-regulation for your cheap tickets, but the excessive competition in the industry means cost controls eventually get a stranglehold on every part of an airline, except executive compensation…The next time you buckle in, remember that you are only getting as much airline safety as you were willing to pay for, and have a nice flight.” JC March 7, 2008
There’s a sizable concern that things just aren’t right. When Bain completed their 2007 global survey they found a ratio approaching 2:1 of managers (43 percent agreed while 25 percent disagreed) who felt their companies would have better long-term results if privately owned.
Some companies have intentionally avoided a stock exchange listing for that very reason.
“Certainly one of the advantages is being able to manage for the long term without having to become obsessed with quarterly results. When a company like ours (Bechtel) is taking on major projects with long-term risks, it is certainly advantageous to have that longer-term perspective.” Jonathan Marshall – Bechtel Source
Others purposely engineer their ownership structures to protect their ability to thrive in the long term. Google’s IPO submission read in part:
“The standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future. Therefore, we have designed a corporate structure that will protect Google’s ability to innovate and retain its most distinctive characteristics.” Source:
Some point out the short-termism problem is “contained” to certain stock markets.
“…Other than London, the European stock exchanges and especially their Asian counterparts tend to have limited liquidity because of family ownership and bank holdings. … So the biggest stock owners don’t see their shares as commodity items. Instead they’re something to be developed and passed on to the next generation.”
Source: Professor J. Seth, Are U.S. Companies Doomed to Keep Planning for the Short Term?
Others still, may feel the current situation simply requires better risk management practices, management oversight and/or a realignment of compensation practices (see Rotman’s “The Risk Issue” Spring 2007 for an excellent overview). Perhaps they’re right, but I think we need to consider that these are all symptoms of the same underlying short-termism problem. For those who agree the short-term focus is “wrong” – shouldn’t we do something about it?
An alternate view of the purpose of an enterprise:
The prevailing view (for many) that customers exist to create profit for the enterprise’s shareholders is in contrast to an emerging alternate vision which notes that the purpose, indeed the very existence of the enterprise is to profitably serve its customers. Without them, there is no enterprise….there are no shareholders. In this new paradigm we come to see that the ultimate stakeholders that define the success of the enterprise and to whom the enterprise is ultimately “accountable” to are its customers… not the shareholders.
So if we come to recognize that:
1. having a short-term focus does not have a privileged profit generating status
2. the enterprise’s profits are created by the will of customers, and
3. profit streams typically require some investment to ensure their continuation,
then we need to ask ourselves the final question…
IF we have shareholders demanding short term profits that will come at the expense of the long-term value of its customers, shouldn’t the enterprise seek to “fire” those shareholders? …Just as surely as it would fire an employee or supplier that was working at cross purposes . Just as surely as it ‘fires’ customers that aren’t profitable by minimizing interaction expenses and/or realigning fees.
If the pressure for delivering near-term profits puts the brand on a path that exposes the enterprise to greater risk, then surely the C-suite and the Board of Directors must take a stand and uphold their fiduciary responsibility. As noted earlier Boards may be afraid of being exposed to lawsuits from shareholders for not maximizing profits – but with this emerging viewpoint, they may face a similar legal threat from the other side (although I am not a lawyer). Shareholders after all, are free to select other enterprises or financial instruments benefiting as they do from their capital liquidity if they wish to maximize their short-term profitability objectives. Shareholders with a short-term investment horizon ……are not stakeholders.
This doesn’t mean the enterprise isn’t held accountable for meeting profit and other objectives. Quite the contrary, it places an even greater premium on identifying, developing and implementing sustainable value. Short term profits and time to market pressures don’t have to win out over the long term investment decisions since it is not any less profitable if it is done right (if over the slightly longer term).
Collins & Porras (See: Built to Last) spoke of the need to have a BHAG (Big Hairy Audacious Goal), a long-term vision that is supposed to be so daring in scope that is seems almost out of reach. What is needed is a willingness to pursue this path led by the CEO adopting the mantle of responsibility of the Chief Brand Officer. (see Ted Matthews) The resulting realignment of systems, people, skills, program implementations and performance compensation will provide a stronger balance of what is good/better/best for the maximum accumulation and retention of profitable customers and the realization that retention is in fact the new acquisition.
For those interested in more, this clip starts off Niall Ferguson’s The Ascent of Money series