Bill Clinton has a great riff about corporate orientation in his recent Daily Show appearance:
I was virtually the last generation of American law students and business students taught that corporations had a responsibility—because they had special privileges under the law, like limited liability—to their stakeholders: to their shareholders, their employees, their customers, and the communities of which they were a part. Then starting in the late 70s, that practice changed and all of a sudden the shareholders were way up here and all the stakeholders were down here. It had the ironic consequence of giving the most influence over corporate decisions to the stakeholders with the least concern about the long term profitability of the corporation and the greatest concern about the short term profitability.
Ben Heineman recently suggested that Steve Jobs’ approach to running his public company bucked the trend, almost ignoring shareholders but benefiting them regardless by focusing on customer satisfaction:
Apple has paid no dividends since 1995. It hasn’t used leverage. It holds $76 billion in cash with nary a thought of a buy-back. It is hard to argue that fundamental business decisions were driven by stock options (although there is the issue of options back-dating in the debit column).
Obviously, Apple shareholders have done just fine, with Apple and ExxonMobil today changing places back and forth as the U.S. company with the highest market cap. Yet this has been a long process of product design, introduction and success.
The Economist chimes in by warning against elevating other stakeholders to the current position of share owners:
The era of “Jack Welch capitalism” may be drawing to a close, predicted Richard Lambert, the head of the Confederation of British Industry (CBI), in a speech last month. When “Neutron Jack” (so nicknamed for his readiness to fire employees) ran GE, he was regarded as the incarnation of the idea that a firm’s sole aim should be maximising returns to its shareholders. This idea has dominated American business for the past 25 years, and was spreading rapidly around the world until the financial crisis hit, calling its wisdom into question. Even Mr Welch has expressed doubts: “On the face of it, shareholder value is the dumbest idea in the world,” he said last year.
Yet this need not mean that the veneration of shareholder value is wrong, and should be replaced by worship at the altar of some other business deity. Most of those preaching reverence for other stakeholders concede that the two are usually not mutually exclusive, and indeed, often mutually reinforcing.
Jack Welch clarifies that supposed advocacy of short-term shareholder value isn’t his real position:
Look, the job of a leader and his or her team is to deliver to commitments in the short term while investing in the long-term health of the business. Bottom line: That’s management. Good managers know how to eat today and dream about tomorrow at the same time. Any fool can just deliver in the short term by squeezing, squeezing, squeezing. Similarly, just about anyone can lie back and dream, saying, “Come see me in several years, I’m working on our long-term strategy.” Neither one of these approaches will deliver sustained shareholder value. You have to do both.
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