Thursday, September 29, 2011

Time to Abandon Shareholder Capitalism?

This is the problem.
An article from the Harvard Business Review says it is, and that we should make the shift to "customer-driven capitalism".  “It’s time to discard the popular belief that corporations must focus first and foremost on maximizing value for shareholders,” says article author Roger Martin, Dean of the Rotman School of Management at the University of Toronto.  “That idea is inherently, and tragically, flawed.  It’s impossible to continually increase shareholder value, because stock prices are driven by shareholders’ expectations about the future, which cannot be raised indefinitely.”  Martin writes that determining what your customers value and focusing on always pleasing them is a better optimization formula.  “If more companies made customers the top priority, the quality of corporate decision making would improve because thinking about the customer forces companies to focus on improving their operations and the products and services they provide, rather than on spinning lines to shareholders,” says Martin.  In the article Martin uses historical stock prices from the S&P 500 to show that the focus on shareholder value hasn’t done shareholders any favours.  They have actually earned lower returns since corporations adopted it as their guiding principle.  Two companies who have placed customers at the forefront of their operations, Johnson & Johnson and Procter & Gamble, have generated shareholder returns that are at least as high as, if not higher than, those of leading shareholder-focused companies.  The article is also available online at http://www.hbr.org/2010/01/the-age-of-customer-capitalism/ar/1  Duh.  So let me get this straight.  Assuming the premise that a company's value is expressed solely as "share price", companies that focus on customers' needs rather than owners' (shareholders') needs are more successful, and therefore generate greater "shareholder returns".  This seems intuitively obvious to your humble scribe.  A penetrating glimpse into the obvious.  I actually thought that was the objective in the first place.  I suppose the value of the good Dean's work (soon to be released as a book, I understand), is that a) he provides proof that this is so, and b) it's not a bad idea to remind those in the "C-suite" about the customer once in a while.

The Good News:  Take care of your customers, and they'll take care of you.