A Different Type of Company


I want to create a different type of company.  One that values employees and customers, and doesn't just pay lip service to that ideal.

ON SHAREHOLDER VALUE

Modern business theory is based on the idea that the purpose of a corporation is to "maximize shareholder value". That's become the conventional wisdom since the 1980s, and though some people have begun to question it, it's difficult to overstate how central it is to business today.  The term is embedded in corporate charters; boards make decisions based on it; CEOs are installed to carry it out.  It is business's north star.

There have been positive effects because of it.  In particular, productivity and share prices have risen dramatically.  The S&P 500 has increased 2,000% since 1980, and US worker productivity has grown 70%.  Other factors have contributed to these long-term trends, but maximization of shareholder value has played a central role.  The good news is there's been a substantial amount of wealth creation.

The bad news is these gains have been highly concentrated.  Over the same period, workers' pay has grown only 11% while CEO pay has ballooned 1,000%.  And though corporate cash reserves are near record levels today, stock market gains have primarily gone to the wealthiest 10% of Americans, who own 80-90% of stocks and mutual funds.

Perhaps this shouldn't be surprising.  If companies are being run to maximize shareholder value, then shareholders, and the managers they appoint, should be expected to benefit.  But the long-term effects are concerning.  As workers miss out on meaningful wage growth, a less vibrant middle class means weaker consumption and slower overall growth.  A top heavy economy could come back to bite business.

Also, rising income inequality strains our social fabric. It's incredible that both presidential campaigns on the left and right - Sanders and Trump - have tapped the same populist anger and are running on similar anti-trade platforms, which is a proxy for workers' frustrations.  Free trade can lift a lot of boats, but without an underlying commitment to retain or retrain American workers, they have suffered disproportionately.

There are pernicious day to day effects, too.  From the perspective of shareholder value, workers are a line item expense.  That's just the way it is.  And like any expense, that line item should be minimized and its output maximized - which helps explain why employees are always being asked to do more while wages have remained relatively flat.  It also helps explain my experience in finance.  Being viewed as a productive asset works fine for machines, but has its limitations for humans.

To summarize, over the last 35 years, maximizing shareholder value has turbo-charged growth, but not everyone has been on board the rocket ship.

And that, I believe, is the theory's flaw: In an organization with multiple stakeholders, it focuses on a single constituency, which inherently produces conflict.  How can a company be fully aligned if its values - which almost always speak about the importance of people - aren't aligned with its purpose?  Sometimes being true to your values means not maximizing shareholder value.  There are some things that are just more important than profits.
 

ON STAKEHOLDER VALUE

I believe business needs an organizing principle that aligns all stakeholders - investors, employees and the broader community - behind a common goal.  The purpose of this more holistic form of capitalism would be for the entire company to prosper, not just a single part.  As such, a company would be organized to maximize stakeholder value.  And to give this principle true power, all stakeholders would be represented at the highest level possible: the board of directors.

There are pros and cons to this approach. On the positive side, workers would benefit.  Employee input can be integrated into management decisions from the top down and the bottom up, which would help improve company culture, balance remuneration and strengthen strategic thinking.  A stronger voice would mean happier employees, and happy employees are good for customers - and the bottom line.

Furthermore, a more balanced board would help free management from shareholders' short term bias and empower them to plan for the future. This would result in more consistent returns, better long term performance and less volatility (especially if other companies adopted this approach).

On the negative side, top management and shareholders would give up the potential for outsize returns.  They'd have to trade in the motorboat for a stronger, steadier ship.

There are other challenges.  Getting the balance of power right in a stakeholder led organization is critical.  The board should not be divided evenly among each stakeholder.  A business needs to be competitive, which means greater representation for shareholders.  But employees and the broader community would need real power.

Also, to ensure that it doesn't ossify into separate groups, the board would have to be true to the underlying purpose of the company.  They would have to consider the whole before its individual parts. 

And measuring stakeholder value is harder.  While the same financial metrics can be used for shareholders, intelligent measures for employee happiness and customer satisfaction would need to be developed.  But if done right, they could produce valuable information that most managers don't have to today.
 

GETTING DOWN TO BUSINESS

Maximizing stakeholder value is not a great panacea for business.  The business life cycle still exists - companies will be born, mature, and die.  But it can make for a healthier life.  It could even make for a healthier death.  Imagine a stakeholder board renegotiating golden parachutes to help laid off employees find work and pay for retraining programs, or ensuring a new drug company doesn't engage in profiteering.  It's just the right thing to do.

I don't want to come across as having all this figured out.  I don't.  But what I'm arguing is that there has to be a better way.  One which values people and the bottom line, empowers business to succeed, and doesn't setup business to be inherently conflicted with itself. 

I think that better way starts by aligning all stakeholders behind a common purpose, which is for the entire company to succeed, and that is embodied in the shift from maximizing shareholder value to maximizing stakeholder value.  Only then do you have a company that is internally aligned.

It's important to lay a theoretical framework, which I guess is why this post couldn't wait.  But these are just words - until they aren't.  That's the challenge in front of us today.  That in addition to creating better fitting clothes, we have an opportunity to build a different type of company.  


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