Carmel Fisher - The value of putting the customer first

I enjoyed reading an article this week that challenged my thinking; in fact it challenged the very basis of capitalism.  Its premise was that the accepted management theory, that companies should be run to maximise shareholder value, is not only wrong but is the cause of much that is wrong with today’s economy.
 
A Washington Post columnist, Steven Pearlstein, took a journey through history and decided that the imperative to maximise a company’s share price (for the benefits of shareholders) has no foundation in history or law.  

Rather, early companies were generally run for public purposes such as building canals or roads and paid equal heed to all stakeholders – shareholders, staff, customers and the community.  Pearlstein repeated a famous quote from 1953 when carmaker Charlie Wilson told a Senate committee “What is good for the country is good for General Motors, and vice versa.”

The move towards prioritising shareholder interests is said to have begun in the 1970s when globalisation and deregulation led to profits being squeezed.  Company executives found it easier to disappoint shareholders rather than workers or their communities.  However by the mid-80s, companies with lagging share prices found themselves targets for takeovers by competitors or corporate raiders, and disgruntled shareholders were happy to sell.  

This increased shareholder activism led chief executives to have a renewed focus on profits and share prices, at the expense of jobs and wage increases.

And so developed the management maxim that profitability and shareholder value was the end all and be all.  

Business text books have ensured that business students are taught this basic capitalistic notion, share markets focus on profitability above all else, and companies encourage management to focus on short-term profit results and reward them accordingly. 

This focus on maximizing shareholder value has resulted in a long, slow decline in people’s trust and respect for large companies, and in an ironic twist, it hasn’t actually delivered on its promise of value for shareholders.  According to the University of Toronto, the compound annual return on S&P500 stocks during the “managerial capitalism” years (1930s-1970s) was 7.6% compared with a 6.4% return in the “shareholder capitalism” years from 1976 to the present.

The defense of maximising shareholder value is that no company can maximise value in the long term without keeping great employees, producing great products and services and doing their part to support their community and government.

It is true that, managed properly, there should be no inherent conflict between the interests of shareholders and all other stakeholders.  But, there is a very good argument to say that if businesses put staff and customers first, they will still achieve the objective of maximising shareholder value.

Back in the 1970s, business guru Peter Drucker said “the purpose of business is to create and keep a customer.”  It is interesting that many of the companies that arguably put the customer first – think Apple, Johnson & Johnson and Amazon - have been amongst the most successful at maximising shareholder value. 

Maybe the theory should be reworded to “maximise customer and employee satisfaction”.  Now there’s a thought.