The true cause of the mayhem in our capital markets is our slavish devotion to the theory of shareholder value maximization. Over the past 40 years, we have come to utterly embrace the notion that the singular objective of a company is to maximize the return it earns for its shareholders. It is not to make customers happy. It is not to serve as an employer of choice, nor is it to contribute to society. And it is not, importantly, to earn a fair return for shareholders, given all the other stakeholders. No – the sole purpose of the organization, according to shareholder value theory, is to maximize shareholder value by increasing its own stock price more or less forever.
This theory has, unsurprisingly, caused executives to turn their attention from the real market – where products are made, services provided, employees hired and customers served – to the expectations market – where stocks are traded and dividends paid. Executives have turned their attention from winning with customers over the long term to focusing on investors in the short term. It’s incredibly damaging to real market performance and the executives themselves. The executives have to convince themselves that there is meaning in talking up their stock price to analysts, making deals with hedge funds and sweet-talking the financial press. There just isn’t. It’s all demotivating and unproductive.
It is like an NFL quarterback being asked to pay attention to the point spread instead of the actual game. This, of course, would never happen. The NFL imposes a strict and absolute separation between the real game (played on the field) and the expectations game (played through the betting lines in Las Vegas). On this front, there’s a lot capitalism could learn from the NFL – America’s top sports league in both viewers and profits. The impact of shareholder value theory will be explored in the next excerpt from Fixing the Game, available online tomorrow. Later this week, further excerpts will explore the lessons capitalism can learn from the NFL.
Read more excerpts from Fixing the Game:
Roger Martin is Dean of the Rotman School of Management, University of Toronto. He holds the Premier’s Chair in Competitiveness and Productivity and serves as Director of the Michael Lee-Chin Family Institute for Corporate Citizenship at Rotman.
