When A.G. Lafley took over as Procter & Gamble's chief executive he removed the TV screens in company headquarters that tracked P&G's stock price. And in 1997, following Research In Motion Ltd.'s IPO, the company founders decreed that anybody who discussed RIM's share price at work had to buy a doughnut for every other employee. Rotman School of Management dean Roger Martin says both are welcome signs for a new age of customer capitalism
The above decisions by Proctor & Gamble and Research in Motion go against the tenets of shareholder value - the belief that everyone in the company should be intently focused on raising the share price. Yet, in Harvard Business Review, Roger Martin, dean of the Rotman School of Management at the University of Toronto, says it's a welcome sign because we have to enter a new age of customer capitalism.
Prof. Martin delineates two eras in modern capitalism. The first started in 1932, following the publication of an influential book, The Modern Corporation and Private Property, by Adolph A. Berle and Gardiner Means. The prevailing logic was that management should be separated from ownership, and companies would be guided by top managers who were, in essence, hired help.
But that was turned around in 1976, after an article by Michael C. Jensen and William Meckling appeared in the Journal of Financial Economics. They argued that managers were advancing their own interests over those of shareholders, and primacy must be given to shareholder value.
Prof. Martin notes, however, that shareholders have not done better in the era of shareholder supremacy. From 1933 to the end of 1976 - when shareholders were supposedly playing second fiddle to management's interests - shareholders of Standard & Poor's 500-listed companies earned, on average, compound annual real returns of 7.6 per cent. That compared to just 5.9 per cent from 1977 to the end of 2008, when shareholder value was the obsession.
If shareholders were all you cared about, Prof. Martin asks, would the focus on shareholder value be wise? No, he counter-intuitively responds.
To create shareholder value, he says, "you should instead aim to mobilize customer satisfaction. In other words - and nobody should be surprised by this - [management thinker] Peter Drucker had it right when he said that the primary purpose of a business is to acquire and keep customers."
As we were all reminded by the recent financial implosion, there can be acute dangers in the theory of shareholder value. But even before that, Prof. Martin says, there were limitations to the theory, as CEOs realized that to boost share prices, they had to raise expectations about their company, which can't go on indefinitely.
"They can push shareholder value up in short bursts, but, in due course, prices will fall again," he writes. "So the executives invest in short-term strategies, hoping to get out before the inevitable crash, and often later criticize their successors for failing to avoid preordained decline."
Instead, he urges company leaders to seek to maximize customer satisfaction, while ensuring that shareholders earn an acceptable risk-adjusted return on their equity.
That will also mean rethinking executive compensation, making sure that the stock top executives receive vests over a long period, and not be based on current share price. A significant portion of Mr. Lafley's compensation as CEO was in stock that vests only over the 10 years after his retirement.
"I firmly believe that if more companies made customers the top priority, the quality of corporate decision making would improve because thinking about the customer forces you to focus on improving your operations and the products and services you provide, rather than on spinning lines to shareholders," Prof. Martin concludes.
Power points
Counting down the minutes
- At Google, meetings often have a giant timer on the wall - downloadable, four feet tall and run off a computer - counting down the minutes left. Carmine Gallo, Business Week
Resolution: find a mentor
- Make it a goal this year to find a good mentor, and start building a relationship, consultant Jeffrey Gitomer suggests. Sales Caffeine newsletter
Visualize your online video
- Online video has become a more popular marketing approach these days. But if you're going to use it, consultant Bud Rosenthal reminds you to make sure that you are providing useful information to aid viewers in their decision-making - not an irrelevant branding commercial that mimics a television advertising spot. And, he says to also include a call to action: "Decide what action you want your viewers to take before shooting the video. Do you want them to fill out an inquiry form, forward the video to a friend, mention a coupon code, or click a link to learn more about a particular product or service?" MarketingProfs.com
Quick-fix diet
