I mark it as a dark day for American corporate leadership when stock options became the fundamental center of executive pay. Options were meant to focus an executive’s attention on long-term growth. But a market fueled by ever shorter-term demand for double digit growth morphed the rewards into an addiction for relentless quarter on quarter performance.
Shareholder value became the drug of choice for CEO’s. And while consultants and pundits have said it for decades, this month, Harvard Business Review finally pointed a finger at the obvious– and with research to back it up. Roger Martin, Dean of the Rotman School of Management at the University of Toronto authored The Age of Customer Capitalism. Right up front he labels the goal of shareholder value based capitalism as “tragically flawed.”
I highly recommend this very thoughtful article, which centers on an analysis of market cycles and organizational performance. But I am a simpler guy and look at the world through a leadership lens.
Business operates best on a virtuous cycle:
- Executives take care of employees
- Employees take care of products and customers
- Customers take care of shareholders by spending money
- The Board (representing shareholders) takes care of executives.
When options fuel the drive for near term results, with a goal of shareholder value:
- Employees are busy taking care of executives through cost cutting and deal making
- Executives are taking care of shareholders (and through options, themselves)
- Which leaves customers to take care of themselves.
Shareholder value is important- but as a artifact of performance, not as its very definition. And Martin shows us that it is simply not sustainable.
By the way, just in case you think this stuff is new, here is a link to an article I wrote on leadership for DestinationCRM.com almost a decade ago.