Customer Value, Shareholder Value

Last week, Rachel Sandler, writing in Forbes, reported that “Nearly 200 CEOs Say Shareholder Value Isn’t Everything.” In fact, 181 CEOs from the Business Roundtable signed a pledge to that effect.

And before you dismiss the pledge as idealistic, look at the companies. Amazon, Walmart, JPMorgan Chase and Apple all signed up for a fundamental redefinition of the reason for corporations to exist — and how their decisions should be made.

I happily applaud this step toward a return to sanity, but it isn’t lost on me that there were no specific commitments or actions, just a recognition that we may have lost our way. And it does, of course, make for good publicity. But the idea isn’t new.

Peter Drucker, an influential business thinker on reasons for business existence, made a similar statement in “The Practice of Management” in 1954. Drucker explained clearly: “Because the purpose of business is to create a customer, the business enterprise has two — and only two — basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

If a company exists to create a customer, and if a company does that well, it’s not a long stretch to imagine that shareholders will come out well. While he was far too early to see the trends ripen, Drucker alludes to both the market and organizational conditions that now ask companies to revisit their focus of attention.

There was a time when businesses organized around customers. Employees took care of customer needs by making, servicing and selling products or services. Managers took care of employees by ensuring that needed skills, tools and supplies, and facilities were at hand.

Executives took care of managers, ensuring that they had strategic resources necessary for operations. Shareholders took care of executives, supplying capital and governance. Customers took care of shareholders by spending hard-earned cash with the business.

All of this created a virtuous and, more important, self-sustaining circle — as long as everyone did their bit.

Somewhere, however, the circle was distorted. As more senior management pay included options, those executives became shareholders. Before dot-coms were a bubble, they were (and remain) a huge lever for creating wealth. That created a laser-like focus on shareholder value, which became the fundamental management mantra in the 1990s. Unfortunately, an asset overused soon becomes a liability. Boards, representing shareholders, became ever more expectant of ever higher returns on capital. Executives responded by demanding ever more in the way of reporting and risk from managers.

Managers’ turned to taking care of the needs of the executive suite rather than the front-line workers. The constant focus on more return to shareholders led production to focus on caring for (or perhaps defending against) management’s need for ever more productivity.

Unfortunately, that left fewer resources for taking care of customers. In fact, customer relationship management (CRM) technology, which could have allowed for far better customer care, became a weapon for cutting costs and, in many cases, did more harm to customer relationships than good. (Anyone feel appreciated as a customer trying to get through your bank’s voice response system to talk to a human being? I didn’t think so.)

In essence, giving management a stake in outcomes encouraged shorter-term (think quarterly reporting) focus and left customers holding the bag. That strategy is efficient, but not sustainable.

I encourage you to map this in your organization. Look at the metrics and accountabilities and ask yourself what groups do they serve? Be specific. If you cannot draw a straight line between a process to how a customer’s life is better, start looking for whom it really serves. Map to see if the wheel it creates really is a wheel, and if it drives sustainable customer loyalty and profitability. (Think about Jim Collins’ flywheel here.)

I certainly do not mean to deride shareholder value, and, if I may be so bold, I do not think the venerable Peter Drucker intended such a slight either. But shareholder value should not be the goal. It is an artifact, a result of a well-run, sustainable entity that can create and keep profitable customers.

Originally published in Arkansas Business, Barry Goldberg On Leadership, August 5, 2019.