Why the 'Maximize Shareholder Value' Mantra Is Misguided

Don Tennant

Several years ago I interviewed the CEO of Novell, who told me that in order to obtain the skills the company needed, in the past 12 months he had replaced a quarter of his work force rather than retrain them. The reason? He had to maximize shareholder value.


That CEO was Ron Hovsepian, a genuinely good guy whom I had gotten to know pretty well, and who is now the president and CEO of Intralinks, a New York-based cloud services provider. I asked Hovsepian how difficult it was to recruit and retain people with the skills he needed, and this was his response:

I'll give you a little statistic. This past year, I turned over 24 percent of the workforce. One thousand of our 4,000 employees are new to Novell. So the change we're going through is pretty significant. Candidly, among all the good revenue stories and the profit improving, people don't realize how much we've really gone in and changed our workforce to get the right skills here.

I was kind of blown away by that, and I asked him why he wasn't retraining those workers instead of replacing them. It took him a while to get to the point, but he eventually got there:

We absolutely retrained the ones that we felt had the right aptitude and the right capabilities. And it also takes two. A lot of people don't want to be retrained as part of that transition. Investing in training our people is a big piece of what we're doing, including at an executive level, because I didn't have enough of a pipeline of people. So we're taking some of our youngest, best and brightest talent and investing in them further, around business management and other skills, so they grow. It's done with great thought and care, while balancing it against the financial demands of what we've got to get done. And the cycle time is the biggest issue. The brutality of the pressure the company has to operate under in 90 days is what drives us.

The reason he replaced a quarter of his work force all had to do with the pressure to report strong quarterly earnings to his shareholders, and this was one way to cut costs and do that. It was all about what has come to be a mantra in corporate America: "Maximize shareholder value." But is that really the best way to run a company?


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Feb 10, 2012 1:03 AM Jake_Leone Jake_Leone  says:

Don what year did you talk with this guy?  This is significant, because he was able to replace a quarter of his engineering workforce.  If a Tech CEO can do that, why on Earth does Obama believe that U.S. Engineers are hard to find?

The example is striking, and points to a huge waste of potential.  Poster-child for the fact that industry is lying about a U.S. engineer shortage.

Can the U.S. afford to have a President that is Under-the-Influence of such short-sighted business leaders?

And Don, this guy relies on low-level managers to decide who stays and who goes.  The truth is most low-level managers have many reasons, aptitude rarely is one of them, for keeping or laying off workers.  A really good reason to let someone go, is if they threaten to take your position, and a young trainee is no threat.

I took a look at Novell's historical stock price, looks like in 2006 it was 9.64$ a share, end of 2009 $3.90.  I think Ron Hovsepian knew it was time to step off the burning ship, and probably was relieved to get acquired at 6$ a share (or a 33% loss).

I feel sorry for the company (stockholders, investors, and employees) that hired him as CEO.

Feb 10, 2012 1:04 AM Jake_Leone Jake_Leone  says: in response to Jake_Leone

Don, I should have asked what year did Hovsepian replace a quarter of his workforce?

Feb 10, 2012 2:01 AM Don Tennant Don Tennant  says: in response to Jake_Leone

I spoke with him at the Brainshare conference in Salt Lake City in March 2008, so the year he was talking about would have been March 2007 to March 2008. Note that not all of the new people would have been Americans ... he said later in the interview that the H-1B program "definitely plays a role" in getting him the talent he needed. I linked to the interview in my post if you want to read the whole thing.

Feb 10, 2012 9:51 AM Dolores Dolores  says: in response to Don Tennant

"So we're taking some of our youngest..."???? Youngest???? Are any lawyers reading your blog, Don? Where did they get the idea that 'youngest' was a predictor of productivity and trainability? I completed a Master's at 52 and am back in grad school for a very technical certificate program (SANs) at 59. And I am far from alone. This weekend I'm going to start learning on my new Android tablet I got (a steal) just to get some hands-on with that technology. I have secured wireless in my home (and I set it up), I  take vitamins and supplements and stay active, and I am not dead yet. (And my gray hair is all blonde) My real name is Legion, as there are so many of us out there.

I can't be the only one who wanted to barf at Hovsepian's comments. Except for lawyers who would probably salivate.

Feb 10, 2012 11:03 AM jake_leone jake_leone  says: in response to Dolores

This CEO is obviously bigoted.  Again I pity any investors that get tangled with him.  His company lost value during his tenure, by pure luck he was able to waltz out (but not without significant loss of share holder value and opportunity cost).

At age 65 my dad originated several inventions (entirely on his own), patented, and sold them (as I.P. and as product).  The idea that younger means unable to continue in engineering is foolishness.

As far as I know, everyone in my dads family who made it to 65 (and beyond) was sharp as a tack until the day they passed.  Age is simply not a factor that you can use to determine fitness for engineering, and if you do, you are doing a disservice to your company.  And if you are a CEO that practices age discrimination, such as this, then you are unfit to lead.

It is the height of managerial laziness to miss-classify valuable traits.  Frankly, I would suggest strongly that the real reasons for eliminating senior personnel at Novell could well be tied to sand-bagging, cut-throat politics, and miss classification of capable people.

As I said, a newby is not a threat to a manager with idiotic tendencies,  an experienced engineer on the other hand might know too much about what is actually going wrong.  Who do you think is going to be laid off?

Feb 10, 2012 12:38 PM R. Lawson R. Lawson  says:

If 25% of your companies employees "aren't a good fit" then clearly management has failed along the lines. 

They complain that there aren't enough IT people with solid business skills, so they push us into the roles of programmer-analyst, then eventually the either drop the hyphen or call them business-analysts.  After that, they complain that their aren't enough people with technical skills!

It's amazing how thick headed some members of the business community are.  Their actions caused the problem, and then they turn around and act as if it is the fault of that 25%.  I think the 1% has more to do with it, and the fact that they don't really make solid plans.  They follow trends.  And when the trend is to offshore, they offshore and in a big way.  When the trend is to increase business skills, they do that and in a big way - but they go to extremes.

I got tired of working for these firms.  When I stopped allowing them to drive my career and became the driver, this profession became very lucrative.

If I became an analyst for say PwC (a former employer) and allowed them to push me into the business side of IT I may have increased my value TO THEM, but my skills would become tightly coupled TO THEM and less transferable.  Hard skills, that I possess a lot of, are easily transferable to other projects, in other companies, and even in other industries.

Soon after I took the leap and left PwC for consulting, what I thought would happen did happen.  Usually I'm in the ship when it goes down, thankfully I was able to watch that one sink on the decks of another ship.  They basically gave employees an option - take this buyout, or stick with us and roll the dice in 6 months.  Many who rolled the dice regret that decision because they became the bridge offshore - and still lost their jobs.

I think I am very good at communicating and know a few things about business, but a quick tongue or a slick pen rarely solve complex business problems.  You need know-how and solid experience.

Feb 13, 2012 11:55 AM Dennis Dennis  says: in response to Dolores

As a man who has come to his second career late in life - and who has enjoyed success in that new career (despite my age, LOL)- I wholeheartedly agree that the blatant ageism in Hovsepian's comments about "young and talented" is insulting. And stupid. Companies who stereotype talent are doomed to fail.

Perhaps that's why turnover is so great - managers are looking for "young" employees when they should be looking for "good" employees.


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