According to Dan Adams, author of "New Product Blueprinting: The Handbook for B2B Economic Growth,"
maximizing shareholder value may be a great outcome, but it's an unlikely one if it's the driver of a company's actions. Instead, Adams argues, companies need to be driven by maximizing customer
value. He has come up with a list of five reasons why companies need to shift from focusing on meeting the demands of shareholders to focusing on meeting the needs of customers:
- Shareholders care more about how healthy your company looks than how healthy it is. According to the authors of the 2008 Harvard Business Review article "Innovation Killers," "Over 90 percent of the shares of publicly traded companies in the United States are held in the portfolios of mutual funds, pension funds, and hedge funds. The average holding period for stocks in these portfolios is less than 10 months." In other words, that hedge fund manager you were trying so hard to please last year has already dumped your stock. Shareholders have very little interest in the long-term health of your company, only in the appearance of long-term health. And when managing the expectations of Wall Street analysts' conflicts with the actual job of building the firm's long-term competitive strength, guess which wins? Every quarter becomes "the most important quarter in the company's history." Employees will become numb to this familiar refrain because they hear it all the time. Expectations might stay the same or increase or decrease, but not as a result of the proactive effort of the company to create long-term strength.
- Maximizing shareholder value doesn't work anyway. We should not be shocked to find this failed logic has led to failed results. In a January 2010, Harvard Business Review article, "The Age of Customer Capitalism," Roger Martin wrote about his research in comparing the pre-maximize era (pre-1976) with the post-maximize era (post-1976). Here's what he found: The compound annual real shareholder return actually dropped from 7.6 percent to 5.9 percent. The new goal of maximizing shareholder value did nothing to maximize shareholder value. Companies that were successful often found they had created more illusion than reality. Jack Welch, the poster child for maximizing shareholder value, was highly successful over his tenure. But GE shareholder value plummeted after his retirement, most likely because investors were trading on the appearance of health - not the actual long-term health - of GE. And that appearance changed dramatically with Mr. Welch's retirement. It's been 10 years since he retired, and GE's market capitalization is still only one-third of what it was when he left.
- Only tangible goals, pursued day after day, ultimately get results. Finishing a marathon is a noble goal. But it's important to note that the personal satisfaction you feel afterwards is the result of achieving your goal-it's not the actual goal. If you planned to run a marathon and made personal satisfaction your goal, you would fail to focus your training on the more tangible task of running more than 26 miles. Like achieving personal satisfaction, maximizing shareholder value in and of itself can be a difficult thing to figure out how to achieve. But when you instead focus on something tangible like improving customer satisfaction, you can begin to see how that goal will result in maximized shareholder value. The more happy customers you have, the happier your shareholders will be.
- Employees need a higher calling to be inspired. According to Napoleon, "Small plans do not inflame the hearts of men." If you're the CEO and you think your employees are passionate about this quarter's earnings per share, you're out of touch. You might be excited about it because you have large stock options, but that's not the kind of passion that's going to rub off on your employees. In fact, many employees will question your motivation to reach the goal when they know you'll benefit disproportionately - sometimes wildly disproportionately - from the achievement of that goal. These same employees, however, can become very motivated when given the opportunity to deliver real and measurable value. Employees will quickly forget last quarter's earnings, but years from now they'll be telling their grandkids how they were on a new product team that turned their industry upside down.
- Meeting customer needs requires understanding them - and from that understanding can flow a river of profits. Done correctly, meeting customer needs will not reduce your profits; it will increase them. But why should the goal be to not just meet, but understand customers' needs? Nearly four decades of research say the new product battle is usually won or lost in the "understanding" phase, often referred to as the "front end of innovation." According to a 2007 Booz Allen Hamilton study, companies that directly engage their customers to understand their needs have operating income growth rates three times higher than those that do not. When you see a gulf that large between good and poor practitioners, it should scream, "opportunity!"
By the way, it's probably worth noting that last April, the once-proud Novell was acquired and split into two business units of The Attachmate Group. That's right, Attachmate - the terminal emulation guys. It seems being driven by "the brutality of the pressure the company has to operate under in 90 days" didn't work out all that well.