Why the 'Maximize Shareholder Value' Mantra Is Misguided - Page 2

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.

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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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