It is easy to get into the camp of those who believe that customers should be the primary focus of a business. After all, customers are the ones who spend their money on the products and/or services. Revenue and profit are always good for a company. It seems to be quite fashionable to talk about the customer being the most important person. Yet, you can’t deny the influence Milton Friedmann has had on defining the purpose of a corporation (we touched on it here and it comes up frequently during the live chat). It should be noted that Friedmann’s words have gotten over-simplified to simply state that the sole purpose of any business is to increase its profits. While there is more to his philosophy, there is also the sense that it does not really matter who is running the business as long as customers keep buying and dividends keep getting paid out.
So what are the perspectives on shareholder primacy?
The recent report from the Aspen Institute (worth taking a look at to see the different positions for and against shareholder primacy) lists them.
Arguments for shareholder primacy
- Restricts powerful senior managers from primarily acting in their own interests
- Shareholders tend to be long-term investors
- Stock market is an efficient reporter of information that supports better decision making as it “entails the virtues of simplicity”
- Everyone benefits when you serve shareholders
- Provides a useful metric to evaluate corporate performance
- Acknowledges wide range of owners
Arguments against shareholder primacy
- Based on two false premises that shareholders are owners and ownership confers a financial obligation
- Encourages short term decision making and actions
- May be an outdated and potentially harmful notion in 21st century
- Majority of shareholders are institutions and thereby not able to provide effective accountability
- Makes the company the center of the universe
- Most owners of corporations do not know nor possess the necessary amount of information about the organizations in which they invest
- A sense of mission creates more wealth than the pursuit of creating more wealth for shareholders
- Shareholder thinking and behavior does not account for natural complexity
The “world’s dumbest idea”?
Steve Denning has an interesting discussion about the Aspen Institute report . He’s the one who states that shareholder primacy is the “world’s dumbest idea.” He acknowledges that conventional wisdom puts the emphasis on maximizing shareholder value. If you have read his posts on Forbes, you are probably aware that Denning strongly states that maximizing stakeholder value is misguided and really the customer is where the focus should be.He critiques the report by stating they missed the debate by focusing on “fighting short-termism,”
The substantive debate is not about short-term versus long-term. It’s about whether organizations should operate as money-making machines solely for the benefit of managers and shareholders or as instruments which add value to society.
Despite Denning’s advocacy for the end of shareholder primacy…
Wall Street, business schools and conventional wisdom still heavily influence the focus on who benefits from the profits. Shareholders still hold primacy. Maybe for larger organizations that are publicly traded, there is more pressure to show quarterly earnings. It seems whatever they do, everyone else does. So, are shareholders still number one or is this idea is on its way out?
What do you think? Should shareholders be the primary beneficiaries of wealth and value creation? Is it really “short-termism” that is creating such a problem? Join us on Friday, June 20, 2014 at 5pm GMT/12pm ET/9am PT to see if the purpose of a business is really changing and in what direction.
What is the purpose of a business/corporation? Why?
How does this change our conception of business’ ?
If shareholders still retain the power to hire or fire senior executives, why should the customer’s perspective even matter?