It’s an age-old lament. Regrettably, it hasn’t changed much in recent years. It’s the solemn proclamation by some leaders of publicly traded companies that their most important job – and every employee’s top priority – is to maximize shareholder value. Really?
In my days as a senior corporate executive, I often bristled when my CEOs and CFOs publicly invoked this view in ways that seemed to me cliched and unthinking. What did I really hear – and almost everyone else hear – when CEOs and CFOs spoke about maximizing shareholder value? Right or wrong, the cynical take was what they really meant was increasing their personal wealth (and job security) and that of the senior leadership team – including me – board members, and large, wealthy shareholders. Yes, to be fair, many 401(K) shareholders benefit when a company’s stock value rises, but it rarely represents the accumulation of enormous, generational wealth realized by the insiders and their primary influencers.
Is this what happened to Boeing? The firm has gone from being the best airline manufacturer in the world, the pride of America, to an organization that can’t seem to solve its 737 Max 9 woes. John Gapper wrote in the FT Weekend (13-14 January), “Boeing has become bureaucratic and focused more on financial returns than engineering prowess,” as if the latter can no longer beget the former. He added, “Many of its engineers pine for its glory days and its former willingness to bet the company on progress.”
There are other unfortunate examples of once-great corporations hollowing out their core technical capabilities in favor of financial managerialism. Yes, of course, every successful company must have tight financial controls, reporting, and accountability. This is obvious.
A big part of the problem, however, is the very idea of maximization. Maximizing an outcome places it, by definition, first and foremost among other desired outcomes – often with a zero-sum mindset at work. The jargon of “maximizing” shareholder value almost always comes at the expense of mid- and long-term employee productivity and customer satisfaction. I’ve seen this occur many times. It should be no surprise, however, coming from an accounting structure that sees human beings as expenses - and not the assets they are - and treats their reduction in number as "synergies."
Financial analysts are often young “monetizers” focused largely on quarter-to-quarter earnings results. They place enormous, counterproductive pressure on CEOs and CFOs to report short-term, managed – if not manipulated – results and forsake appropriate investments in talent and infrastructure.
A far more productive conceptual framework for this exercise comes with the word “optimization.” Optimizing is about balancing multiple, competing tensions. It means finding the optimal place on, in this case, the financial-results curve just before destructive diminishing returns set in. It means balancing financial performance with the fiduciary demands of sustaining quality and productivity.
Yes, layoffs are often necessary. Tough decisions do need to be made, but who calculates the resulting insufficient workforce capacity, decreasing morale, loss of innovation, turnover, risk of quality degradation, and, ultimately, customer dissatisfaction, brand decline, and loss of market share? The answer? Nobody. These essential, downstream effects never get measured and are rarely discussed in board rooms in any meaningful way. It’s a terrible shame and a waste of resources.
Words matter. Corporate leaders should speak first about building great products and services and inspiring and equipping talented employees to do so, even having the courage to push the point on their financial analyst calls. If they could speak first of investing in people and innovation, efficiently and judiciously, of course, they will optimize shareholder value over years and not just quarters.
