I just read a piece in the ProMarket Blog ( https://promarket.org/where-friedman-was-wrong/ ) about whether Milton Friedman got it “right” or “wrong” in his assertion that a company’s objective should be to maximize value shareholder value. This is a subject I have been thinking about for a long time, and I find that while I agree with Friedman’s premise, I have several caveats that are important when one thinks about how to make this happen. I would further say that my thinking about how shareholder value is properly achieved (largely) resolves the questions posed by the authors of the ProMarket Blog piece concerning the question of “value” and/or “well-being”.
That said, I have changed my view about where managers ought to focus if they want to maximize the value that the business they are managing generates. Let’s start the thought process by identifying the stakeholders in a business:
- Owners (shareholders)— These are the folks who provide the capital that allow the business to form and then operate. And, they expect a return (the reason a business exists is to make money) on that investment.
- Managers— These folks are paid by the owners (even when the managers are the owners) to take an idea, turn it into a viable business, operate (develop a strategy and implement it) that business and make it successful.
- Employees— The employees, under the direction of the managers, are responsible for executing on the strategy and providing the expertise and labor necessary to produce and deliver the products and/or services that business delivers.
- Customers— Customers buy the products/services that the company produces and the more product that the customers buy, the better the business does.
- Society— Virtually every action produces externalities, i.e. costs that are imposed on others (not directly involved in the transaction) by the act of doing something. An example might be that of an outdoor concert that is designed to provide a paying audience with entertainment. Homeowners who live near the venue, might see the music produced as noise that prevents them from sleeping. The “noise” is an externality. So, there in some chance that society as a whole might be affected by the operation of a business and the distribution and use of what it produces.
For many years I held to the standard belief and focused on making the customer happy. This made sense to me because if the customer is happy, they buy more of your products (and maybe at a premium price) and my business would prosper. This was good, as far as it went, but I soon discovered that unless I had good (competent, innovative and productive) managers and employees, my chances of delivering products and/or services that delighted my customer was very unlikely. Stated slightly differently, that employees are a key contributor to a business’s success is a foundational concept. I believe that it is impossible to get a groundbreaking business off the ground much less grow it and make it successful (and thereby being able to make customers happy) if you don’t have managers and employees who are exceptional and committed to the success of the enterprise. So, having happy customers depends on motivated, talented and committed employees—both managers and staff.Based on that train of thought, I have spent a lot of time and effort over the years trying to make sure that my managers and employees were happy because when I said to my clients or my bosses that “it wasn’t me, it was a team effort”, it really was. And, when I was successful at managing the human capital dimension of the business, things went well and when I wasn’t, it was a real struggle. At PwC we focused on attracting, developing and retaining the “best and brightest”. This involved many things, including:
- Creating a work environment that was conducive (which importantly an active personal development program for all of our professionals) to maximizing our goal to attract, develop and retain the best and brightest;
- Making sure that we had rewards systems that we merit-based and clearly rewarded top performers for doing the right things—focusing on working as high performing teams to do the right things for our clients; and
- Making sure that the world knew that PwC was a great place to work, because that made attracting high quality talent easier and unless you can attract talent, you can’t develop it further or retain it.
The people are what made PwC Consulting great and that made the business grow because great employees provide great service that makes for happy customers who buy more product and beget (by the resulting good reputation and brand) new customers. It is a virtuous cycle that begins with your people.
So, we have covered all the stakeholders, except for “society as a whole.” This one is a little more of a stretch, but bear with me. I believe that to truly be successful, a business is a long-term proposition. And, a continuing operation can’t afford to do things that are going to hurt the community in which they operate because if they do, the community will eventually push back and potentially inhibit the company’s ability to continue to serve its customers and provide a return for is shareholders. In this sense, the well-being of the community is in sync with the well-being of the owner which includes thinking about not only profits, but how their business will continue to thrive (an necessarily contribute) in the context of a well-balanced environment.
At the end of the day, the shareholders well-being is dependent on the innovation and overall productivity of all the stakeholders in a business and it is unlikely that a business will thrive (i.e. make money) in the long run if all the stakeholders aren’t properly cared for.
Copyright 2017 Howard Niden— you can find this (days earlier) and other posts at www.niden.com