by Dan Adams, founder of The AIM Institute and author of “Business Builders: How to Become an Admired & Trusted Corporate Leader“
Back in the ’80s, Jack Welch was a superstar. As the CEO of General Electric, he sent its stock value soaring. How? By engaging in an intense combination of downsizing, outsourcing, offshoring, and “financial engineering.” Unfortunately, 20 years after Welch’s 2001 retirement, GE’s value was at a quarter of its peak — and the company’s previous reputation for manufacturing leadership, employee loyalty, and breakthrough innovation was greatly tarnished.
Clearly, Welch’s approach didn’t stand the test of time. Hey, hindsight’s 20/20. But what is concerning is that so many companies today are ignoring that hindsight — they’re STILL putting shareholder wealth ahead of building a stronger company.
I’m not out to villainize Welch: He was a product of his times, and later he even renounced shareholder value as the primary goal for a company. My goal is to help today’s companies break their addiction to quarter-by-quarter servanthood to Wall Street — because it’s making them weaker, not stronger.
Many leaders still fixate on this debunked approach. He’s done the research. In a survey yielding 465 responses from publicly traded corporations, I asked senior leaders to identify one of four goals as their company’s primary one: maximize shareholder value, grow by meeting customer needs, beat competitors, and satisfy all stakeholders. I compared the responses from companies whose respondents said they were growing faster than the competition to those whose respondents said they were growing more slowly.
We found that 38 percent of senior leaders see maximizing shareholder wealth as their company’s primary goal. And it was, by far, the top goal for slower-growth companies. For faster-growth companies, the top goal was to grow by meeting customer needs.
There are four types of leaders: Builders, Decorators, Remodelers, and Realtors. Builders behave like a company’s founders, with a passion for delivering differentiated value to customers. They are far more likely than other types to enjoy sustainable growth. Decorators act more like Welch: They’re obsessed with cost-cutting, curb appeal, and quarterly financial reports.
Decorators, like Remodelers and Realtors, have their place — it’s just not in the driver’s seat.
Companies never outgrow the need to have a Builder mindset. They need decision-makers who realize that maximizing short-term shareholder value is far less important than the smart customer research and innovation that actually move the needle on revenue.
Here are three reasons why maximizing shareholder value is an unworthy goal:
REASON 1: It doesn’t inspire employees.
Employees’ goals should be actionable and inspiring. Maximizing shareholder value is neither. If a leader says the goal is to raise earnings per share this quarter, most employees will be clueless on how to help — and frankly, it may lead them to think, Is this just about the bosses getting their bonuses and stock options?
Far better to set goals around growing by meeting customer needs or beating the competition.
REASON 2: It has a terrible track record.
My research found that only 32 percent of the senior leaders at faster-growth companies said their primary goal was maximizing shareholder wealth (far more of these respondents — 49 percent — listed “meeting customer needs” as their top goal). At slower-growth companies, 70 percent of senior leaders named maximizing shareholder wealth as their primary goal.
What’s more, a landmark Harvard Business Review article in which Roger Martin analyzed shareholder returns from two time periods:
- 1933–1976, when the prevailing view was that professional managers should pursue the interests of all stakeholders.
- 1977–2008, when it was widely accepted that the primary goal of business was to maximize shareholder wealth.
In the 1933–1976 period, shareholders of the S&P 500 earned compound annual real returns of 7.6 percent. From 1977 to the end of 2008, they did much worse, earning real returns of only 5.9 percent a year.
Certainly, there were other economic forces at play over these decades. But an intense three-decade focus on boosting shareholder wealth didn’t seem to work.
REASON 3: It defies investor logic.
When you understand how a publicly traded company is valued, it should discourage you from focusing on the stock price, at least in the near term.
Imagine a company has current year earnings of $1 billion and a price-to-earnings ratio of 20, leading to a market valuation of $20 billion. This means $19 billion — 95 percent of the company’s value — is driven by something other than this year’s earnings. What is it? It’s the market’s expectations of future growth. For most companies, by far the largest component of its value is determined by what investors think that company will do in the future, not today.
Sadly, many business leaders focus on this year’s earnings (the 5 percent), hit the reset button next year, focus on that current year, and repeat. This gives them little leverage to change their future, compared to leaders focused on future growth (the 95 percent).
Paradoxically, focusing on shareholder value distracts leaders from impacting shareholder value. Those fluctuating stock prices are highly distorted measures of a company’s true value, more accurately reflecting the moods and tactics of traders. We’ve moved from an era of shareholders to share handlers, with the average holding time now down to mere months.
If you try to satisfy those traders and build the long-term value of your company, you’ll find yourself aiming at two very different targets. This isn’t a winning strategy.
Are these really the people senior leaders need to please? Builders don’t owe any allegiance to those who feel no allegiance to them. Builders focus on what they are building, not the fickle crowds watching them work.
Many struggling companies could be transformed if leaders returned to what he calls their “first duty” — to leave the business stronger than you found it. This requires making sure leaders with a Builder mindset are in charge and well-supported by the organization.
All stakeholders — shareholders, employees, customers, suppliers, and communities — benefit when a company’s growth is not just strong and profitable, but also sustainable. When growth is just unsustainable window dressing, only opportunistic leaders and opportunistic investors benefit.
Leaders must realize they haven’t been handed a laurel wreath, but a trowel. What will you build with it? How will you leave your business stronger than you found it?
Dan Adams is the founder of The AIM Institute and author of “Business Builders: How to Become an Admired & Trusted Corporate Leader“. He is a chemical engineer with a listing in the National Inventors Hall of Fame. Dan has trained tens of thousands of B2B professionals globally in the front end of innovation and works with senior executives on driving profitable, sustainable growth.