The April 22 issue of The Economist featured a timely article on how business leaders and economists are rethinking the wisdom of maximizing shareholder value (i.e., quarterly increases in share price) over the needs and interests of other corporate stakeholders (e.g., customers, employees, suppliers, and society at large).
Some influential economists have raised the call for a new consumer-centric focus. Others are demanding a renewed focus on employees.
There are strategic merits to both approaches. Over the past decade, the emergence of social media has given consumers unprecedented authority to shape the reputation and value of companies and their brands. And happy, productive, and empowered employees play an essential role as brand ambassadors and as the creators of new products and services.
But The Economist suggests that a more comprehensive and strategic approach – reminiscent of Porter and Kramer’s landmark 2006 Harvard Business Review essay on corporate social responsibility (note: reprint purchase required to access full article on hbr.org) – is what’s necessary for companies to stay competitive over the long term.
Rather than a tactical focus on the short-term interests of shareholders, customers, or employees, the article suggests that a long-term strategic focus that aligns a company’s business objectives to meet the needs of its most important constituencies is the key to long-term sustainability. The Economist calls this “ecological” approach “stakeholder responsibility.”
The Economist suggests that companies that focus on quarterly returns risk losing sight of the broad range of stakeholders who ultimately influence and define their success. By driving shareholder value at the risk of product or service quality – or at the risk of alienating key staff, suppliers, and distributors – companies can quickly lose the magic recipe that made them successful and profitable in the first place.
So what lessons can companies learn in the aftermath of the Great Recession of 2008?
1. Businesses need to remind themselves that maximizing shareholder value is ultimately a tactic, not a comprehensive business strategy.
2. The best way to maximize shareholder value over time (i.e., beyond the next quarter) is to ensure that businesses invest in growing the key relationships that are critical to strengthening and sustaining their competitive advantage. This includes critical investments in product innovation to meet the evolving needs of consumers, investments human capital development to ensure a healthy pipeline of employees who possess the skills required to produce innovation, and forward-thinking investments in the supply and distribution chains that connect companies to the world around them.
3. This “long view” approach requires a renewed focus on the downstream implications of business strategy – i.e., on understanding that business success is a marathon, not a sprint. And this approach demands a thorough understanding of the social impact of a company’s value chain, and an appreciation for how a company can enhance its competitive advantage by investing in that value chain.
