Forget Maximizing Shareholder Value

By Chris Sims

I was a new manager doing annual performance reviews for the first time. I wanted to do a good job, and to truly align my group's work with the company's 'bigger picture'. I wanted to know why we existed, what we were trying to achieve, and what we valued. So I asked my manager.

The question seemed to upset my manager, and she referred me to her manager. He seemed equally annoyed, but explained to me that our one purpose was "to increase shareholder value". Now, would I please get my performance reviews done? I left that conversation feeling unsatisfied by the notion that all our work was for the sole purpose of making our investors wealthier.

The January-February Harvard Business Review magazine examines the idea of focusing on shareholder value in the article The Age of Customer Capitalism. Shareholder value is mostly determined by the company's stock price. The price of the stock, in turn, is mostly determined by the optimism or pessimism of the market.

For managers, the implications of this are clear: The only sure way to increase shareholder value is to raise expectations about the future performance of the company.

The article proposes the radical idea that it is better to focus on the creation of customer value. Employees can have a much more direct impact on the creation of customer value, compared to shareholder value. Besides, if you create customer value, you have a good chance of making a profit. It's possible that this will even influence investors optimism and lead to higher stock prices! What do you know? By placing the focus on creating value for customers, everybody wins.

Cheers,

Chris

Comments

[Aaron Day]

Perhaps a better title would be: Maximizing Shareholder Value by Maximizing Customer Value. A bit wordier, and more likely to get your business types to pay attention.

I have no issue with the capital providers for a business getting rich. I want them to be rich so they can pay me to do my job, which is to provide technical solutions to the customer.

[TomGrantForr]

When I started working at Forrester Research as a tech industry analyst, the first thing I wrote was "From Product Development To Value Development." Companies that think in terms of, "What value are we delivering?" have been doing better during both good and bad economic times than their peers. Among other positive effects, this business model helps balance against short-term thinking driven by quarterly share price.