Photo credits: „Eye“: http://tinyurl.com/y8gb8h4b. “Fear“: http://tinyurl.com/y8gtw3wj.
Trump’s economic policies are starkly different from his predecessors and deviates from mainstream economics and political thinking. Take, for example, his massive tax cuts for the corporate world or his initiated trade wars. Just by looking at recent economic numbers and the booming stock market his policies seem to pay off and open a new era of economic prosperity. But do they really?
Long-term market performance indices and forecasts tell a different story. Shareholder buybacks and alike contribute nothing to building a solid foundation for future business success. They yield short-term benefits and the party is on. But, for how long? Where does it lead to? Has big money finally succeeded and overtaken economic and political thinking? How sustainable is this short-term growth? Who benefits, who loses? And, last but not least, what kind of answers does it provide to today’s global challenges that are becoming more and more volatile, uncertain, complex and ambiguous? What if Trump’s favored form of capitalism leads to a dead end?!
As explained in a previous post, I am more than skeptical about the outlook of traditional capitalism.
Fact is that traditional capitalism does not answer today’s challenges in a VUCA (volatile, uncertain, complex, ambiguous) world, widens the gap between rich and poor, exploits and threatens to destroy our environment and thus our own planet. What we need is a different, a new business paradigm that not only helps find solutions to today’s problems but can also serve as guidance to sustainable business in the 21stcentury.
In this article I explain why and how purpose-driven human business can make a huge difference. It differs significantly from the classical business paradigm. At the same time it has built-in bridges every business can cross to build a sustainable future.
Maximizing Shareholder Value: Engine for Growth?
„There is one and only one responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.“
– Milton Friedman
No doubt, Milton Friedman and shareholder value theory has shaped Western business since the 1970s. It has led to tremendous wealth of companies as well as societies, even though the fruits of this growth have not been distributed equally.
And, Milton is still very much alive as Steve Denning points out in a Forbes article. He explains that “in 1990, an article in HBRby Michael Jensen and Kevin Murphy, gave shareholder value thinking a new push. The article, “CEO Incentives—It’s Not How Much You Pay, But How” suggested that CEOs were being paid like bureaucrats. Instead, they should be paid with significant amounts of stock so that their interests would be aligned with stockholders. Thereafter, the use of the phrase ‘maximize shareholder value’ exploded and CEOs became very entrepreneurial — but in their own cause,not necessarily their firm’s cause.”
Denning continues stating that “by 2017, shareholder value thinking was everywhere. Joseph Bower andLynn S. Paine reported in Harvard Business Reviewthat shareholder value thinking “is now pervasive in the financial community and much of the business world.” It had led to a set of behaviors by many actors on a wide range of topics, “from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility.”
Acknowledging shareholder value thinking is prevalent in today’s business world, and a booming stock exchange market, what’s so wrong about it?! Why change a winning formula?!
„On the face of it, shareholder value is the dumbest idea in the world.“
– Jack Welch
Jack Welch, former CEO of General Electric, had been heralded as one of THE proponent of maximizing shareholder value. This is in contrast to what he has been preaching since he left GE, stating „On the face of it, shareholder value is the dumbest idea in the world.“ Welch also pointed out several times that „shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.“
So far so good. But what about business performance in the market place?
According to the 2009 Shift Index of Deloitte’s Center for the Edge there is conclusive proof of failure of traditional management. Accordingly
- The rate of return on assets has fallen by 75% since 1965
- The life expectancy of Fortune 500 firms is down to 15 years, and is heading towards 5 years.
- Only 1 in 5 workers fully engaged
Preserving the performance of a status quo may be laudable. Yet, it doesn’t secure lasting, sustainable business. The opposite is true. Mariana Mazzucato explains that „shareholder value theory – the destructive idea that companies should be run solely for the benefit of shareholders – has led to financialized businesses that do not invest in the areas that will lead to future growth or the invention of useful new products.“
In short, traditional businesses infiltrated by shareholder value theory not only ignores long-term perspectives, they also risk their own future existence. Myopia at its best.
Stuck in the past
In face of this evidence why do so many companies still stick to a business paradigm of the past?
There are lots of reasons for clinging to this pastime. Let’s have a look at two of them:
- For one, it is convenient. Governance in most businesses still built on the old business paradigm, along with complicated incentive system for individual and company performance at the stock market. Changing these processes and culture takes ages. Why change it given that those who would have to make the call for a change personally benefit from the old system?
Linking maximizing shareholder ‘value’ to personal compensation blinds managers from the real world – and most of them don’t even realize it because they were born blind or lost eyesight early in their childhood (or education). From this perspective, they live out their DNA. I guess, you can’t even blame them for their upbringing shaped their belief system. They were indoctrinated.
- A second reason for favoring existing belief systems is that proponents of the status quo simply don’t see any real alternative at hand. Thinking in complicated, elaborate governance structures and processes implies that there needs to be an even more complicated system? There is simply no time to address this, even less so, coming up with new ideas that improve existing processes.
As long as this reasoning prevails, it is difficult to change anything until it may be too late. Alas, it is not that complicated at all. Let’s have a look at the opposite of the traditional business paradigm of short-term profits and shareholder value theory. It’s called purpose-driven business.
MVP’s for doing business in the 21stcentury
A purpose-driven business follows a compass that gives a clear direction for the future of the business. The compass also indicates where the business is coming from, i.e., why it is business in the first place. Both, the motivation and the vision of a business constitute the credo of its practice. I call this the MVP of a purpose-driven business whereas M stands for motivation, V for visionand P for practice.
For example, Johnson & Johnson’s company credo is engraved in granite at the entry to company headquarters, which makes crystal clear that customers are first, then employees, and shareholders absolutely last.
Another example is Procter & Gamble which declares in its purpose statement: ‘We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.’
On this token, a business that has forgotten or neglects its motivation or vision for short-term gains, such as maximizing daily stock prices, may just as well be digging its own grave in the long-run. It is anything but a purpose-driven business.
Human business is purpose-driven business
Facing the increasing number of challenges in our volatile, uncertain, complex and ambiguous (VUCA) world, Human Business addresses today’s challenges. It focuses on serving and delighting its customers, workforce, business, and society. And it does so holistically and puts us as humans in its center. That is, it constantly seeks ways and means to generate and add sustainable value to its customers, workforce, business, and society. From this perspective human business follows three elementary principles:
- Delight your customer(s)
- Take care of your employees
- Build sustainable business value
(1) Delight your customer(s)
Having a customer focus is not new. Peter Drucker, father of management thinker, explains that
“There is only one valid definition of a business purpose: to create a customer.”
Alas, delighting a customer goes beyond creating or satisfying a customer. Delighting a customer implies that a business has a deep understanding of the needs, expectations and wishes of its customers and strives to fulfill and exceed them. It seeks to build customers for life. It reaches out to its customers, communicates with them, walks in their shoes and shows a sincere interest in them. There are no quick fixes for this approach. It is an attitude and belief system.
(2) Take care of your employees
Employees are not resources like products. They are human beings and want to be treated as such. A human business understands and practices this. It shows
a sincere interest in the needs of their employees. It starts with a safe, secure and environmentally friendly work environment. For employees to follow a direction you have to set it, share it and let your employees contribute to it. Let them become a part of it.
Dov Seidman states that „working with passion is an engine that is unbelievable. A person with drive and passion does three times the job of another person. But it is not so much the quantity of the job; that is not the point. The point is that they draw crowds; they have followers; they push, and lead, and so achieve much more.“ (Dov Seidman (2011). “How: Why How We Do Anything Means Everything”, p.295, John Wiley & Sons)
(3) Build sustainable business value
Shareholder value is not identical to business value. Business value comprises short-, mid- and long-term business concerns, interests and investments. Business value is made up of a number of factors: the overall business performance and outlook, customer satisfaction ratings, market position, innovation performance, the skillset and turnover rate of the workforce, the attractiveness of the company as an employer of choice and many other factors.
Whereas the daily stock price is heavily influenced by quarterly results and a relative short time horizon into the future, business value is more than quarterly results. Jeff Bezos clarifies why holding a long-term perspective is so important: “If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn. We say we’re stubborn on vision and flexible on details.” (Source: “Jeff Bezos Owns the Web in More Ways Than You Think”. Interview with Steven Levy, www.wired.com. November 13, 2011.)
Last but not least, business value doesn’t only look at business numbers but includes corporate social responsibility, too. Klaus Schwab, founder and head of the World Economic Forum, explains that “corporate social responsibility is measured in terms of businesses improving conditions for their employees, shareholders, communities, and environment. But moral responsibility goes further, reflecting the need for corporations to address fundamental ethical issues such as inclusion, dignity, and equality.”
Human business as a compass for organizational excellence
Klaus Schwab’s wide view on business value summarizes what it means when we say that human business is holistic and human-centered and focuses on generating and adding sustainable value to its customers, workforce, business, and society. It serves as a business compass that helps optimize daily operationsand build and sustain organizational excellence.
Walking the Talk. Building a Human Economy
At Motivate2B and The Art of New Business we are witnessing businesses that have made the transition to a human business. And, we too, follow the principles of human business by ourselves. What else can we do?! We walk the talk and invite you to do the same. Please join us and share your stories.