Common-Sense Capitalism

Profit, profit, profit! That's where most corporations -- and investors -- concentrate in their all-important pursuit of maximum shareholder returns. But many corporate managers also use this quest as an excuse when their blind pursuit of short-term profits screws things up for the long term -- even when they've destroyed shareholder value along the way.

The Economist recently published an article on the growing push toward "stakeholder capitalism," in which businesses expand their focus beyond shareholders to embrace customers and employees as well. While such sentiments might make some modern investors shudder, I think a shift like this shouldn't be controversial. If anything, it's common sense.

Let's take a good look at several companies that forgot about their customers and/or employees, and contemplate the risks and ruin they imposed upon shareholder value.

Blockbuster (NYSE: BBI)
Before Netflix (Nasdaq: NFLX) revolutionized DVD rentals, Blockbuster was happy to rest on its laurels, profiting off late fees that increasingly annoyed its own customers. In effect, its lax attitude toward its customers' happiness fed renters' resentment, inviting Blockbuster's own disruption. I doubt many former customers now shed bitter tears about the former rental giant's current precarious situation.

A glance at the company's five-year stock chart reveals a terrible ride for long-term investors, making Blockbuster a dangerous stock as it now struggles to survive.

Goldman Sachs (NYSE: GS)
I'm not sure which problem Goldman Sachs shareholders should worry about more: the company's ugly public relations woes, or government allegations that Goldman committed fraud.

Both pitfalls raise questions about whether Goldman cares for anything but itself. A recent Associated Press article quoted an unnamed source as saying that rivals often point out to prospective clients: "Look, you never really are a client of Goldman. The only client of Goldman is Goldman." Ouch.

Also, note that Goldman's shares have fallen 20% since the SEC announced its investigation a couple weeks ago. A company that exhibits signs of ruthlessly selfish motives can endanger its reputation, its legal well-being, and its shares' performance.

Circuit City
The electronics retailer is dead and buried, but it still serves as a perfect example of what happens when management pursues the wrong priorities. Many suspected that when Circuit City fired its experienced salespeople to hire cheaper, inexperienced labor, it would not only ruin morale, but also cede advantage to customer-centric Best Buy (NYSE: BBY). Circuit City's loss was the survivors' gain; Best Buy has recently touted its market-share growth.

Unconscious capitalism: Asleep at the wheel
Though stakeholder-driven capitalism might defy many investors' economic dogma, it's hardly new or untried.

Whole Foods Market's (Nasdaq: WFMI) John Mackey has long advocated conscious capitalism, a holistic, stakeholder-driven concept that incorporates the needs of customers, workers, suppliers, and shareholders alike. In speeches and debates, Mackey has often asserted that when all these stakeholders are happy, long-term success (and profits) are more likely to follow. By his reasoning, integrating these principles into a company's mission would make it a far less risky investment idea.

In addition, corporations that attempt to maximize the happiness of all their stakeholders over the long haul have a better chance of transforming both customers and workers into an army of positive evangelists. This kind of word of mouth can give companies a priceless advantage against more clueless competitors.

Take "net promoter scores." This concept, put forth by Harvard Business Review years ago, separated surveyed customers into "promoters" and "detractors," and found that the percentage of respondents who fit into those two categories directly correlated to a company's revenue growth. Taking such scores into consideration could clearly help shareholders find the best companies for the long run.

A return to long-term common sense
Shareholders, stop believing that only short-term profits matter. Embrace the ownership of your companies, and expect your investments' management to act responsibly and ethically toward all its stakeholders. Investors like us have been part of the problem; we must learn to be patient and prudent as our stocks pave responsible, stakeholder-friendly paths toward long-term riches.

Companies that brutalize and abandon important stakeholders often disappoint their investors in the long run. But businesses that focus on customers, employees, and shareholders will likely yield better performance, becoming stocks we can be proud to own. That's not just common sense -- it's also good capitalism.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.