It seems sensible for companies to maximize shareholder value -- especially since shareholders are those companies' owners. But an intriguingly contrary school of thought suggests that CEOs might want to pay a little more attention to customers and employees instead.
Let's put profits aside
Former GE CEO Jack Welch is one particularly surprising advocate of this philosophy. As he's explained: "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers, and your products."
That's a bit ironic, since Welch's tenure at General Electric (NYSE: GE) was marked by efforts to cut costs and cut loose less profitable businesses. Today, under Jeffrey Immelt, the company seems to be taking a somewhat longer-term view. It still holds risky financial assets, but it's also been investing in promising new technologies such as wind and solar power.
A root cause
I like the way Welch is thinking here. Customers, employees, and shareholders are the key stakeholders in every business, and companies need to pay attention to each of them. Managers' problematic focus on maximizing profits likely comes from recent shifts in executive compensation. As CEOs get bigger and bigger pay packages, typically including significant stock options, they have had a greater incentive to boost short-term performance in the hopes of driving up the share price. Yes, their interests are aligned with shareholders … but not necessarily for the long term.
Executive stock options can also hurt overall employee morale. A New York Times article noted that the CEOs of Dow Chemical (NYSE: DOW) and Whirlpool (NYSE: WHR) have profited mightily from stock options as their share values rose, even as they laid off thousands of workers. Sure, both companies stand to profit as we emerge from recessionary days and start making and buying more things. But a disenchanted workforce can be a drag on a company, especially once a healthier economy gives workers more hiring options.
If leaders take Jack Welch's words to heart, they'll offer solid, valuable products and services that please and attract customers, and make sure to keep their employees happy. That will likely generate more revenue and earnings, which will end up -- shockingly enough -- rewarding shareholders. Consider it further proof that companies can achieve great growth and profits without succumbing to greed.
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