We hear it from nearly every top CEO when he or she writes a letter to shareholders -- the purpose of the company is to maximize shareholder value. But shareholders are just one part of a company's stakeholders.
In this clip from the Rule Breaker Investing podcast, Motley Fool co-founder David Gardner breaks down the different kinds of stakeholders and how successful businesses work to maximize all stakeholders' value.
Make sure to check out the other parts of this series:
Businesses That Win Trait #1: Create Value for All Stakeholders
A full transcript follows the video.
This podcast was recorded on Oct. 21, 2015.
David Gardner: This week, we're going to go with the businesses that win. This one in particular is for entrepreneurs. Now, we have a lot of small business owners, a lot of people working in businesses today, a lot of very entrepreneurial thinkers who listen to Rule Breaker Investing, and who, at The Motley Fool, might be a member of our Rule Breakers premium service. We over-index at The Motley Fool with entrepreneurs. So, this is for you. And one of the great Buffett quotes -- I think I've had occasion to mention this before -- "I'm a better investor because I'm a businessman, and I'm a better businessman because I'm an investor."
So, these five traits of businesses that win that I'll be presenting this week, yes, they work for stock picking, that's why I'm presenting them on Rule Breaker Investing. But, if you're an entrepreneur, they work for you too with the business that you are crafting. Let's get right into it.
Number one. Trait number one of businesses that win are ones that manage for all stakeholders. This is a really important concept, and something that I would say is a relatively new concept. I first came across this thinking in the book "Conscious Capitalism" by John Mackey and Raj Sisodia. Full disclosure: John Mackey is a member of The Motley Fool's board of directors. So, yes, we tend to read books if they're written by directors of our company. And I really like this book a lot, and I recommend it.
But, John Mackey, who's the founder of Whole Foods, talks about four traits that make up what he would call conscious businesses. One of them is purpose-driven, and I'll talk about that maybe a little bit later at another time. But the second is, companies, organizations that manage for the success of all stakeholders.
So, coming out of 20th century capitalism, one of the big messages often right there in the Fortune 500 CEO letter -- you know, you read the annual report, read that CEO's letter of Fortune 500 companies, what's the purpose of this corporation, corporation XYZ? To maximize shareholder value. That was taught in business schools by economists. Milton Friedman, an amazing mind and a great economist of the 20th century, this was one of his assumptions, that this is the purpose of business, to maximize shareholder value.
So, that was the environment, at least, that I grew up in, and still the way a lot of businesses think. But once I came across Mackey's thinking, and others, no doubt, as well, and start to think about the other stakeholders.
Let me give a few examples of stakeholders. Let's start with customers. Another good, key stakeholder group? Employees. This works for every organization -- for profit, non for profit, customers, employees. How about partners and suppliers? Here's a fourth group: shareholders. And a fifth group: community. It might mean your online community, it might mean your local community, it might mean the global community. Community. Those are examples of stakeholder groups.
Now, the best businesses, the businesses that win, trait number one this week are the organizations that create a win for all of their stakeholder groups. Picture, if you will, each of the stakeholder groups together in a circle with their hands clasped circled around the thing in the middle, which is the company. And everyone in that circle should want that company to succeed.
If you're a customer, you want them to be awesome. If you're an employee, you want them to be the best place to work. If you're a shareholder, you want it to be a great stock. The list goes on. If you're a partner or supplier, you absolutely want them to succeed dramatically. And certainly the community wants that.
Now, that's the right model for all organizations. And the for-profit companies that really get that are the businesses that win. I hope you have that in your business. But if you don't, now you know what to work on.
So, now, imagine, if you will, once again going back to the past, where just shareholders, CEOs were trying to maximize the value of the enterprise for just one stakeholder group. Imagine how that feels if you're another stakeholder group. And now, you can see why a lot of the bad businesses or the greedy businesses or the crony businesses that didn't do so well over the long term, why they didn't do so well. Because they were trying to maximize shareholder value. Shareholders want to make money right away. They want their stocks to triple.
If you're hitting the age of 63 and you've just been named CEO of a company, you've finally risen through the ranks, you'll probably be there for three to five years before you're leaving, what's your goal? If it's to maximize shareholder value, short term thinking, of course. You're going to be trying to make the best moves you can make to get that stock moving for the three to five years where you were the CEO.
So, these are the businesses that don't win overall, the ones that don't manage toward success for all stakeholders. Of the five examples that I've given, the five groups, I think the customer is the single most important one, because I think that's why organizations exist ultimately, to solve other people's problems, the customers. But all five count a whole bunch. And it's a creative decision to problem solve to create a win for all of your stakeholders. And those are the businesses that win.
Two quick examples -- I just mentioned them -- Whole Foods. I think Whole Foods is a very good example. Whole Foods was founded on this concept. And then, another company that I think at least gets the customer-centrism better than anybody else, since I just mentioned that of the five groups, I favor customers as the most important, and that's Amazon.com.
As a customer of Amazon, I have been treated better by that company than almost any other company that I can imagine having done business with over the last 20 years or so. Amazon did come out under fire earlier this year for mistreating employees. That certainly is always going to be a concern for every company. Steve Jobs, I think, probably mistreated some employees too. But, in the end, it's the companies that really do please mass numbers of people that are the businesses that win.