April 3, 2013

Forget “maximize shareholder value.” It leads to horsemeat in the lasagna.

We’ve been blindly repeating the mantra “maximize shareholder value” (MSV) for many years. It’s time to re-think.

There’s an insightful/disruptive article in Forbes that turned on the lightswitch. The author, Steven Denning, takes on the demi-gods of B-school conventional wisdom and makes the case that MSV sloganeering has led to corrosive next-quarter-itis. Excessive cost-cutting tends to satisfy Wall Street, stress employees and piss off customers.

Turns out Peter Drucker was right again: “There is only one valid definition of a business purpose: to create a customer.”

A conventional CEO, driven by (and compensated for) meeting the Street’s expectations, is the one likely to allow horsemeat in the lasagna. It’s short-term smart, as she collects her bonus, even if the brand begins a slow death spiral.
On the other (stylishly gloved) hand, Zappo’s policies put beancounters into shock. Don’t know whether the shoes you’re ordering should be 8 or an 8-1/2? Order both and send one pair back, with free shipping. Discuss choices with the call center person for 20 minutes – he’s not on the clock. Inefficient and wasteful, right? Just step back and see how their customer loyalty keeps doubling and redoubling sales.

Management has two masters: shareholders and customers. Choose wisely.

Cost-cutting has its limits. You can surpress wages and cut benefits, which will benefit shareholders while making your workforce unstable and hostile. Or substitute cheaper ingredients (as in taking the cheese out of Cheez-Whiz) but will the pennies saved equal the erosion of customers? If you’re a dentist, you can send lab work to China, and increase your profits, but what if the lab 12 time zones away substitutes inferior metals that won’t last a decade?

In short, pleasing the Street might not grow your business and in fact “maximize shareholder value” might even fatally damage your brand. Pleasing customers and making them return again and again as brand evangelists is a proven strategy to grow your business exponentially – and shareholders get a bigger benefit.