Newsletter #6: Why “maximizing shareholder wealth” is a terrible goal

Beginning in the 1970’s, business executives came to believe that their top goal should be to maximize shareholder wealth. Jack Welch, CEO of GE, became the “darling” of this movement. But in more recent times, leading thinkers have seen the folly of this. Later in life, Welch even called it the “dumbest idea in the world.”

There are many reasons why maximizing shareholder wealth is a poor goal. But for me, the simplest—and easiest to explain—is this: It’s a lovely result, but a lousy goal. Any goal you set in front of employees should be actionable and inspiring. Tell me my goal is to raise earnings per share this quarter, and I’m stumped.

But I could do something with this goal: Create customer value … which would deliver profitable organic growth… which would increase shareholder wealth. So let’s focus on the goal we can achieve, not the result of that goal.

And let’s make our goal, “Understand and meet customer needs better than others.” When your new products and services create customer value for your customers, this leads to your profitable growth… which in turns leads to increased shareholder wealth.

In future newsletters, we’ll talk about the linkage between creating customer value and profitable organic growth. But for now, let’s see why profitable organic growth promotes shareholder wealth.

Imagine your company has a P/E (stock price to earnings) ratio of 20. What drives the value of your company? Only 5% comes from your performance this year. The rest—95%—comes from the market’s expectations of your future growth.

For example, say this year’s earnings were $1 billion. Why did the market value your company at $20 billion? Where’s the rest of the $20 billion come from…the $19 billion? Their expectations of the future.

So maybe you should spend 95% of your time thinking about your future… demonstrating that future growth will be rapid, profitable, and sustainable. Sadly, most management teams fixate on this year’s results.

You say your investors won’t let you think past this year? What about companies like Amazon… that went 7 years before turning a profit? As Warren Buffet said, “Companies obtain the shareholder constituency that they seek and deserve.”

In the next newsletter, we’ll look at the goal of market-facing innovation… and why you should make this your goal. For now, check out this 2 minute video, chapter 5 in my (free) B2B Organic Growth series.

I’ve given this message on maximizing shareholder wealth to many executives, and I know it can be hard to abandon something that’s been long accepted. ?At the same time, many find it “freeing” to be able to focus on what intrinsically makes more sense: focusing on customers. They are, after all, the ones that ultimately pay our bills. ?

So if it might help, please share this newsletter or video with your executive team. And let me know how it goes. Until then, I wish you good growth!

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About the author: Dan Adams is the founder of The AIM Institute, and author of the book, New Product Blueprinting, the blog, Awkward Realities blog, and the 50-video series, B2B Organic Growth. He is a chemical engineer with many patents and awards, including a listing in the National Inventors Hall of Fame. Dan has taught his B2B innovation methods to tens of thousands of B2B professionals globally, lectured at many leading universities, and is a popular industry keynote speaker.