Objective Myopia - Why Executives fail to secure the creation of maximum shareholder value and sustainable profitability

    The creation of maximum shareholder value and sustainable profitability has been widely considered as the primary objective and performance measure of executives and the business organization they run on behalf of its shareholders around the world and yet many executives’ understandings of the primary objective can be observed myopic. What has been myopically understood by many executives is the primary objective of the shareholders for which they financed the company: To secure the creation of maximum shareholder value and sustainable profitability regardless of the product, service, business, industry or market the company may operate in the passage of time and change in the economic environment as long as the primary objective will be legally achieved. Why?

Because from the economic perspective of the shareholders, to secure the maximum return on capital or to make money as much as possible (which is achieved when the public corporation secure the creation of maximum shareholder value and sustainable profitability) is their primary objective because as we have shifted the global economy from barter to the use of currency, we are rich or poor according to the degree in which we can afford to enjoy the necessaries, conveniences, and amusements of human life using money. These perspectives are supported by many known economists, executives, and management consultants too. For instance, in one of the famous New York Times articles in 1970, Milton Friedman explained the direct responsibility of the executives to its employers as well as the primary objective of the shareholders in his own words

“In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

And from the history of business management, Alfred Sloan Jr., the legendary CEO of General Motors, explained the primary objective of the company as follows

“The strategic aim of business is to earn a return on capital, and if in any particular case the return in the long run is not satisfactory, then the deficiency should be corrected, or the activity abandoned for a more favorable one.

For Alfred Sloan Jr.’s perspective, it is very clear that the business activity or product is just one of the means to make money in the economy and it should be abandoned for a better alternative if the return on capital is no longer satisfactory or its deficiency cannot be corrected.

    Jack Welch, who achieved the creation of more than $400 billion shareholders’ value and decades of profitability that earned him the title as the Manager of the 20th Century, viewed the shareholders’ primary objective and his duty as the Chairman and CEO of General Electric in the same way like Milton Friedman, and Alfred Sloan Jr., which is to secure the creation of maximum shareholder value and sustainable profitability regardless of the product, service, business, industry or market GE may operate as long as its primary objective will be achieved. It is the reason he scanned the market and entered on different businesses that offer an economic opportunity to make money as close to low hanging fruit. He exited from a business too (regardless of its performance in the past) if commoditization is taking place and GE does not have the competitive advantage to win.

    Steve Jobs, who allocated Apple’s resources to reinvent the products and services of other industries (e.g. music player, phone, online stores, and games) after accepting his defeat in personal computer, receives no complaint but praise from Apple’s shareholders and Wall Streeters as he led the company to become the world’s largest public companies by market capitalization and among the most profitable public companies in the last decade.

    Frederick W. Taylor, the father of Scientific Management, expressed the same economic view too when he defined that the principal object of the management or the primary objective of a business organization and its shareholders which is to secure the creation of maximum and permanent prosperity without associating the primary objective of a company to a particular product, service, business, industry or market where it should operate. 

    Warren Buffett’s clear understanding of the primary objective of the shareholders in financing a company can be observed from the way he allocates Berkshire Hathaway’s capital in various companies that operate in different products, services, businesses, industries or markets using the return on capital as guide. It is for the same reason he moves the company’s capital to other investment alternative when he perceives that the economic opportunity to make money has changed or will be unfavorable in the foreseeable future. The clarity of his understanding of the primary objective of the company and its shareholders can be easily validated too from the rules he established to manage a business as follows:

Rule No. 1: Never lose money.

Rule No. 2: Never forget rule number 1.

    However, due to the myopic understanding of many executives on the primary objective of the shareholders on the business organizations they run, they are allocating its capital within a specific product, service, business, industry or market they are in or they believe they know which is limiting the economic opportunity of the company and can be viewed to be far from the primary objective of the shareholders, which is to achieve the maximum return on capital or to make money as much as possible regardless of the product, service, business, industry or market the company may operate in the passage of time and change in the economic environment as long as the primary objective will be legally achieved. 

    The gap in the view of the primary objective exists because from the perspective of managing a company, the executives of multi-million or billion US dollar companies, for instance, can easily expand its organizational capabilities by simply hiring someone with expertise to understand the emerging economic opportunities brought by transformative products, services, or methods to do work or to manage a business to seize it like how George Westinghouse bought the patents of Nikola Tesla related to electric generators, transformers, and AC motors and then hired him as a technical consultant that ushered us to the age of electricity and helped Westinghouse Electric Corporation to make huge money. But due to the executives’ objective myopia, we can learn from the history that many companies and its shareholders had been deprived of some of the biggest economic opportunities to make money from numerous companies with transformative products, services, or methods to do work that emerged in the world economy outside the industry that the executives know or they are in to the extent that the company under their management soon failed, stopped growing, or was sold for survival when its products or services became obsolete or the source of their company’s livelihood was taken away by the same companies they previously ignored (e.g. Railroad companies failed when its executives ignored the automobile and airline companies, Western Union missed the great economic opportunity to make money from telecom companies when its executives ignored the patent of Alexander Graham Bell, and Yahoo was sold for survival when its executives ignored the importance of Google’s search engine technology).

    To quantify the amount of economic opportunities lost by numerous companies and its shareholders due to its executives’ own objective myopia, we will go back on the history when the personal computer, the internet, and the smartphone were about to revolutionize and transform our economy and way of life starting in the early 1970s that continue today. By looking back at this particular period, we can find and conclude that many executives of business organizations that achieved the creation of significant amount of shareholder value and profit for many decades before the arrival of the Information Age had failed to allocate its capital (e.g. as low as $35 million US dollar of cash) that had caused their companies and its shareholders to miss some of the biggest economic opportunities to make money and secure the creation of significant amount of shareholder value and profit in the field of information technology that have been dominated by startup companies (e.g. Microsoft, Apple, Intel, Dell, Oracle, Adobe, Yahoo, eBay, Amazon, Google, Alibaba, LinkedIn, Tencent, and Facebook) and by Venture Capital companies (e.g. Sequoia, KPCB, Naspers, and Softbank) at different period in the last fifty years. The amount of economic opportunities missed by many large companies and its shareholders due to executives’ own objective myopia is staggering and can be measured through several publications. For instance, Sequoia Capital, founded in 1972 by Donald T. Valentine, invested few million US dollars on several startup companies in the field of information technology such as Atari, Apple, Yahoo, Cisco and other technology companies that on a particular period of time had created a total market capitalization around 1.4 trillion US dollars.

    And at the start of internet revolutions in the early 1990s, Kleiner, Perkins, Caufield and Byers (KPCB) and Sequoia Capital invested twelve million and five hundred thousand US dollars each at Google (founded in 1998) that turned into 3 to 4 billion US dollars return on their investment when Google went Public in 2004.

    Masayoshi Son of Softbank of Japan invested around $20 million US dollars on Alibaba (founded by Jack Ma in 1999 in China) that turned to more than $90 billion US dollars within a particular period after Alibaba went Public in 2014. The return of Softbank’s investment was equivalent to 4,500 times from the company’s original investment which is considered as an astronomical achievement for an executive who is primarily responsible to secure the creation of maximum shareholder value and sustainable profitability on which the executives’ performance is measured.        

    Naspers, a little-known publishing company from South Africa, invested 32 million US dollar in the early days of Tencent in 2001 that was translated to USD 175 Billion market value in 17 years while many century-old media and publishing companies around the world had been struggling to find ways to make money in the Information Age. 

    And from the study and analysis of the history as we search for one best way to do work or to manage a business in the last hundred years, we can find that many executives missed to make money too by failing to invest on the second wave of business transformation of an existing public company like Apple that created more than one trillion US dollar of market value and became one of the most profitable companies in the recent history with the reinvention of music player, online stores, mobile computing, games, and telephone. But if we will go back on the history of business management as early 20th Century, not all executives missed to invest on emerging economic opportunities from an established company. In 1914 for instance, the Executives of the already profitable chemical company called Du Pont invested few million US dollars in General Motors that was soon translated to several billion US dollars that can be considered as one of the biggest pay off in corporate investment in the early 20th Century.     And to measure further the great economic opportunities missed by numerous executives to make money in the information technology due to their own objective myopia, in the Global Top 100 companies by Market Capitalization compiled by PWC as of March 31, 2018, seven out of top ten largest companies by market capitalizations in the world are all technology companies that did not exist fifty years ago. The seven information technology companies have recorded a combined market capitalization around USD 4.4 trillion US dollars led by Apple (USD 851B), Alphabet (USD 719B), Microsoft (USD 703B), Amazon (701B), Tencent (USD 496B), Alibaba (USD 470B) and Facebook (USD 464B). 

  Many Board of Directors of Fortune 1000 were sleeping at work from the view of Don Valentine as many big companies, including Xerox, missed the great economic opportunities to make money from information technology companies at Silicon Valley. However, despite of the huge economic opportunities missed by many companies and its shareholders due to executives’ own objective myopia, we can observe that there is no discussion or call to bring out and address this management issue related to the allocation of capital. 

    In the research paper called The Theory of Firm: Managerial Behavior, Agency Costs and Ownership Structure, Michael C. Jensen and William H. Meckling observed and wrote the following:

“Indeed, it is likely that the most important conflict arises from the fact that as the manager’s ownership claim falls, his incentive to devote significant effort to creative activities such as searching out new profitable ventures falls. He may in fact avoid such ventures simply because it requires too much trouble or effort on his part to manage or to learn about new technologies. Avoidance of these personal costs and the anxieties that go with them also represent a source of on-the-job utility to him and it can result in the value of the firm being substantially lower than it otherwise could be.”

The great economic opportunity to make money missed by numerous executives in the advent of personal computer, internet, and smartphone revolutions can be gleaned as well from the view of John Sculley, the former CEO of Apple and Pepsi, when he said in his own words

“Healthcare missed the PC and Internet revolutions, but it can't afford to miss the cloud and mobile revolution.”

However, from the history of business management in the last hundred years, we can find that it is not only the healthcare companies in the like of Pfizer and GlaxoSmithKline that missed the huge economic opportunities brought by information technology because the cash-rich Oil & Gas companies in the like of ExxonMobil, BP, Chevron, Total, Aramco and Shell had missed it too (while ExxonMobil tried to enter in Personal Computer business in the 1980s, it failed to acquire or invest on startup companies like Apple, Intel, Oracle, and Microsoft). The executives of giant telecom companies such as AT&T and Verizon can be observed to miss the same great economic opportunities too despite they were sitting with several billions of cash or capital. The executives of automobile industry (e.g. General Motors and Ford), the airline companies (e.g. Boeing and United Airlines) and the century-old business organizations like Procter & Gamble, Nestle, and Coca-Cola can be observed to miss the same great economic opportunities despite their executives can easily participate on numerous startup companies with transformative products, services, and methods to do work or to manage a business by investing or acquiring the startup companies that emerged in the early 1970s onwards via a Corporate Venture Capital Arm in the same way Sequoia, Softbank, Naspers and KPCB did. 

    From the history, we can observe that there are too many business organizations and shareholders around the world that had been deprived by some of the biggest economic opportunities to make money from information technology not because of lack of capital or because of the absence of economic opportunity to grow rather there was a failure of management, primarily in the allocation of capital, due to its executives’ own objective myopia. And while the failure of management in the allocation of capital is widespread and the amount of economic opportunities missed was so huge amounting to several trillion US dollars as illustrated, no executives came forward to accept their failure of management, primarily in the allocation of capital, except to Warren Buffett, the CEO of Berkshire Hathaway. 

    In one of the Berkshire Hathaway shareholders’ meeting, Warren Buffett personally admitted to his shareholders that he missed to invest in companies like Google and Amazon because he failed to understand how Google will make money and under estimated the capabilities of Jeff Bezos to executes his strategy. With the outstanding performance of Warren Buffett to produce a remarkable return on Berkshire Hathaway’s capital under his management, no shareholders have the guts to ask him about his failure in the allocation of capital. However, despite of his outstanding investment performance, Warren Buffett came forward and publicly acknowledged his failure in the allocation of capital because he knew deep inside that his duty as an executive of the company he run on behalf of its shareholders is to secure the creation of maximum return on capital and from what has been taking place in the information technology industry where Venture Capital companies are thriving is too big to ignore. Hence, he made his adjustment in his investment methodology by investing in technology companies and startup companies too which he claimed that he does not understand before. And with his admission on his shortcomings as the Chairman and CEO of Berkshire Hathaway, the Oracle of Omaha showed that he was not only one of the greatest investors in history but one of the most ethical and transparent executives of a public company in history too.

         If we will look back at the history, the objective myopia among many executives has existed for more than a century but left undiscussed if we will trace it starting from the railroad and telegraph companies in the mid-19th Century. From the history as we search to find the one best way to do work or to manage a business in the last hundred years, we can find that it is being repeated throughout the history. For instance, the manufacturers of typewriter soon found themselves to be thoroughly massacred by numerous Personal Computer companies in the advent of information technology in the same way how the automobile killed the horse breeding companies and made the highly successful railroad business unprofitable. Yahoo was sold for survival when its executives failed to buy Google’s search engine technology in the early days similar to the failure of Western Union’s executives to buy the telephone patent of Alexander Graham Bell. These kinds of events can be observed repeated when the discount store, internet, and outsourcing companies took the world economy by storm at different period in the last hundred years that caught many executives unprepared. The consequence? Many successful business organizations in the past soon failed or simply disappeared. Some were sold for survival and some simply have stopped growing and now on the path of total obsolescence but not because of lack of capital to enter in emerging business with transformative products, services, and methods to do work or because of the absence of economic opportunities in the market to grow rather there was a failure from its management, primarily in the allocation of capital, due to its executives' own objective myopia.