Shareholders - Whats the point?

It’s a given that in the business world today that managers and exec teams are focused on maximising value for shareholders. It’s well documented the issues that managing millennials and balancing corporate governess bring (see Havard business Review 93). There has also been much written around creating meaningful, sustainable and long-term businesses. This is a challenge that all businesses, business owners, investors and potential investors face. A challenge not made easy with the speed that the technology space moves at and the current trend for the overvaluation of tech stocks. How easily the previous .com boom has been forgotten. I have sat in rooms and been on both sides of this debate. I am acutely aware as part of an exec team that runs a public business that my responsibilities, legal, compliance, governance are primarily for the shareholders. It is in business common for exec teams to push back on this goal, to talk about building sustainable businesses and putting the staff first. Admirable yes! a reality? When the pressure comes on and we/you/they are required to put shareholder returns as priority the argument is everything else comes second.

The Harvard business review recently ran a series of articles challenging this view asking the question “What if the assumption underlying the above thinking was wrong?” A very readable and interesting set of articles and on the whole, I am in agreement with them. The crux of the question is: What if the view that shareholder returns take precedence over all is built on a somewhat debatable, possibly even incorrect interpretation of the law?

The idea of shareholder primacy is a fairly recent event going back just over 4 decades, it is rooted in the theory set by academic economists in the 70’s. The notion is that shareholders own the corporation and by virtue of that have the ultimate authority over its business. I remember being at diner when Alan Joyce the CEO of Qantas (not with him) was having to make some extremely tough decisions and the airline was in freefall. My view over a decent bottle of red (not that it matters to him or Qantas) then was that firstly no one would want the job, he was in my opinion making the right decisions and no one wants to walk into what looks like an unfixable situation and that secondly the shareholders were in no means acting in Qantas’s best interests, simply their own. The shareholders made no complaints about staff cuts at the time, Joyce was remorseful but stood by the business decisions he was making. He was and has been proved to have been right. 

The point being there are serious flaws in the theory, especially in the inability to deal with the “accountability Vacuum” This occurs when shareholders many of whom are short term investors have no real responsibility to the companies whose stock they own. Public companies operate in an environment today that is almost an extreme version of shareholder centricity a point Joseph Bower and Lynn Paine address far more eloquently than I can an article in the HBR. What this does is force execs in businesses to focus on the short term, this weakens the business long term prospects and ultimately damaging the economy.

The right approach should surely be to have the health of the company at the core, not short-term gains of shareholders? Businesses are independent entities, governed by law with the potential for an indefinite life “in theory”. With good leadership (and the view on what that is has been challenged and is changing constantly) businesses can serve shareholders, the economy and society over long periods of time.

40 years ago academic writing changed the way modern businesses have been run. A lot has changed in 40 years! Why have businesses not?