It’s about more than just shareholders! Business writers are excited! Bernie Sanders supporters are gratified! Long-time members of the KJR community are wondering (1) why this is even news, and (2) how could so many commentators all miss the point so completely?
The subject is the Business Roundtable’s discovery that creating shareholder value is too cramped a metric to tell the whole story. It’s breathing new life into the ancient mantra that businesses need to create value for all their other constituencies as well — the communities in which they do business, their employees, suppliers, and even (gasp!) their customers.
The discovery fits nicely into the developing narrative that
capitalism, in its unfettered, laissez
faire form, often creates damage that ranges from minor inconvenience to
monstrous harm and injustice.
So let’s congratulate the Business Roundtable for trying to
soften the impact of the emerging backlash — for modifying its allegiance to
the newly unpopular proposition that pure-play economic theory automagically
defines good public policy.
But ethics predicated on fear of punishment isn’t ethics at
all. To the extent this is all an attempt to placate those who see capitalism
as a system that mostly looks out for someone else’s best interests, it’s a
shallow and fragile change.
What matters more, as was first pointed out in this space seventeen years ago, there are bigger reasons for CEOs to reject such a puerile and shallow fiduciary philosophy as the pursuit of shareholder value.
It’s like this: Shareholder
value, which is EconomistSpeak for making
the price of a share of stock increase, is a poor predictor of future
performance. Heck, it doesn’t even reliably describe current performance.
Why? you might ask. Answering a question with a question I
might ask you in return, what does reliably describe current performance and
accurately predict future performance?
Well, you might answer, steps that increase a company’s
competitiveness in the marketplace are what describe current performance and
accurately predict future performance. Steps like developing superior products;
instituting efficiencies that let the company sell its products for less; making
doing business with the company in question more convenient. Steps like that.
The steps companies have been taking to increase shareholder
value aren’t just different from what it takes to be more competitive. They
Take, for example, the popular practice of using cash assets,
often supplemented with borrowed money, to buy back stock. The theory is that
the same assets, divided by fewer shares of outstanding stock, result in the
remaining shares being more valuable.
Which they would be if the CEO and board of directors were
to immediately liquidate the company. Otherwise, all buybacks do is make this
money unavailable for such trivialities as product improvement and customer
Debt-funded stock buybacks might be the most egregious paean
to the shareholder value theory of business governance, but it’s hardly the
most prevalent, or the most banal. That award goes to the constellation of
practices focused on artificially deferring profitable expenditures so as to “make
And by profitable expenditure I mean all expenditures,
because any expenditure that isn’t a profitable one shouldn’t be deferred. It
should be eliminated on the grounds that why would you do anything else?
For example: You need to hire a systems administrator. There
are only two possibilities: The company will, in the long term, be more
profitable because IT has filled this position, or it will be less profitable.
If it will be more profitable, deferring the expenditure defers profit.
Imagined conversation between the CEO and board of
Board: We understand you deferred some profit this quarter.
CEO: (Proudly) that’s right! And we’ve identified lots more
profit we can defer in future quarters!
Board: What the hell is wrong with you?
Real-world board: Great job! Keep it up!
Much of the problem, as should be evident, is that cost
reduction is easy to measure. Just about all other value creators are not.
Deferring a hire, or an equipment purchase, or what-have-you reduces
expenditures in easy to recognize ways. The benefits resulting from having
enough staff with the right skills and equipment to do the work is, in
contrast, easy to understand in principle, but devilishly hard to measure.
And as we’ve all had the tiresome mantra drilled into our
heads that anything we can’t measure we can’t manage, the results are as easy
to predict as they are hard to avoid.
Which leads to this conclusion: The Business Roundtable has
taken a correct step.
It’s for the wrong reason, but at least it’s a step.