The Fallacy of Shareholder Value

We are 30 years into the business cycle of Shareholder value. And over those thirty years we’ve seen a major shift in how businesses behave. The idea of Shareholder value was popularized by Jack Welsh. The basic idea can be netted out to the idea that if you take care of the Shareholder, by increasing the value of the stock, all the rest of a businesses priorities will be aligned to grow the business, keeping customers and employees happy too. While there are many articles available now, as to why this is not necessarily true.

To start with let’s focus on what value is to the shareholder. Shareholders are people who buy stock low, in order to sell it high. That’s the value, they get “profit” from their share purchases. The company does not get any value from the shareholders. Companies only get the value from their stock, when they offer new shares to the market. Those shares get sold, and the company get’s an infusion of cash. The difference between the original prices the company can offer it at, and the price that the seller gets is not captured by the company, but by the seller of the stock who bought it from the company. So at the very simplest, Stock is only valuable to a company when it issues new shares. But, since publicly traded companies have officers (AKA executives) the biggest value to the company is as a way of compensating executives, who receive stock as part of the compensation packages (usually at a lower price than it is available on the public market at time of issuance). In this regard, executives are shareholders of the company, and they receive move value if the price of them stock grows quickly from the time of issuance and when they can sell it. Companies that “grow” quickly, will provide a lot of value to the shareholder.

Employees, on the whole, want a stable work environment that allows them to utilize their skills, grow new ones, and have a rewarding career that reduces the amount of stress in their personal lives. Seeing your work being used in the market is rewarding, and knowing that you have the time to improve your products or services leveraging your abilities. Being recognized for your contribution is extremely important for many employees, and sharing the reward of the company’s success provides a powerful incentive to rank and file employees. For many years, employees could achieve this by getting stock from the company in a manner similar to the executive team. This helps employees, align their priorities to those of the executive team. But does it align with the customer?

But what about the value to customers. Let’s try and see how this is helpful. Customers what high value products and services at a low price. Maximizing the value of the investments in those products and services. They also want to buy things that have long life, again to maximize their investments. This means they want stable companies, that support their products over time. If customers perceive ongoing value, they will continue to buy those goods and services. If the product or service is complex to implement and use, then stability in use, without a lot of complex upgrades and changes, may be more valuable, then lots of feature upgrades. Feature complete (or good enough) products and services are therefore more important than change and growth.

So if we look at these competing priorities, it seems to me that focusing on Shareholder value, while powerful for rewarding executives and investors, does it benefit employees, and ultimately customers? Customers are critical in the life of a company. I would say, without customers there is no value for businesses. Customers, can be other companies, individual, and governments but ultimately the provide the revenue that drives all aspects of value. If you keep customers happy and engaged, then your company should make an appropriate revenue, allowing you to pay your employees and executives appropriately. What about the Shareholders? Well they make their money in speculation in the post initial offering, I say: don’t worry about them. Don’t measure yourself on their profits, that’s a separate business.

About Michael

I created this site to help showcase the mobile application community in the Research Triangle Park area of North Carolina.
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