In 1962, Thomas J. Watson, Jr. delivered a speech titled “A Business and Its Beliefs: The Ideas that Helped Build IBM” to celebrate the company’s fiftieth anniversary. A year later that speech was expanded into a book. The three key ideas were:
- Respect for the individual employee.
- A commitment to customer service.
- Achieving excellence.
When Lou Gerstner took over a troubled IBM, he did away with those beliefs and replaced them with eight principles. Here are the first three.
- The marketplace is the driving force behind everything we do.
- At our core, we are a technology company with an overriding commitment to quality.
- Our primary measures of success are customer satisfaction and shareholder value.
That’s how things stand for most companies today. For most US companies the goal is increasing shareholder value, measured quarterly in earnings-per-share. Is that such a bad thing?
The short answer is “yes.” Here’s a longer answer.
Shareholder Value and the Short-Term Fixation
The idea of increasing shareholder value as the sole goal of a business traces back to Nobel Laureate Milton Friedman and the Chicago School of Free Market Economists. It was Friedman who said that “The only social responsibility of a business is to increase its profits.”
Other economists followed Friedman and, gradually, the idea that the most important thing was to maximize shareholder value became the idea that the only thing a business should do was maximize shareholder value. Employees were not important. The communities where you did business were not important. Your customers were not important. Only the shareholders mattered. Nowadays, people start businesses with the idea of cashing out, not passing them along to their children.
While that shift was happening, the world was running faster and faster. We started measuring earnings quarterly, mostly because we could, not because it was better.
Management by the Numbers
Maximizing short-term shareholder value is a pure numbers game. You may lay off people to improve your profits, which means that you don’t really need to have quality relationships. Why invest in training and development if they won’t increase profits this quarter? You cut back on R & D and advertising, “just for this quarter” and then next quarter you do it again. It’s easier to justify ethical lapses when the most important thing is to make your numbers this quarter.
The result is that managing in the short-term sets up a cycle that’s like running in front of a thresher. You hope that you’ll get to retirement before the thresher catches up with you.
Focus Only on Short-Term Shareholder Value is Toxic
Maximizing short-term shareholder value may be good for shareholders, but it’s not good for the rest of us. When the sole focus is on short-term numbers then the things that make companies and communities and countries great places to work and live fade into the background.
Most people want to work for something more than a paycheck. They want to do something more than help the company hit those quarterly targets. They want a purpose. That was exactly what IBM offered in 1962. I remember a friend who brought a copy of Watson’s book back from an interview in the late sixties, and raved about wanting to go to work for IBM.
When you concentrate on the short-term, the urgent drives out the important. First, you do what you have to do to make the quarterly numbers come out right. Then, if you have energy and time and willpower you do the things are important for the long term.
Why It’s Hard to Think of the Long-Term
It’s easy to measure short-term success. Just take a look at the numbers. Long-term success is harder. There are numbers there, too, but you won’t see them for years. And the things that go to build up those numbers are things like values and culture that are hard to define and almost impossible to measure. Other things, like relationships and trust, and innovation, take time to mature. They don’t have any easy and accurate measurement systems, either.
So you’re facing urgent short-term goals with clear measurements and less specific long-term concerns with no clear measurement systems. Plus, if you get a bonus, it’s probably based on short-term results. There’s a lot of pressure to choose short term goals and leave the long-term for somebody else.
The Key to Getting the Long-Term Right
There’s actually a pretty simple key to getting the long-term right. Manage as if people mattered. When you do that, you’ll make investments in things like training and development. You’ll organize things so that relationships and trust build and make the company more effective.
This is not a trade-off: people or numbers. It’s people and numbers. If you aren’t successful in the short term, there won’t be any long term to worry about.
So, it’s short-term and long-term. We’re talking about stakeholder capitalism, not shareholder capitalism. And if we don’t get it right, we will all suffer the consequences. We will all wind up working for companies that treat us as cogs in the great shareholder value machine.