“Shareholder value orientation” – now, where did that come from?!

Well, it came from the US. And, alright then, a bit from the UK.

For the (blissfully) ignorant among us, what is it? It is the view that the purpose of a public corporation is to maximize the value of the company for shareholders. Traditionally, we find this orientation in Anglo-American societies. The view that the public corporation is more a social institution which has to consider the interests of various stakeholders, including shareholders but also employees, customers, the local community, etc. is the traditional soft stuff found in other parts of Europe and Asia (although, over the last decade or two “shareholder value orientation” has been spreading like a forest fire – pardon the analogy – gaining geographic terrain even in previously unlikely homes such as Germany, France and so on).

Whenever I ask a group of executives or MBA students in my classroom “to whom is the primary responsibility of a company?” nine out of ten people will wholeheartedly shout “shareholders!”, with usually a small, minority contingent on the backburner – with a suspected long-term Marketing indoctrination – arguing that “the company should adopt a customer-focus” and always place customers first (because that’s the best thing to do in order to gain shareholder value I guess…).

But why is that? Why do we immediately assume that the primary beneficiaries of organisations should be shareholders? I even find that quite a few people get a bit annoyed if not angry by even raising that question – like it is some God-given truth, which can’t be opened for debate and is even quite embarrassing to think (let alone talk) about.

Don’t get me wrong, I am not saying that companies shouldn’t do it but surely it is not a “law of nature” or so that a company is ultimately (only) responsible to its shareholders. It’s a choice. And like with many choices in business, that means that it is something worth thinking about every now and then; whether it is really the choice you want to make.

My former colleague (the great) Sumantra Ghoshal – who unfortunately died some years ago – would even argue (if inebriated) that shareholders are not owners at all, at least not of the company. He would argue something like the following (and a posthumous pardon to Sumantra if I remember his argument slightly incorrectly; he would often not be the only inebriated party in the conversation…): He’d say, if you own a dog, and the dog jumps into your neighbour’s house and wrecks the place, you are responsible for all the damage. However, if you own shares in an oil company and one of its oil-tankers shipwrecks and causes a billion dollar in damages to the environment, you’re only responsible for the extent of the monetary value of your shares; that’s the maximum you can lose.

Although Sumantra of course realised the legal reality of the situation, his argument was that therefore a shareholder’s ownership rights are just as limited as his responsibilities. As a shareholder, you’re an investor, which gives you the rights to for instance dividends, but it doesn’t make you the “owner” of the place in our traditional sense of the word.

Moreover, he would continue to argue that as an employee you often give a lot more: your intellectual capital, loyalty, ideas, firm-specific skills and investments, etc. And companies would do well to solicit such “gifts”. And if as an employee you give a lot more (than just money), and a lot more of yourself, perhaps you’re also entitled to more, in terms of the company’s loyalties and priorities.