I sometimes yell at the TV. It's not a good behavior and I'm trying to quit. That's why I stopped watching most television "Business News Reports".
What gets me is that they're not talking about business news at all. They're talking about stock market news. And that's not the same thing.
Even the vaunted Harvard Management Update does it. In a recent issue they were talking about the "interests of the company" in such a way that you could substitute the phrase "stock price" and not lose any meaning. Well, folks, I've got a news flash.
"Business" is not just, or even primarily, what happens in the stock market. Business is delivering value in the form of products and services. It happens in big businesses and small ones, in car washes and conglomerates.
You'd have trouble explaining that to these young business reporters, though, because they've thoroughly absorbed the idea that the sole purpose of a company is to make money for stockholders, to "increase shareholder value" in the preferred language of the day. That's nonsense. It's dangerous nonsense.
The primary purpose of a company is to deliver value to customers at a profit. Some of that profit should flow to the shareholders. Some of it should be plowed back into the company to help it remain competitive and profitable. Do it any other way and you get in trouble.
Corporate raiders and many economists would take issue with that last paragraph. Their position is that a concentration on shareholder value is ultimately best for everyone. Companies will become more efficient, they cry, and society will become more prosperous. The world will be a better place.
The idea that a company's most important job is to increase shareholder value began its rise to prominence in the late 1970's and early 1980's. Those were bad times for American business.
For years US business was king of the hill. Then, suddenly it seemed, in the 1970's the Japanese were beating us in markets all over the world. Economists were predicting that the Japanese economy would be the largest in the world by the year 2000.
American companies were uncompetitive. They were badly managed. Even worse, according to T. Boone Pickens and others, management was living high on the hog while stockholders were not making any money. Pickens and other corporate raiders had an answer for that.
Their answer was to take over a company and then make it profitable by pursuing two strategies. They would sell off some parts of the company. Then they would make the rest more profitable by cutting the work force and scaling back on unnecessary expenses.
That improved operations in the short term. Usually the stock price went up. Stockholders figured they were getting a good deal. The raiders and turnaround managers got a good deal too. They tended to make a lot of money.
It seemed to work and CEOs that did it got glory and big bucks. You may remember "Chainsaw Al" Dunlap. He fired thousands at Scott Paper and got those great short term jumps in the stock price. He wrote a book called "Mean Business: How I Save Bad Companies and Make Good Companies Great."
Sunbeam thought he'd be the answer to their prayers and they hired him. He fired a few thousand more, got investigated by the Securities and Exchange Commission, and would end up being fired himself.
Dunlap was an egregious example, but increasingly it looked like the way to be a great corporate manager was to be ruthless and make the stock price go up quarter after quarter. The guy who was best at that was Jack Welch.
Shortly after he took over GE, Welch laid off over 100,000 people. That earned him the nickname, "Neutron Jack," after the neutron bomb that kills the people but leaves the buildings intact. Welch wasn't alone in firing lots of folks. We went through an incredible era of downsizing and rightsizing at companies of all kinds.
Welch wasn't just a higher tech version of Chainsaw Al. Welch lasted a long time because he really did deliver shareholder value. During the last ten years of his tenure value increased by an average of 27 percent per year. If there ever was a CEO who delivered shareholder value it was Jack Welch.
He delivered that value in lots of ways. He cut costs for sure. He worked at dominating markets. He gobbled up companies while he sold off parts of GE. And every quarter the results were good and reflected in the share price.
Welch may also turn out to be a great CEO when viewed with the perspective of history. It's one thing to get results while you're in the CEO suite. Lots of folks have done that. Harold Geneen, for example, built ITT from a tired maker of telephone and telegraph equipment into one of the largest corporations in the world.
When Geneen retired ITT pretty much disintegrated. Welch worked to assure that wouldn't happen at GE by also concentrating on developing people. He understood that great companies are not built of accounting systems and clever strategies. A company has to be made up of good people that continue producing results for years and years.
The ways that a company builds long term competitive advantage and profitability are pretty straightforward. You build profitability by delivering recognized value in your target market. You build long term competitive advantage through a strong culture and people who can deliver that value consistently. That's hard work. You should pay attention to it.
Making the increase in shareholder value the most important thing is like playing basketball while you're watching the scoreboard. You can't pay attention to the real game that way. You're bound to stumble. And after a while it may seem easier to rig the scoreboard than it is to run down the court and play defense.
As the nineties churned on, the market just kept going up. It seemed like this concentration on shareholder value was working. This became very important to lots of people as more Americans than ever became shareholders themselves. They loved having their portfolio value go up. So they added their pressure for increasing value, every quarter, no exceptions.
Meanwhile out there in the corporations the problem was to get the folks below the top level to work hard to increase share price. Many corporations decided that stock options were the way to solve the problem.
The idea was that you would pay folks in stock instead of cash as a reward for achievement. That had two advantages. It didn't cost you cash. And it tied everybody's wealth to the share price of the company stock.
I remember walking through an administrative area in a company during the mid-nineties. I noticed that every computer seemed to have a little window where the company's stock price was displayed as it changed from minute to minute. Some folks were checking out market news.
How many of those folks were thinking about the company stock price instead of their jobs? We'll never know. How many CEOs and top executives resorted to legal but not necessarily ethical accounting to make sure that their company's stock went up for one more quarter? We'll never know that either.
What we do know and what we need to address is that concentrating on shareholder value alone is unhealthy and unwise. The share price is an artificial construct, a derivative, of the real game. The real game is delivering value to customers.
Delivering shareholder value is important, for sure. You won't get investment capital if the investors don't get a good and fair return on their money. But that return, that money, will come from operations, not from accounting tricks.
Business is what happens on the front lines where the business and the customer touch. The stock market is just another market.
RESOURCES
For a slightly different presentation of Wally's views on the shareholder value imbalance, check out his radio commentary for 14 January 2003.
One of the best ways to get an idea of what it was like in American business around 1980 is to look at some of the books published then. The Art of Japanese Management by Richard Pascale and Anthony Athos is an excellent book even re-read years later, but its introduction sketches the times and how businesspeople viewed the issues at the time. The book appeared a year before In Search of Excellence and covers much of the same ground, only with better research. It's worth snapping up one of the used copies available on Amazon since this book is currently out of print.
Want to find out more about Chainsaw Al Dunlap. One good place to start is at the Web site for a business ethics course at Babson that has pointers to many articles dealing with Al and his career.
You may also want to get Al's side of things by purchasing his book, Mean Business: How I Save Bad Companies and Make Good Companies Great
Then there's the other side. Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price by John A. Byrne gives that Business Week reporter's view of things.
"T. Boone and the Raiders" is the title of an article in on CFO.com
A good summary of Harold Geneen and what he did and didn't do is contained in his obituary.
Geneen's book, Managing, is currently out of print but you'll get value out of picking up a used copy at Amazon. Don't let Geneen's failure to create an enduring company put you off, there's lots of wisdom in this book.
Jack: Straight from the Gut is by Jack Welch and John A. Byrne and yes, that's the same guy that wrote the book on Chainsaw Al. The downside of this book is that it's Welch's self-congratulatory look at his career. That's a small price to pay for the upside which is plenty of insight into Welch, his time at GE, leadership, relationships, business success and more.
There are plenty of books and articles out there about Welch and GE. If you're looking for some ideas on how to apply Welch's methods or ways of thinking in your own company, I suggest The GE Way Fieldbook by Robert Slater. There's lots of solid advice in this one.
While we're on the subject of Welch and GE, let suggest one more good read. It's Execution by Larry Bossidy and Ram Charan. Bossidy came out of the GE culture and his book does a great job of outlining how the performance was actually achieved.
Created/Revised/Reviewed: 13 January 2003
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