Shareholder Value Added (SVA): the singular goal of a company should be to maximize the return to shareholders. It was the big idea starting in the late 1970s and I was exposed to it during my MBA years. As bright eyed, bushy tailed (or was it bushy-eyed, bright tailed?) students we consumed the defining article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”
As a young manager rising in the ranks, I learned my job was to not selfishly optimize benefits for myself and my staff but for the owners of the firm. I must admit I did have some troubles rationalizing the idea at the time. As the owner of a few common stocks, the concept resonated with me. Imagine that, employees working solely on my behalf. But the other thought in the back of my mind was that I was ready to dump the stock if something better came along or if I needed the cash. Employee loyalty, nice. My shareholder loyalty, uhh.
For the next 20 years up to his retirement in 2001, Jack Welch played the SVA theory to grow GE in the most valuable and largest company in the world. Others followed the form and function. Who was I to argue? Put the discomfort aside.
What emerged was the widespread use of stock options as executive compensation tools. This led to execs concentrating on increasing stock price and Wall Street pushing for short-term myopic returns to satisfy shareholders. We also experienced questionable practices such as outsourcing to lower costs followed by using the savings to repurchase stock to drive up the price. And then there was out and out bad behaviour with C-suite manipulation of accounting numbers (e.g., Enron). The discomfort didn’t go away; it got worse.
In 2009 the discomfort loop was closed. Jack Welch stated “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.” Begone SVA.
If SVA is now out, what’s taken its place in my toolbox?
I favour John Kay’s Obliquity idea that firms should focus on Purpose not on profit or growth, market share to increase profits. Profit is still important but how to go about achieving it is different. You don’t establish a profit or market share goal and shoot for it as a target. Instead you set your sites on something better (like purpose); profit and market share are natural outcomes.
In a similar fashion, you don’t set Happiness as a personal goal. Happiness emerges as you strive to achieve a greater cause or contribution.
How does this fit with complexity thinking? Developing a safe-to-fail experiment in the Cynefin Complex Domain is obliquity. It’s an indirect approach to discovering patterns that can lead us to new ways and solutions to satisfy customers, employees, and yes, shareholders.