April 19, 2010 11:52 pm

Confusion clouds the shareholder value debate

Business thinkers return to first principles

Would all those chief executives who do not want to create value for their shareholders please raise their hands. Nobody? I’m glad we could agree on something.

But from here on, the consensus breaks down. As the letters section of this newspaper has revealed during the past couple of weeks, the apparently simple label of “shareholder value” is understood and interpreted in a surprisingly varied number of ways. No wonder this debate gets heated, and confused.

There is no shame in being unclear. Some of our most distinguished business leaders are equally confused. Jack Welch, the former General Electric boss, may have launched this debate when he called shareholder value “the dumbest idea in the world” last April. But less than a year earlier he had chastised Jeff Immelt, his successor, for failing to respect the discipline this dumb idea demands. He said he would “get a gun out and shoot him” if GE did not hit profit forecasts. “Just deliver the earnings,” he said. “Tell them you’re going to grow 12 per cent and deliver 12 per cent.” Like the guy said: dumb.

In search of enlightenment, I travelled to Lake Maggiore in Italy last week to attend a symposium called “The future of economics and management in a post-crisis world”, organised by the European Academy of Business in Society.

Intellectually, this is an exciting time. Academics and business thinkers are being forced to return to first principles, question base assumptions and consider whether trusted models have led them astray. How robust is the prevailing “theory of the firm”? What is business for?

Unsurprisingly, Adam Smith was invoked. For those who still defend shareholder value with enthusiasm, The Wealth of Nations provides good ammunition. Robert Grant, professor of strategic management at Bocconi University in Milan, questioned whether the alternative “stakeholder” approach could really be helpful when it came to the business of making money.

Citing Smith’s line “It is not from the benevolence of the butcher, the brewer or the baker that we can expect our dinner, but from their regard to their own interest”, Prof Grant said: “If the butcher signs up to the animal rights movement or the baker starts campaigning for healthy eating, the prospects for their businesses are not good.”

He said businesses that tried to serve multiple stakeholders got confused. For good measure, he chucked in the provocative suggestion that, for the all the hand-wringing over Kraft’s takeover of Cadbury, hadn’t the investors’ response shown that the shareholder value idea still held attractions for the majority of market participants? Most of the tools of modern management – at least in publicly held companies – are based on the principles of creating shareholder value. Would we have to reinvent management altogether if that were no longer the unequivocal goal?

Dig a bit deeper, however, and the stand-off between the different advocates in this debate is not as substantial as it first appears. Prof Grant said that he could see the attractions in business strategist Arie de Geus’s “entity view” of business, which holds that most successful companies treat their enterprises as “living work communities” rather than purely economic machines. And he agreed that customer satisfaction, employee welfare and even social legitimacy could be seen as relevant and useful indicators of how well value was being created by the business.

This is really not very far from what Paul Polman, chief executive of Unilever, told me three weeks ago, even though the way he said it caused outrage to the noisiest supporters of the shareholder value nostrum. Mr Polman is confident that Unilever’s share price will rise and the company will be increasingly profitable. He just thinks the best way to achieve this is to sell more valued products to appreciative customers in a responsible way. I am sure he is right. Second-guessing shareholders or, worse, being bullied into taking damaging short-term measures to hit arbitrary earnings targets is the last thing he is going to do. You do not create lasting shareholder value that way.

My journey home has been delayed by an Icelandic volcano. But Lake Maggiore is calm and still. It must be the beautiful setting that has inspired me to attempt this haiku-as-management-mission-statement, now that the sound of debate has temporarily ceased: “Shareholder value/Approach it like happiness/With obliquity”.

stefan.stern@ft.com

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