In the current Harvard Business Review, Rotman school dean Roger Martin (author of “The Opposable Mind” and “The Design of Business,” both books endorsed by this blog) argues that it’s time for a new overarching goal for the firm (”The Age of Customer Capitalism“). Martin argues that since the 1980s companies have been focused on the wrong objective: shareholder value. He states that shareholders are frequently short-term holders and overwhelmingly indirect (i.e., you buy a share of a mutual fund that invests a fraction of that share in a particular firm). Therefore, the side effects of shareholder maximization strategies are short-term thinking and lack of concern for anything not directly financially-related.
Reading Martin’s piece brought to mind the chill that went through me years ago when I read Michael Jensen’s (the godfather of shareholder maximization) 1980s HBR article “The Eclipse of the Public Corporation.” In this piece Jensen argued vociferously that older, low-debt versions of company capitalization were antiquated, and the companies of the future would be highly leveraged in order to tightly tie owners to the performance of their companies.
We see where that got us. Perhaps there were others who also instigated the era of private equity, but I first and foremost blame Jensen. He got what he wished for and as a result saddled the rest of us with an unmitigated disaster – an economy teeming with overleveraged investments – which looked great as long as the economy kept growing, but which changed into albatrosses around our collective neck when the (inevitable?) downturn came.
Now, says Martin, it’s time to redefine the relationship between a company and its stakeholders. Shareholders are one, and not the primary, audience for company strategy. Customers come first.
Well, hallelujah!
[Martin has an interesting companion piece to this on the HBR website, "What We All Lost When Business Lost Respect." ]
