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Tenet #9 - Ten Tenets of Strategy

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by Larry Pendergrass, Principal

Tenet #9: Balance the stakeholders.

In my opinion, if you wish to build a company for the long term, you must balance the stakeholders; I like the term maximizing stakeholder value. I see 5 stakeholders: your shareholders, your customers, your employees, your suppliers and the society in which you do business. Any one of these can shut down your business, and any one of them can make a powerful partner to create a long term differentiated and defensible business.

In this blog, I discuss the ninth of my Ten Tenets of Strategy. These tenets were gained through years of personal experience and discussions with key thought leaders and are offered as guidance for the development of your strategy.

  1. Your core competency is not your strategy.
  2. Compete on core capabilities, your set of business processes integrated throughout your value chain.
  3. Make hard choices. Decide what you will not do.
  4. Focus on customer outcomes. Design your strategy through the customers’ eyes.
  5. Analyze and design for the industry forces.
  6. Understand and analyze the landscape of possible customer outcomes.
  7. Know your competitors and their strategies profoundly.
  8. Diversify around your core capabilities.
  9. Balance the stakeholders.
  10. Strategy is dynamic. Adjust as necessary, but with caution.

Balancing the stakeholders may seem more tactical than strategic, but the reason this tenet is on the list is the vital impact it has on your strategy, and how crucial it is to weave throughout your entire core capability.

The term “shareholder value” is relatively new, having been attributed to both Alfred Rappaport (Professor Emeritus at the Kellogg Graduate School of Management, Northwestern University, in 1986) and to Jack Welsh (former CEO of General Electric). Of course, the concept of the responsibility of management and the board of directors toward increased returns to investors is certainly as old as civilization. But the obsession of corporations on increasing shareholder value is said to have begun with Jack Welsh in a speech he made in 1981 called “Growing fast in a slow-growth economy”. Other business historians point to contemporaries of Jack Welsh and Alfred Rappaport, such as T. Boone Pickens as the source of today’s fixation on shareholder value as the sole responsibility of management and the board.

Regardless of the source, there is no denying the impact of this concept on business and our economy. The principal is taught in virtually every business law class in global business schools that all executive management and board members have one fiduciary responsibility, and that is to the shareholders. Cases are studied as student warnings, lest there be any doubt, of executive teams and boards that had accepted a lower offer for the acquisition of their company because it “was better for the employees”, and then paid the price in shareholder lawsuits. Top executives are incentivized today to insure an ever-increasing stock price in the short term, often sacrificing employee good-will, customer service and vendor partnerships. Decisions are made that optimize quarterly stock price while often turning a blind eye to the long term health of the company. The mantra given is “The board and management have only one fiduciary responsibility, and this is to the shareholders.”

Today, there is a considerable debate in academia and the media concerning the cost of this hyper-focus on near-term shareholder value. Steve Denning, in forbes.com, recently wrote an article entitled “The Dumbest Idea in the World: Maximizing Shareholder Value”. (Actually, this title quoted a statement by Jack Welsh, who later recanted the thought.) Articles and books have been penned by the likes of Roger Martin (Dean of the Rotman School of Management at the University of Toronto), Jay W. Lorsch (Professor at Harvard Business School) and Lynn Stout (Law Professor at Cornell University, see her new book The Shareholder Value Myth) not only pointing out the cost to society and the economy, but showing the fallacious assumption in the legal underpinnings of this myth. Stout writes that “… Contrary to what many believe, U.S. corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price….”[2]

Among these new challenges is whether or not corporations that are managed solely on maximizing shareholder value actually perform better than others. According to some writers (such as Stout) there is no empirical evidence that they perform better. And who are your shareholders? What do they want? They are not a homogeneous group, and don’t all want the same thing. Some are day traders, some are institutional investors, and some are wishing to invest for a decade and don’t want executives to threaten their investment in the long haul. For these and other reasons, some brave CEOs like Howard Schultz (Starbucks) are bucking the trend and going on record saying that companies must have a larger purpose than just raising stock prices. Bill Hewlett and Dave Packard were famous for saying that the number one priority for HP is profit, because profit is needed in order to do what they want to do for their customers, for their employees, for their shareholders and their vendors.[3]

I would go further and say that you risk your long term business with a hyper-focus on short-term stock price! A hyper-focus on maximizing shareholder value naturally leads to many ills. Again, here is Lynn Stout: “In the quest to ‘unlock shareholder value’ they sell key assets, fire loyal employees, and ruthlessly squeeze the workforce that remains; cut back on product support, customer assistance, and research and development; delay replacing outworn, outmoded, and unsafe equipment; shower CEOs with stock options and expensive pay packages to ‘incentivize’ them; drain cash reserves to pay large dividends and repurchase company shares, leveraging firms until they teeter on the brink of insolvency…”[4]

A better mantra was offered by Peter Drucker in The Practice of Management: “There is only one valid definition of a business purpose: to create a customer.”

Again, if you wish to build a company for the long term, you must balance the stakeholders. Here are the five stakeholders to whom I am referring:

Shareholders
It is a truism that your set of shareholders is an important stakeholder. Ignore them at your own jeopardy. But your set of shareholders is only one of 5 important stakeholders.

Customers
Remember Peter Drucker’s definition (above) of a company’s purpose. I have seen companies so focused on squeezing customers (from accounts receivable to service costs) that they do so at great risk to their overall business, even while they are making the numbers look good to the stock market. This risk is especially a problem when a large company has one set of behaviors honed-in to one industry, and then translated to another industry where perhaps you have only a few large customers over which to battle. Lose any one of these customers and you lose market share and the competitive battle.

Employees
Some business leaders have espoused a philosophy that indicates the company IS their set of employees, while at the same time exhibiting behaviors that deny this principal in every way. In some industries and during particular economies where there is a labor surplus, managers can get away with this behavior, for a while. But if you are in a battle for talent, it’s just pragmatic to raise “employees” to one of the 5 stakeholders that you must balance. And the more you are in a battle for talent, the more important this stakeholder becomes. Technology company leaders understand this battle for talent better than those in other industries.

Suppliers
Just as some companies underestimate the partnership they need with their customers, many undervalue the impact of either poor or excellent relationships with their suppliers. As a result, companies drive accounts payable to the limit, and keep their suppliers as much in the dark as possible. Especially in high tech industries, you will often find yourself battling for the availability of suppliers that can deliver to your needs. Tight partnerships can make the difference between having a strong, valued, differentiated core capability, and struggling to design new products and fill orders. As with customers and employees, the more you are in a tight battle for suppliers, the more these suppliers must be treated as key stakeholders.

Society
It goes beyond idealism to say that society must be a balanced part of your strategy and business tactics. To ignore this reality will eventually constrain a business, or worse. I am not just talking about following the law and acting ethically. You must understand and account for the impact of your company on the local and global economy, education, society, ecology and other non-direct stakeholders in the success or failure of your business. Your impact on these other elements of our daily lives can heavily influence whether the society becomes your best friend or worst nightmare. I have seen companies at their best and worst in these areas, and sooner or later the benefits of proactive cooperation (or costs of discounting) will be felt by any firm.

If you wish to build a business for the long term, balance the needs of your shareholders, your customers, your employees, your suppliers and the society at large. Strategize with this balance in mind. Incentivize based on this balance. To do so will unleash your full potential in building a solid, differentiated business that can be well defended. Set a strategy and manage a business without this balance at your long term peril.

 

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