Strategy: Where do your responsibilities lie?
“On the face of it, shareholder value is the dumbest idea in the world because shareholder value is a result not a strategy, your main constituencies are your employees, your customers and your products”…. No this is not me evangelizing, but a quote from Jack Welsh.
How many times have you heard the management message “We owe it to our shareholders”, or “it is our responsibility to our shareholders…” So why do so many companies seem to prioritize shareholder value more than their employees, customers or products?
A cynic may remark that such phrases often precede an announcement of job losses or cost-control, as if shareholder value possesses some form of ethical importance. So just how much responsibility does a company have to its shareholders?
Before trying to answer this question, we need to refine the word “responsibility” a little further. Above, we have already mentioned an “ethical” or moral interpretation, which infers that because the shareholders are the ultimate owners of the company, it is the duty of all employees to ensure a profitable return on their investment, even if it means losing your own job and livelihood. That’s quite an “ethical” load to bear!
The other definition could simply mean “good-business”, or more precisely provide the minimum return on the shareholder’s investment that will encourage them to start or continue to invest in your company, and hence provide the working capital it requires to grow.
I would argue that there is no “ethical” responsibility to a shareholder, they don’t suffer the pain of losing their livelihood, or the financial losses of having paid for products or services that don’t work. A non-employee shareholder has made a conscious business decision based upon an expectation of a better return on their investment than they would have got elsewhere.
Companies that build their own strategies around this premise of owner-responsibility inevitably become short-term focused and volatile in their planning, in line with variations in their market attractiveness, and the need to maximise “owner” returns.
A growing company that puts the “good-business” responsibility definition at the centre of their strategy also acknowledges that their ultimate responsibility is in fact to their employees, customers and products, all of whom will generate the minimal return on investment needed to encourage shareholders to invest and provide capital for growth. Just as Jack Welsh stated.
Being a commercial blog, what are the consequences of this clarification of responsibility? It can be argued that a shareholder growth strategy is very similar to a customer growth plan. There will be investors interested in short-term and others in long-term returns. Some will have expectations of equity or control, others not. Some will be more fickle than others. In other words a balance shareholder portfolio that brings you the capital you need, but also does not present an existential threat should they pull-out. This is very similar therefore to a balanced Opportunity Portfolio.
As the leadership team, how much do you really know about your shareholder’s minimum return expectations?, just as a sales person would seek to identify a compelling need. What happens if you don’t deliver, or conversely deliver more than they expected in a single year?. This resembles a sales person’s concerns over the revenue forecasting. There is much to be borrowed from selling techniques that can help strengthen your investor-portfolio.
You have a responsibility to your employees and customers to ensure continued investment that will help you grow your business, but you only owe shareholders transparency and honesty.
