Recently I read an article by McKinsey about a college professor and former Medtronic CEO saying the current form of capitalism is detrimental not just to communities and employees, but also to shareholders. While everybody decry about the short termism of companies, he also says managing companies solely for shareholders is bad for business. Companies should really create value for customers which, if successful, ultimately will create value for shareholders.
Ever since the fall of Lehman in the fall of 2008, I’ve been hearing a few folks point out how our current system of capitalism is damaging. There was a book called “Capitalism 4.0” by Anatole Kaletsky which, if I remember correctly, basically said unbridled free market was bad and really was not the epitome of efficient markets. There is no such thing as a truly efficient market. Capitalism really required a blending of free markets and government regulations.
Then there was “The Myth of Shareholder Value” which basically said that companies are NOT legally bound to create value solely for shareholders. The author called for a movement away from short term thinking and more towards a holistic long term thinking.
And now this Harvard Business School professor. He says that running companies strictly for the shareholders is destructive and that boardroom members should manage shareholder expectations. We should be thinking about investments; we should be thinking long term; and we should be creating value for customers, not for shareholders.
A lot of what he says makes sense. In the mid to late eighties, every time there was an announcement of a layoff, the shareholders would cheer and the stock price would go up. But I would think: “Those are your customers; they buy your goods, one way or another. If everybody felt they had to lay off folks, there would be few customers left with money to buy. Run it out long term and….” Fast forward to today and we face huge inequality and a lousy economy with lack of demand.
Then in the late nineties with the dotcom mania going on, there was immense pressure to fulfill the monthly forecast, never mind quarterly. I know because I worked for a tech company and it was a constant pressure to meet the monthly numbers. I thought: “Hmmm, with this much pressure going on, there has to be a lot of fudging the books. You CANNOT consistently meet the forecast because if you were able to forecast correctly each time, then you wouldn’t be working for a company – you would be out making a killing.” A couple of years later, we had the Enron bust which highlighted how they cooked the books in order to meet the quarterly predictions.
Finally, the Great Recession came along in 2008 and almost destroyed our financial system, all because of financiers’ short term thinking to produce the quarterly profits. Here, these guys were not just trying to generate shareholder value, they were also trying to obtain obscene bonuses. But whatever their compelling reason for their behavior, it was short term and not customer oriented. And now, five years later, we’re still in the troughs of the Great Recession (technically, the recession is over but it sure doesn’t feel like it).
If enough people decide that unbridled free market is not the way to go, or that the focus on just shareholder value is destructive, maybe we can come up with a different kind of capitalism – one that benefits everybody and is not quite so destructive.