Here’s a PR manifesto offering a post-credit crunch reality check that sticks up for maintaining the primacy of shareholder value in business.
This manifesto might seem a lost cause. Speaking at the RSA/Sky Sustainable Business Lecture Series in London, Richard Lambert, director-general of the CBI, the British employers’ group, said “what you might call Jack Welch [1980s] capitalism” was drawing to a close – a reference to the former General Electric chief executive’s championing of shareholder value. Last year Welch dubbed his old mantra “the dumbest idea in the world”. He added: “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.”
Richard Lambert advocates that doing good is good business and that:
“The risk now is that the public and political response to what’s happened will itself have troubling consequences. If you don’t trust an institution to behave well, you impose regulations – perhaps to a point that undermines the dynamic workings of a market economy, and in turn holds back the forces of job creation and sustainable economic development”
He’s not alone in thinking that shareholders are now just one of many competing interest groups CEOs work for. In a recent FT interview, Paul Polman, Unilever chief executive, said:
“I do not work for the shareholder, to be honest; I work for the consumer, the customer. I discovered a long time ago that if I focus on . . . the long term to improve the lives of consumers and customers all over the world, the business results will come.”
I think these intelligent people are setting up a false dichotomy. Shareholder value is not necessarily at odds with social value. Customers and employees are not necessarily at odds with shareholders. Sure, running a socially respectable, customer-facing business may well be the ticket for shareholder value.
So I prefer the more robust approach of Lord Haskins, the former chairman of Northern Foods, who has questioned Mr Polman’s assertion that he does not work for Unilever shareholders, saying:
“Isn’t it the shareholder who appoints him, provides him with the funds to run his business, and awards him with his substantial pay package?”
To echo Michael Skapinker writing in the FT, before we consign the shareholder value movement to the dustbin, it is worth remembering why it arose: to prevent chief executives from running businesses in their own interests rather than those of the companies’ owners.
So here are my manifesto’s key points:
- The emergence of a generation of CEOs who ran companies for their own benefit;
- A generalised passion for short-term stock value.
- CEOs (agents) should be more accountable to the owners (principals) of their businesses;
- They should agree and assert the kind of firm they are running (long or short term value, for instance);
- They should communicate and sell these propositions.
- As a fan of Theodore Levitt, I’ve no doubt that Welch and Polman are right that great products, services and customer focus are the key ingredients of a successful company;
- No firm can function without a licence to operate;
- Key stakeholders need to be kept onside – employees, customers, suppliers and the like;
- If the longer term is what counts most, CEOs need to do more than they currently do to invest in innovation and in R&D (here’s a useful manifesto addressing this issue).
- Longterm profits matter a great deal to some firms, but that requires great flexibility and constant change.
PRs would do a much better job for their employers and clients if they spoke plainly and honestly about the realities of business. The current recession is caused by a crisis of profitability and negative growth. It is experienced as a crisis of confidence and trust. But it is not helpful to the cause of restoring growth and boosting reputations in society when PRs communicate that profit and growing shareholder value no longer matter most.
Today, the reality is that millions of people are losing their jobs, accepting pay freezes, going part-time, and feeling insecure about their futures, precisely because there’s not enough profit or a strong enough expectation of long-term shareholder value growth in the system. We’d all do better with our PR if we faced the truth rather than evaded it.