To create shareholder value, business managers need to put customers at the head of the stakeholder list. Employees and the community should also come before shareholders’ interests. This is not to disregard the interests of shareholders, as they are the beneficiaries of the business. Instead, we must concentrate on building the company, not the interests of shareholders.
Too often, the interests of shareholders do not align with good solid business practices. For example, managers are inclined to ignore long-term investment to improve the quarterly numbers to juice the stock price, cut customer service to enhance short-term margins, or cut back on R&D and other cost-cutting measures such as wage reductions or layoffs.
Don’t get me wrong. A business must be profitable to be sustainable and growing. The interests of shareholders are not served if the business goes bankrupt. My point is that where does one focus the resources of the company? Business success starts with the customer. The customer is where the company must focus its resources to create shareholder value.
Over my career as a business manager and consultant, my business strategy mantra is that business operations must strategically be market-focused. Experience makes it clear that business concepts must have a strong differentiating impact on customer choice. Business strategy must be centered on delivering products or services that are highly competitive with clear differentiation to be successful. The focus must be on creating long-run competitive customer value and long-term profitability. This can only be achieved by focusing on product design, price, advertising, promotion, production, and distribution, which drives competitiveness and profitability. Making the quarterly numbers to support the stock price rarely aligns with market-focus objectives. However, when the business succeeds and thrives, the shareholders succeed, and their investment thrives.
Roger Martin, who is Professor Emeritus at the Rotman School of Management at the University of Toronto, is a leading authority on business strategy and management states in his landmark book, entitled “A New Way to Think,” states “The harder a CEO is pushed to increase shareholder value, the more the CEO will be tempted to make moves that actually hurt the shareholders.” He goes on to say, “Determining what your customers value and focusing on always pleasing them is a better optimization formula. Companies should seek to maximize customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity.”
Roger sums up his comments by saying, “I firmly believe that if more companies made customers the top priority, the quality of corporate decision-making would improve because thinking about the customer forces you to focus on improving your operations and the products and services you provide, rather than on spinning lines to shareholders.”
It is hard to resist shareholder pressure to pump up value as quickly as possible, particularly for emerging and start-up companies. So investors put up the money, and if the company does not produce instant results, management is pressured to come up with announcements, launch new products prematurely, make an unnecessary acquisition, or do a round of potentially damaging cost-cutting.
The best course for business managers to fend off aggressive shareholder demands is to have a clearly defined market-focused strategy that is communicated, and use the company’s resources for customer development, customer value, and sustained profitability.