The Editor's Post by Philip Whiteley

Show me the people

Since the 1980s, the dominant business theory has been summarised by the phrase ‘maximising shareholder value’. It appears to be a form of uber-capitalism; lacking in sentiment maybe, but encouraging enrichment for investors and vibrant competition and innovation.

Is it really quite so rational, however, to divert attention away from the actual organisation and how it works? Is there not a danger that by singling out the one stakeholder who doesn’t actually work for the corporation – the institutional investor – for special treatment, that it’s a way of approaching capitalism that is akin to the tail trying to wag the dog? ‘Value’ seems to have become something you shop around for, rather than something that is created by inventive individuals producing goods and services that people want.

There are two issues here: firstly, even by the single yardstick of ‘shareholder value’, it makes sense to pay far more attention to developing the internal human capital of the business than has historically been the case, as study after study has shown. Secondly, how much sense does it make to pretend that the interests of only one stakeholder should matter? It’s unethical, sure, but is it even practical?

Investment and business analysts forensically analyse short-term profit figures and money flows to assist the army of speculators and investors. This is all based on the premise that organisations consist of money; which they don’t, they consist of people.

Money is no more than a by-product of what people do, something that human capital analysis is starting to demonstrate. Shareholders have money, and they want to make more money. Their theories are based on money, not organisations, and they try to pretend that people are just a resource or a cost – hence share prices are invariably driven up when job losses are announced, without a scintilla of analysis as to whether the particular roles being lost, or the impact on teams and customer service, will be positive or negative.

A few years ago, Southwest Airlines, the most profitable and successful airline in North America over the past 30 years, reported that it been forced to defend its level of expenditure on training. Investors saw it as a ‘cost’ and, in the spirit of ‘maximising shareholder value’, wanted that cost reduced. Of course Southwest Airlines‘ exceptional levels of service and customer retention depend in part on its investment in training, and it was able to see off this challenge. In the future, more and more companies will be able to express this belief in human capital metrics, such as ROI of staff development initiatives.

The irony in all of this is that shareholders themselves would be better off if they ditched the ideology of ‘maximising shareholder value’ and the econometric nonsense that accompanies it – especially the unthinking mentality behind the pressure to cut visible costs without a thought for the impact on service and the organisation.

The cult of ‘maximising shareholder value’ encourages hot money that moves around in the search for elusive hyper returns, rather than investing in the creation of dynamic, innovative enterprises. It irrationally elevates easily measurable costs ahead of indirect ones such as high staff turnover or low employee commitment.

If we ditched this failed ideology, we’d all be better off. Shareholders included.