Much is made of mission statements designed to motivate employees or guidelines laid out to encourage innovation, but what about a corporation's mission statement? Should it focus on pleasing shareholders? Employees? Customers? In this article, we'll look at the different interests that companies can align themselves with how these decisions affect shareholders.

The Owners
The era of the company founder doubling as the CEO and controlling shareholder is over. Now such situations are the exception rather than the rule. Consequently, a diverse group of investors holds the company's outstanding shares. A company's first priority has to be to please the owners. That said, not all shareholders are equal; therefore, a corporation's first goal should be to create shareholder value for long-term shareholders.

Let's take a look at the importance of the distinction between long- and short-term shareholders by examining a share buyback situation. A share buyback is a common way for companies to increase the value of their outstanding shares, but there are good and bad reasons for doing this. The good reason to do a share buyback is that profits and cash reserves are strong, and there are no opportunities for growth within the core business at the time. Ironically, this is when management usually goes on a spree of unrelated acquisitions to try to look innovative and growth-oriented - often to the detriment of the company's future, when the useless parts are sold off at a loss. Simply buying back shares would do much more for shareholders because the shares can always be resold if an opportunity presents itself. (Learn more about repurchase strategies at A Breakdown Of Stock Buybacks.)

A buyback is a bad idea when short-term investors sway the board simply to juice their short-term gains and get out with the cash. Raiders - the reformed Carl Icahn among them - used proxy fights to force short-term solutions like share buybacks and spinoffs to increase the share price and then flee, leaving the company cash-stripped and without its strongest divisions. This schism between the short-term and long-term shareholders influences many decisions, but in general, companies benefit most over the long term by striving to please long-term shareholders. (See more about what ownership means to you in Knowing Your Rights As A Shareholder.)

Customers
To fulfill shareholders' hopes, a company must please its customers. There is no conflict inherent in this arrangement. By providing a superior product or service at a price that customers are willing to pay, the company also benefits shareholders when the sales propel profits.

Similarly, if a business is treating customers badly via bad goods or services, it's the shareholders who feel the pinch of dropping sales and therefore share the desire to fix the problem. The only case where putting the customer first is dangerous is if products and services are being sold for an absolute loss, thus dooming the company and robbing the customer of the desired service. In short, the shareholders' and the customers' interests are so closely aligned, they can be looked at as a single priority.

Employees
Employees, from managers to janitors, do fall below customers on the priority list, but only just below. The best companies take care of their employees and, through employee stock purchases, sometimes convert them into shareholders. Even at companies where the employees don't double as owners, the need for a content and dedicated workforce is obvious. (For related reading, see Get The Most Out Of Employee Stock Options.)

If a company mistreats employees, that mistreatment is passed down the line to the customer. The level of effort a company has to expend in keeping employees happy varies from industry to industry. Investment banks and financial firms might spend millions in bonuses to keep the rainmakers, whereas fast-food chains might minimize their efforts, knowing that natural turnover is a given as employees move on to further schooling or higher-level jobs. That said, even entry-level employers benefit from making employees feel wanted and retaining good people for as long as possible.

Confusing the Natural Order
What happens when corporate priorities are rearranged, or another priority is mixed in? Unfortunately, we don't have to speculate because there are examples of this everywhere. When employees are put first - in the form of unions or management watching their paychecks first and the company second - the company loses money. Look at the automakers that have begged for bailouts or the "corporate kleptocracy" of former news magnate Conrad Black and the bleak outlook becomes clear. (For related reading, see Pages From The Bad CEO Playbook.)

In the U.S., the government has a history of bailing out union-heavy industries. Critics contend that putting industry on welfare will not strengthen it against foreign competitors. This also represents a misalignment of corporate priorities by failing to put customers and shareholders first. (For more on this, read Top 6 U.S. Government Financial Bailouts.)

Companies can operate for a long time with confused priorities as long as they are addressing shareholder, employee and customer needs. Many companies go through phases in which their priorities get mixed up and they are forced to realign following a downturn in business. If companies get their priorities too far out of whack, this is when powerful shareholder crusaders (Icahn numbered among them now) make toehold purchases, start proxy wars, or perform leveraged buyouts. If, however, an outside factor is given priority, the end can be swift and brutal. (To learn more, read Proxy Voting Gives Shareholders A Say.)

Conclusion
Putting shareholders first doesn't conflict with serving customers and treating employees well. Shareholder value is enhanced by satisfied customers and contented employees. Problems arise when these priorities get confused or, worse yet, subverted by a conflicting outside priority like government mandates.

Ideally, every company should put long-term shareholders first by making sure customers and employees are satisfied (perhaps even converting them into shareholders). This is not always the case, however, so companies that put these priorities into action tend to open up an economic moat that separates them from their competitors. As such, for shareholders, it is well worth the effort to make finding these companies one of your priorities.

You can read about some other conflicting company priorities at Is Growth Always A Good Thing?

Related Articles
  1. Term

    What is a Preemptive Right?

    A preemptive right allows select shareholders to buy newly issued shares in their corporation before the general public.
  2. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  4. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  5. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  6. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  7. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  8. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  9. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  10. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Theta

    A measure of the rate of decline in the value of an option due ...
  5. Record Date

    The cut-off date established by a company in order to determine ...
  6. Corporate Social Responsibility

    Corporate initiative to assess and take responsibility for the ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  3. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  6. How can a company reduce the unsystematic risk of its own security issues?

    Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!