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 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.)
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, 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.)
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?