Who Does A Business Serve?
There seems to be a growing awareness that the business world has gone astray. The well attired few have presented themselves one after the other, to a number of high profile commissions, investigations and tribunals across the world. Though the investigations differ, I propose they are really seeking an answer to one fundamental question, ’Who should a business serve?’
There have been many answers, the most common: ‘A business exists to maximise value for its shareholders.’ I think this is flawed and dangerous thinking. It creates terrible incentives and culture. To make sense of this, we need to wind back a couple of years and see how we got here.
The concept of a corporation is a relatively new one, its birth was about four hundred years ago, with the first global trading companies. There were noble manors and other entities before that, but nothing quite like a corporation, with its constitution, managers, shareholders/owners and employees. The first corporations existed to develop large projects or specifically to advance imperial appetite for expansion and control.
Corporations, many of which were often wrapped around the egos of a single individual or family, continued to grow in power until we reached a period of great free-market expansion. This is a pivitol moment, in 1970, with the arrival of Milton Friedmen. The famous economist (who incepted the rather hungry form of free-market capitalism that we are enjoying today) announced in a New York Times article,
“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
The modern way of phrasing this is, ‘A business exists to maximise value for its shareholders.’ On the surface, this seems to make sense. After all, don’t shareholders effectively own the business? The choice of who you serve, and how you frame the relationship makes a crucial difference to how you act. Under this framing, business tends to excuse any action that grows shareholder value. Pair this with any self interest on the part of leadership and you can practically hear Gordon Gekko shouting ‘Greed is good.’
The problem is this: This idea of shareholder primacy is neither true or good business sense.
As noted by Harvard professors Joseph L. Bower and Lynn S. Paine, shareholders are not actually legally beholden to a business in the same way a business acts as if they are beholden to shareholders. This accords well with work by Lynn Stout in “The Shareholder Value Myth.” According to Lynn Stout, shareholders don’t really legally own a company. A corporation is a legal entity and the shareholders have a contract with that entity for shares. It is a business decision to treat their views in primacy.
Commercially, shareholders may buy and sell their shares at whim, often anonymously. They may hold the shares for a very short length of time. In fact, since 1976, in the US, the general length of share ownership has shrunk from five years to seven months. This shows a remarkable short-termism in shareholder thinking. Something directly opposite long-term business value. Rather worryingly, according to Llynn Stout, businesses have actually created worse returns as theories of shareholder primacy have risen in power. Perhaps as a result of the short-term thinking of a share driven marketplace.
This isn’t where the story ends though. There are alternatives to the belief that the ‘shareholder is primary.’ ’Enlightened stakeholder theory’ is a competing model, which suggests that a business serves a much wider set of stakeholders, including: customers, employees, financial backers, suppliers, regulators and communities.
This may be a better framing, but as a measure of success, the enlightened stakeholder theory model falls in on itself by suggesting that growth in long-term market value is the ultimate way of measuring success. It’s understandable that something must be measured. A business exists to create value, but the concept of ‘value’ may not be so easily pinned down to a single objective. Not all businesess can and should be directly measured as successful by their long-term market value.
Rather, I found myself turning back to work by Lynn Stout, who proposes it is a mistake to drive towards a single set of business objectives. Echoing work by economist and original Design Thinker Herbert Simon, she suggested that organisations should not try to oprimise to a single objective. Rather, they should persue several objectives and try to do well enough at all, rather then maximising one. This is Herbert Simon’s concept of “satisficing,” (“satisfy” plus “suffice).
The concept of satisficing between many objectives challenges the simple story that a business has one clear objective. The problem with insisting that a business maintain one clear objective is that it doesn’t match the complexity of the marketplaces and the reality of work. There are always a number of competing objectives in any endevour. The art is in managing the tension between them.
So the business can’t serve one set of stakeholders, it serves a set of them. The business has to consider much more beyond shareholders, including its employees, its customers, its leaders, regulators and the wider community.
This sounds less like a simple formula. It turns the problem of ‘who does a business serve?’ into a more complex systems-style problem, where the sum is greater than the parts. It is a less comfortable position because is doesn’t provide a simple answers that can be used in every case. It requires a business to review evidence, consider bias and develop thoughtful decision making frameworks.
So the next time somebody waffles about a business’s core goal being ‘a return value to shareholders,’ you can think twice before nodding your head. A business can’t put anyone right at the centre of its objectives, not even customers.
Instead, the business is both part of and serves a system.
Stout, Lynn A. (2013). , “The Shareholder Value Myth“ Cornell Law Faculty Publications. Paper 771.
Pichet, E. (2008) Enlightened Shareholder Theory: Whose Interests Should Be Served by the Supporters of Corporate Governance? CORPORATE OWNERSHIP & CONTROL, Vol. 8, Nos. 2-3, pp. 353-362, Winter 2011.
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