Henry Mintzberg responds to Colin Mayer, in an exchange of views for this blog on whether shareholder value is a “dumb idea”.
Henry Mintzberg: On the face of it, this will not be much of a debate. Who’s to argue with shareholder value seen as 300 years of capitalism (let alone contemplating 800 years of Oxford, which back then meant cattle crossing)? On the other hand, what we see on the face of shareholder value is not what lies beneath it. There have been some developments in capitalism over the centuries, and especially the last few years, as you may have noticed. In fact, on its way to the market, capitalism has actually metamorphosed into shareholder value – a very peculiar interpretation of it – and economies around the world are now collapsing as a consequence.
Jack Welch is a good place for me to start, too. In his Business Week clarification of his “dumb idea” comment in the FT, he remarked that if companies can just get their long- and short-term acts together, then alongside shareholders, “you’ll see everyone win. Employees will benefit from job security and better rewards. Customers will benefit from better products or services. Communities will benefit because successful companies and their employees give back.” Win-win promises in the face of a win-lose reality.
In 1997, this same Jack Welch signed, and reportedly championed, a Statement on Corporate Governance by the Business Roundtable (made up of CEOs of Americans most prominent corporations). It concluded that “the paramount duty of management and of boards is to the corporation’s stockholders”, dismissing “the notion that the board must somehow balance” the interest of various constituencies as “fundamentally misconstrue[ing]” its role. Indeed, this was referred to as “an unworkable notion because it would leave the board with no criterion for resolving conflicts” among the different interests.
How about judgment? It is quite remarkable that by their own account, the “leaders” of the American corporate world had by 1997 lost their capacity for judgment. So shareholder value was convenient: capitalism without judgment. And this sheds light on why the focus on short-term performance (let alone directly on the current crisis itself).
Shareholder “value” is not about any basic human values; it is about maximising the material wealth of the people who own shares in a corporation, that’s all, and everyone else be damned – the workers, the communities, the environment, etc. And that maximisation requires measurement. Let the numbers do the talking (and the judging).
But how to measure performance in the long run? After all, did not so many of those AIG and banking executives perform fine not very long ago, at last according to the numbers? So the long-run was dismissed too, as shareholder value reduced to driving up the price of a company’s stock as quickly as possible. Three hundred years of capitalism, and now this.
Employee burnout, environmental degradation, even the sustainability of the corporation itself, let alone basic human decency, cannot be so readily measured, nor quite so easily attributed to their source. As a result, their negative consequences have been handed off to the rest of society as “externalities”, to use that convenient term provided by economists. We are now loaded with externalities. In effect, an unholy alliance of economic dogma with financial greed has taken hold of society, and it is destroying us.
How are we to get out of this mess? First, we are told we must get straight back to consumption. The trouble is that this time we may be consuming ourselves. Second, we are told that we have to “renew” capitalism. I thought capitalism was a way to raise money for business activities, not the be-all and end-all of human existence. How about renewing society, judgment, democracy, decency?
Lord Keynes famously claimed that in the long run, we are all dead. He was being a good economist, referring to individuals, not communities or societies. Thanks to shareholder value, among other nonsense, the good Lord may soon prove to have been more correct than he ever imagined.
Henry Mintzberg (www.mintzberg.org) is Cleghorn Professor of Management Studies at McGill University in Montreal, and a founding partner of www.CoachingOurselves.com