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½ To have your focus on providing customers higher value seems obvious,
but if you spend much time in finance, you see that even the accounting
principles that run the business focus executives on shareholder value
rather than customers. It's time for wholesale change. The focus on the
customer is a step in the right direction.

½ Provide a valuable product or service to a customer at a reasonable price

and do the most good in the world you can do. There's a recipe for a
business that will likely survive even the biggest economic downturn

4-3
 

 


 
].Management should be divorced from
ownership
½ In ] 32, Adolf A. Berle and Gardiner C. Means published their
legendary treatise, 

 

 

 

½ Úirms would be run by the hired help, a new class of professional
CEO
½ While there certainly continued to be owner-CEOs, professional
managers came to dominate the corner office.
½ Entrepreneurs were welcome to start up new firms but would be
wise to hand them over to professional managers, who were more
dependable and less volatile, once the business reached a
significant size


 
 
 
 




     

Œ Úocus on ³maximizing shareholder value
ΠBoards of directors view their job as aligning the interests of senior
management with those of shareholders through the use of stock-based
compensation
ΠJack Welch, the CEO of General Electric from ]
] to 200]. A speech
that Welch gave at the Pierre.It was estimated that Welch owned as much
as $ 00 million worth of GE stock at the time he left the company.
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½ Professor Martin suggests that shareholder value capitalism is
also a flawed theory,
½ provides some compelling evidence that the shareholder value
paradigm did not pay off for shareholders (in short ± between
] 33 and ] , when management capitalism was king, the S&P
earned compounded annual returns of .
½ between ]  and 200
, during which shareholder value
capitalism has been in vogue, the S&P created compounded
annual returns of 5. . Úurther, Martin argues that shareholder
return cannot increase in perpetuity
 Ô   
 
 

 

½ Martin invokes optimization theory²"there is no way to
simultaneously optimize two different things´
½ Úrom the perspective of optimization theory, you can
only maximize one variable while controlling for all
other variables
  


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½ shareholder value reflects the value stockholders place on the
company¶s future earnings, and it is impossible to any firm to
continuously raise ±and deliver on ± expectations.
½ If we assume that customers are the source of all future earnings,
then logic would suggest that maximizing customer value would
be the best way in which to maximize shareholder return in the
long run.
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].Because their CEOs are free to concentrate on building the real business,
rather than on managing shareholder expectations.³

A.G. Lafley took over as CEO at P&G

Told to shareholders that things would continue to get worse in the near term
because the company needed to
 


fundamentals, and that would take time.
Most CEOs would be hesitant to send that message to Wall Street and would
attempt quick, rather than meaningful, fixes.
Most boards would discourage if not outright disallow such communications
to shareholders.
2. Compensation structure plays a big part as well. Companies like P&G who
established CEO packages that vested long after retirement have
produced long-term returns.
½ Boards generally don¶t distract their CEOs with stock-based
compensation that is short-term focused or realized at retirement.
½ Short-term rewards encourage CEOs to manage short-term expectations
rather than push for real progress.
½ Rewards priced at the time of retirement only get CEOs to manage to the
finish line. If, like a marathon runner, the company crashes to the ground
after crossing it, that¶s someone else¶s problem
"V
      


       
  

    
 
 

   
  
If more companies made customers the top
priority, the quality of corporate decision
making would improve because thinking about
the customer forces you to focus on improving
your operations and the products and services
you provide, rather than on spinning lines to
shareholders."

4-]2
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