And reconciling shareholder and customer interests in the process.
Donald Gordon could be quite irascible at times. The founder of the insurance giant Liberty Life was never more so than when facing some annoying shareholders at an annual general meeting. One that a colleague shared with me many years ago was when an “activist” challenged Gordon on the company’s rather conservative dividend policy.
“Mr ‘activist,’” Gordon reportedly responded, “I know better what to do with your money than you do! And if you disagree there are many in this audience who will be just too keen to buy your shares from you!”
If ever there was proof that entrepreneurial genius attracts capital then Gordon was it. He is by no means the only creator/builder/entrepreneur that has been at loggerheads with shareholders. In 1988 Richard Branson delisted the Virgin Group after he became “frustrated with the demands of public shareholders”. Another was the demotion/firing of Steve Jobs from Apple and his subsequent triumphant return. At home we have also had Raymond Ackerman’s determination in the earlier years to retain family control of Pick ‘n Pay. Perhaps John Sculley sums up the shortcomings of shareholder paramountcy best in explaining his misreading of Steve Jobs. He confessed that he did not then understand the entrepreneurial mind-set, and wishes he had.
With entrepreneurial genius comes the courage, if not the right, to dictate to shareholders how the company should be run, and shareholders who expect to replicate or recruit that kind of genius through self-serving scorecards, incentives, whistles and bells are misguided beyond belief. Even more misguided is the notion that that kind of genius can be spawned, nurtured and developed from a barren bed of shareholder-value soil. It certainly is not surprising that the shareholder-value focus since the mid 70’s has indeed led to a decline in overall shareholder value.
In short, capital does not attract genius; genius attracts capital. Until we re-arrange this cart and horse, we will continue to experience the phenomenon I wrote about recently, and that is a growing rift between shareholder interests and customer interests. That preordained and guaranteed link between the two, vehemently promoted by Friedman followers since the late seventies, is fallacious, especially in a world that has found many methods of making money other than adding tangible value to people’s lives -- even more so when the motive is profit rather than service.
We have sufficient proof that shareholder value does not always equal customer service. And we certainly have more proof that a customer focus creates shareholder value – unless you are inept, imprudent, and do not follow the rules of legitimate transaction. This was the real insight of all great entrepreneurs. What distinguishing them from many a professional manager is their deep understanding of and passion for their markets and customers; for their products and services. Gordon’s genius for example may have been partly due to his actuarial flair, but what really made Liberty successful in the early days was innovative life products competing against the giant and bloated mutual life assurers.
The fanatical followers of shareholder value also learn quickly that when that fails, it is back to the old rules of customer care. This is certainly the experience of Barclays which said after the LIBOR scandal that “banks need to revisit fundamentally the basis on which they operate and how they add value to society”. The challenge then is to have faith that “adding value to society” is the only valid and sure way of adding value for shareholders. The qualities that distinguish real entrepreneurs such as understanding their products, services and customers should also be the qualities that boards seek in executive appointments. In turn executives should be held accountable for and be rewarded according to “how they add value to society”.
You cannot replicate the entrepreneurial spirit. What drives those real heroes of business is unique to them and is something that economic laws simply cannot explain. Yet over hundreds of thousands of case studies and centuries of business history, the way they thought, behaved and acted has been very well documented. What is surprising is that instead of relying on their knowledge and experience to design a general template for a business model, we have relied on theorists, academics, accountants and consultants to do so. Some even receive a Nobel Prize for their efforts.
What we all have within us is the potential for adopting a key entrepreneurial behaviour – the ability to look beyond immediate and guaranteed self-gain and focus on making a meaningful difference to other’s lives. This is the attribute that should be sought in any executive. This is the behaviour that should be encouraged, nurtured, recognised and rewarded.
Obviously, the only way to do this is to marry qualitative expectations with quantitative criteria and, at the risk of sounding unbearably clichéd again; the ideal target is the value-added or wealth created measurement itself. It is the only one that reconciles accurately contribution to customers with wealth generated for oneself or the company. It should be the primary focal point for all involved, including being a common fate trigger for flexible reward systems.
Wealth created, as opposed to profit, has the potential of shaping company behaviour through two self-evident and important strategic objectives: maximum wealth creation and optimum wealth distribution: in other words creating maximum value for all of the contributors involved, and sharing it in such a way that it encourages continued contribution. Unpacking each component of the value added statement or contribution account creates a template for all of the elements of strategic planning. Prescribing measurable accountabilities in each of these components will in turn ensure the shift in behaviour that companies such as Barclays, and indeed society in general are trying to inspire. I will come back to these in a future article.
We have tried a different method for a number of decades and it has failed us. If the equation that customer service creates shareholder value is true, then what harm can there be in changing the numbers and accountability focus?
Not only does it have the potential of reconciling shareholder and customer interests, but it most likely will be to the benefit of both.