For many years now, corporate leaders have taken the position that shareholder interests come before all other interests – employees, customers, communities. But is this position sustainable or even good business strategy? America’s top business leaders have decided it’s not and are endorsing what they call ‘stakeholder capitalism’.
Actively Knowledge Question:
In your approach to business, whose interests come first, and does that make your business more successful?
In an article by Rick Wartzman appearing in Fast Company, Jamie Dimon, the Chairman and CEO of JP Morgan Chase and Chairman of Business Roundtable, is reported as calling for a change to the principle that shareholders and their interests must always come first.
Business Roundtable is a USA lobbying group composed of its nation’s leading CEOs. Its members have announced, we ‘share a fundamental commitment to all of our stakeholders, each of whom is essential while pledging to deliver value to all of them for the future success our companies, our communities and our country’. They describe this change in focus as ‘stakeholder capitalism’.
The historical ‘shareholder-first posture’ has in recent years come under increasing attack from various critics for stoking short-termism, indiscriminate cost-cutting and income inequality. The shift to ‘stakeholder capitalism’ is described as a ‘return to common sense’.
But there is a fallacy that sits behind these considerations of shareholder and stakeholder interests, and that fallacy is profit. While profit-first remains a motive and purpose in business, there will always be a disconnect and conflicting interests.
The call for change should not be about balancing interests; it’s should be about the purpose for which a business exists. Get that right, and all else will follow.
Quoting from ‘Compete – An Entirely New Level Of Performance’:
‘The greatest fallacy of our time is that businesses exist to profit. Make profit your motive, and you will spend every day solving problems, fighting fires and listening to everyone else’s complaints.
But understand how to make your business competitively fit, and profit will be a natural outcome, and all the problems that a ‘profit-first’ motive creates will disappear.
Businesses are made to compete. Understand what that means, make that the motive of your business and your business will never be the same.’
It’s About Performance Not Interests
Placing ‘shareholders first’ is a language which underpins the principle that businesses exist to profit – better expressed as profiteer.
But profit is an outcome and focusing on that outcome and seeking to maximise it, quarter on quarter, will, in fact, lead to its decline – it is not a sustainable position. The focus must be on the catalysts not the outcome.
Businesses exist to compete. To compete around the value, they deliver to their customers. And if they do this well, profit will be a natural outcome. But if profit-first becomes the focus then self-interest, politics and short-termism will be seeded and take over.
Purpose is the core around which all interests should agree, and that purpose is to compete to the business’s greatest ability. To compete in meeting the needs of its customers better than anyone else. Purpose becomes an expression of the need a business exists to meet – a customer need.
And through competing to its greatest ability, and compounding on that ability, all interests are best served.
What Does It Take To Compete?
Today businesses compete around customer value. That is the value their customers believe they gain from buying from them. A business can seek to define that value, but ultimately, it is how customers perceive value that will be the determining attribute — the value delivered in meeting their needs.
The competitive strength of your business is the sum of the talent and effort applied by all the people who work within and with your business. That sum is determined by the strength of the competitive engine in your business, which sets the floor and ceiling to the success of your business.
There exists within every business, whether recognised or not, a competitive engine that determines whether that business performs well or continuously trips over its own feet.
It is operating every moment of every day and influencing every aspect of a business’s performance — your every action impacts how this engine runs, again, whether you recognise it or not. The engine is formed the moment you begin to think about starting a business and continues for its entire lifespan.
To improve the performance of a business, focus on its competitive engine.
If business leaders are serious about ‘our companies, our communities, our country’ then the path lies not in seeking to balance what are seen as competing interests. But rather anchoring their businesses in the purpose of meeting customer needs, and competing to deliver customer value to the greatest of their ability.
This action will stoke the symbiotic relationship that exists between businesses and communities and from which all interests will benefit.
An entirely new level of performance.
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All the best in the success of your business,