Short-Term is Short-Sighted
We had a phone conversation with Miguel Padro at The Aspen Institute on the questionable pursuit of “shareholder value” as a central business strategy. He agreed that it’s become a destructive obsession with public companies, thanks to Wall Street’s avidity for short-term profits. The conversation ranged fairly widely but we tended to agree that American business needs to expand its vision to take-in a variety of stakeholders—employees, communities, customers, and the environment—as a way of regaining the potential for long-term, sustainable growth. Here are excerpts of our conversation:
What do you produce, in this area, at the Aspen Institute?
Technically we’re a policy program here, but most of work centers on bringing business leaders, investors, scholars, and other actors in society together in dialogue around big questions at the intersection of business and society.
What sort of work do you do, exactly?
We’ve done some pretty well received statements like the Aspen Principles on Long Term Value Creation and Our “Overcoming-Short-termism” policy statement following the 2008 financial crisis. For 10 years we produced the Beyond Grey Pinstripes business school ranking. But most of our work flies under-the-radar in the form of roundtables and dialogues among fairly influential people on the critical issues at the intersection of business and society.
Longer-term thinking is what’s needed right now, isn’t it?
Thinking long-term is incredibly important but in and of itself it may not get us where we need to go. Just thinking long-term may not get to solutions to really big social problems which are global in nature. Another big issue for us is the narrative that we see especially around public companies-that they exist solely to maximize profits for their shareholders. We think this narrative needs to change in order for us to get the business leadership necessary to grapple with modern problems.
“Unlocking shareholder value” by externalizing costs on to society is not creating value, it’s just redistributing gains. Even if you are creating long-term shareholder value you could still be creating damage for other parties that could ultimately be detrimental to society and perhaps the long-term interest of the company or capitalism itself.
Corporations were purposely structured this way weren’t they? To encourage productive risk?
It’s by design that neither shareholders nor corporate management legally own the company and that they are protected by limited liability. The advantage is that it helps amass more capital, creates more liquidity and encourages more risk-taking. But clearly there are risks and tradeoffs in that arrangement that need to be calibrated properly if business and investment activity are to create real and lasting value for society. If the arrangement is used to simply capture a larger share of the gains of increased productivity for investors or companies, while reducing the share for workers, or by degrading the environment to such an extent that we are essentially stealing from future generations, then the system will cannibalize itself and lose its legitimacy.
Banking is where this is especially apparent.
The banking industry is the perfect example. The big banks that collapsed in 2008 were not partnerships, they were structured as corporations. When individual partners were personally responsible for the well-being of the bank or a company, they were much more risk-averse. But when you get to play with other people’s money while being protected from the full downsides of risk by limited liability, taking on more risk becomes a fundamental component to your business model. When things go wrong, someone else will be holding the bag, and when things are going well, you get to reap huge rewards.
Can you think of companies that have a more inclusive vision of their responsibility than simply shareholder value?
Unilever is a great example since Paul Polman became CEO. One of first things he did, he told investors that Unilever was not going to be providing quarterly earnings forecasts because they were inconsistent with running the company with a long-term focus. That caused some controversy but he had a real strategy for the business and their share performance since has been quite strong. The investors that weren’t interested in his strategy dropped their shares. He laid out longer-term strategy based on sustainability (there’s a strong business case there, they buy a lot of agricultural products and climate change is a threat to their business, if you can’t harvest tea for Nestea, obviously that’s bad for business). He isn’t anti-shareholder, he just re-prioritized and doing what was best for the long-term competitiveness of the company became paramount. Their shareholder is doing well, but that isn’t his main priority.
Do you know companies that share the benefits of good outcomes with its employees?
Costco is one of those really interesting ones. Relative to other folks in the retail industry, they pay extremely well and offer many levels of benefits. They have far greater sales per square foot and sales per employee. Their employees stay longer, know how to do their jobs better and end up performing better.
This is only a small portion of what we talked about with Miguel, and on all the essentials we agreed. The future demands we business people must re-evaluate our ways. Good people are finding the path forward. More will need to follow. We must summon the will to overcome our greed and selfishness for a stronger common good. A better future awaits our wisdom and courage.