If you were to name the ultimate definition of creating a business purpose, what would that be? According to Peter Drucker – creating a customer IS the actually the purpose of any business.

It may sound rather simple, like putting 2 and 2 together, but this non-complicated and seemingly transparent definition has lots of things underneath the surface.

Our mission here is to clarify whether maximizing shareholder value is the dumbest idea in the world or not.

We shall start with defining it first and then unveil piece by piece of this intriguing puzzle.

It’s of vital importance to be familiar with the differences in various types of market (real vs. expectations) and lead your business based on numerous researches, and well-arranged plans.

But of course, you must always make room for some unexpected situations. They are an integral and free to say inevitable part of every business.

We cannot offer you a secret instant formula HOW TO actually create your very own customer(s), but we can give you more than a useful guide, along with a multitude of directions, tips, and tricks that might be of help.

DEFINING THE SHAREHOLDER VALUE MAXIMIZATION

To begin with, it very important to be clear on WHAT does maximizing shareholder value (MSV) actually mean.

The idea is generally in correlation with free market capitalism, which promotes the belief that the main purpose of running a corporation is creating maximal value for the (potential) owners.

Though many would point out that this idea itself is not a controversial one, but it’s the mentality that can result in bad things.

When we say bad things, what we mean is overpaid executives, underpaid workers, various compensations, buying back shares and so on.

However, even though these things allegedly make the economy worse off, is this kind of criticism actually VALID?

By digging only a bit deeper, we actually reveal the reverse of the medal (which, by the way, is not bad at all!).

DIFFERENCE BETWEEN REAL AND EXPECTATION MARKET

Until we actually clarify whether the thing is indeed the dumbest idea or not, we shall focus a bit on a matter of markets.

Nowadays, CEOs strive to focus greater part of their attention on the expectations market, not on a real one (meaning delivering real services and products).

The real market is the world we know. It’s the reality which consists of machines and factories, where the actual products are created and distributed to be sold.

Furthermore, this process brings a certain profit and that’s how this circle of life rolls. This is the universe controlled by the executives, at least some part of it is.

On the other hand, the expectations market is a sort of imaginary land.

In this world, investors make assessments of the real market and based on that they predict, expect and project future situations.

It’s the investors’ consensus (both actual and potential), that shapes the company’s stock price.

Bottom line is that expectations are where the cash is, it’s as simple as that.

The slowest and the most demanding part of the procedure is the question of increasing the expectations from the existing point and hence improve real market performance.

Of course, it’s highly important to stress out that these actually vary and undergo constant changes.

Trends are in continuous alteration, and whichever type of market is it about, innovative solutions and approaches are an inevitable part of it.

Therefore, the definition itself may be the same, but how things look in reality is much different.

The rule that works one day may be completely outdated in a short period of time.

And that’s where day to day market research plays a significant role.

ENTERS CAPITALISM

You know that old trick when someone creates (an alleged) problem and offers the solution for that?

That’s exactly what finances professor Michael Jensen and Dean William Meckling offered regarding this subject.

They simply ignored the idea that creating customer is the single valid purpose of the company, the very idea represented by Peter Drucker.

What they pointed out as the major goal is the firm’s ability to maximize the return to shareholders.

This opinion actually became widely accepted and popular.

COUNTER EFFECTS OF CHANGE

Those who supported the new opinion hoped that their belief would focus executives on improving the real performance of their corporations and gradually increase the shareholder value as time goes by.

However, the opposite happened and the real performance fell down.

Shareholder value was supposed to be the logical result, not the strategy itself. Long term value could go in the upward direction only in case some short-term profits occurred.

The actual mess was so big, that it simply cried for new ideas, new solutions, and new approach. Some sort of shift was necessary, in the form of fundamental changes. The customer came as a logical choice.

Taking all the money into an account and the community of people involved, altering these “bad” habits was not an easy task to do.

Some serious rethinking was expected in order to make it easier for the new approach to become reality.

The key focus was the real market, which stood lots of positive chances to bring sustainability, provided things go as planned.

With motivation and true meaning, the real market is the only possible scenario that allows us to connect with our consumers and based on that create huge plans and work on their realization.

Such type of structure gives a bigger sense of authenticity to individuals and helps them discover the meaning in their job.

In this type of arrangement, they are not seen as robots, but as contributors who bring something positive for society.

It’s the idea of advancing humankind that pushed people to support this proactive and fact-based opinion.

THE NECESSITY OF LEGAL (AND OTHER) ADJUSTMENTS

However, the expectations market was not at all to be ignored as it also played more than an important role in forming the business strategy for the upcoming period. Ignoring it would be a disaster, so some adjustments were more than a logical step. First ones to take place were in the law sphere.

The companies and executives as well should be legally responsible for any attempt to handle predictions and expectations.

The point of such rule was to transform the executives into those in charge of giving true value. This came in form of the repeal of the 1995 Private Securities Litigation Reform Act.

The second of adjustments, which obliged to write down the real assets based on the share price in the expectations market.

To change that, elimination of regulation FASB 142 was simply a logical thing to do.

The third measure saw eliminating the use of stock-based compensation as an incentive with the idea of shifting focus on the real market.

Besides legal, some other alterations were necessary as well so to create adequate conditions for changes to take place.

Above all, one of the main aspects to focus on was restoring authenticity to executives. The executives lost their perspective on how to use their work and based on that contribute to society.

Besides, that addressing board governance was also among the suggested changes, as well as regulating expectations market players, above all hedge funds.

CUSTOMER VALUE VS SHAREHOLDER VALUE

Though one has to be aware that these two values are not to be mixed in terms of definition, still, in reality, they work together.

In a way, they depend on each other.

At least that’s how things should work, in some ideal scenario. But, for the sake of understanding how each of them works, here are the definitions.

Speaking of customer value, it is seen as a determining factor for giving an explanation of what business purpose actually is.

To translate this into a bit simpler words, whatever the consumer believes he/she is buying is what’s defines the value and leads to a prosperous business.

So, to make business work based on this logic, it was necessary not only to satisfy the target consumers but much more than that- to delight them!

Gigantic corporations such as Apple, Google, and Amazon are more than excellent examples of the real value of putting consumers in the center.

They show the ultimate, instant and customer-oriented value which led these brands straight to stars.

Of course, those companies would never have been where they are if people who share the same vision and want to fulfill the same mission are gathered in the same community.

Being innovative is a must-have feature if one was serious about surviving on the market and finding their way to the hearts of consumers.

As for the shareholder value, this is seen as a social responsibility with the sole purpose of increasing the profit which will come as a result of needed and planned activities.

Such an approach was a “godsend” for those who were constantly occupied with multitasking on several fields (firm, customers, employees). Instead, they only had to be in charge of making money for the shareholders, that’s all.

We can freely say that such approach sounded rather seductive for those whose thoughts involved nothing else but pure profit.

With this being a single occupation for their minds, it was easy for them to believe that becoming rich during the process is expected, in a way. You can call this a happy side-effect, as indeed sounds that way.

Take Carl Icahn, one of the biggest corporate raiders. He was more than delighted with this approach and became the enforcer. This led to entrepreneurial behavior of CEOs, but in their own cause, not in terms of organization.

However, this approach, compared to the consumer-oriented one, turned out to have plenty of bad side-effects.

This inspired numerous not-so-smart business decisions, reflected in silly takeovers, high leverage, the craze for share buy-backs and whatnot.

Thought the entire burden of such unreasonable behavior is not to be laid on definitions exclusively, still, it’s more than obvious that there were plenty of misinterpretations.

However, the problem went far beyond just not clearly defining the shareholder value, it actually resulted in numerous significant profit declines.

For some companies, the damage was so high that they had to stop operating and were actually completely destroyed.

There was a huge gap, a disconnection between productivity and compensation. Since the ultimate result was discouraged workforce, it was more than obvious that some changes need to take place.

Shareholder Value

Source: forbes.com

Actually, what worked even better is the thing we mentioned at the very beginning of this section-balance.

The two values are intertwined and they can only bring benefits if one takes both into consideration and finds things that are actually applicable to a certain market.

Of course, count this one of “easier said than done” situation, but for the beginning- there were some implications what actually might be a good formula for success.

The first thing to do, to make room for some changes to occur was denouncing the cult of shareholder value and pointing out that this theory itself is wrong.

It’s wrong in multiple key aspects such as financial, social, economic, and moral as well.

Numerous important experts were united in the opinion that this theory itself needed to be overthrown otherwise it could make more damages.

One of the suggestions was to pay more attention to the importance of the investments in innovations, and skilled workforce.

In addition to this, being clear of what is the result and what is the value or in other words starting point and the goal is also important.

Comparing things with the pursuit of happiness, you will certainly agree that direct pursuit is not the way to go.

The single-minded approach is not a solution to make some ground-breaking changes and certainly promises nothing. The same goes for business, don’t chase the profit itself, it’s a guaranteed road to nowhere.

Strive to achieve balance (once again!) and sustainability, fulfill smaller goals and you will prosper gradually and securely. That’s exactly how these two values should and can work together.

HOW MANY VALUES ARE THERE ACTUALLY?

Okay, we defined two major ones, but the truth is there are many more.

Yeah we know, you head is about to explode, as you probably still digest the two we already explained.

But again, things are not so complicated as they may seem at first sight.

The truth is that all those other values are actually some forms of these two-customer and shareholder.

Those varieties come based on the industry, the branch, the size of the company, the number of employees, and so on.

So, the whole point is that this deeper exploring reveals us layers beneath the surface.

Those layers make smaller differences that may give the impression the number of values is countless. It is, but yours is to focus only on those that are in relation to your business.

To put it simply, if your company deals with clothes and accessories for pets, you won’t have to bother brainstorming about what are the values that those companies which are manufacturing equipment for woodcarvers should take into consideration.

We sincerely hope that our silly example entertained you a bit and relaxed you above all. The point is that, no matter how many values are there actually, yours is to stay focused on the ones that matter to your company.

No one says you need to do it by yourself, not at all.

That’s where the power of team steps in and saves the day. Try gathering a group of people that will have the same ideas and plans, and use each other’s skills and knowledge to give an overall contribution.

As you could see from the previously explained parts, making an exact projection is impossible, and no one should waste the energy and resources on that.

On the other hand, we are not telling that you should lead the business just like that, with no plan at all. But try to focus on smaller missions and see what you get when they are completed.

Such an approach will give you a nice insight and valuable feedback on where you stand, and which sections are good to go, which ones require improvement.

Just make sure you stay open-minded and accept the ideas by people who are experts in analyzing consumers and markets.

GIVE THEM WHAT THEY WANT

Okay, we are absolutely positive that these two questions are screaming inside your head in this very moment:

  1. Who the heck are THEM?
  2. How in the world could I know what THEY want?

It’s simpler than you can imagine. When it comes to them, there are actually three groups of people we aim at here. Those are customers, employees, and investors.

Each of them has some individual vision and you are the one to be knowledgeable about the possibilities.

Which leads us to the second question – where you will need to find out what they want and give them that. Is it possible, after all?

Of course, all you have to do is put yourself in their shoes and you will be aware what is it that they want.

What each of them has in common is the desire to get some value from you and yours is to give them that. So, leave all the short-term benefits aside (that’s the dumb part) and try to find out what each of them strives for.

Take customers first, and what logically comes to your mind is that they are looking for a product or service that will bring them benefits, at the same time being of top-quality.

Provide your customers with that!

As for the employees, they also have their own visions (which are, expectedly and for the sake of convenience, the same ones you have), so see how to help them fulfill those.

The third category, investors, also have their own ideas and plans, and they mainly look for something that will bring them profit. Make sure your business looks attractive in terms of that.

Even though it may seem that you are supposed to be some good fairy that has to fulfill someone’s wishes and desires, don’t let the initial impression full you.

It’s the short-term benefits we mentioned, they are the ones that can make you think there’s nothing that will bring any benefits for you.

If you take all three groups and compare their desires, you will logically conclude that all of them are striving for the same goal- ultimate quality!

So, top performance, wide base of consumers, plenty of profits, correct me if I’m wrong- but isn’t that EXACTLY what YOU are looking for as well?

That’s the main catch with understanding and balancing different opinions and uniting them in the same goal. Again, it’s easy to say such things, when it comes to actually doing so, there are many obstacles on the way.

There will be situations where you will certainly have the impression that you are losing yourself and your own ideas, be strong. Those events should encourage you to push even harder and don’t give up.

Use them as a valuable experience, which indeed is.

When the storm ends, you will have lots of useful knowledge and experience, and you will grow as a person.

This goes not only for the business aspect of your life but for private as well.

FINAL THOUGHTS

All in all, you can see that giving precise definitions in this field susceptible to constant changes is not an easy thing at all.

Imagine this to be a truly living creature that has its own life, independent of our ideas and projections on how things should actually work.

Therefore, using trial and error method could be a smart option in this case.

Some things are simply impossible to predict and yet some are so obvious that they require no calculations at all.

Let’s say a balance is also among the most important components that can make any idea and plan work well.

We also mentioned following trends as another essential thing for success.

People and their tastes and opinions are easily changeable, and any market needs to keep tracks on what’s going on.

For that reason, a dedicated team of various experts and professionals is needed to listen and investigate each sector closely.

This is not a thing that can be handled by a single person exclusively, not at all.

Simply one cannot have such strength and diversity of professional knowledge and skills to make absolutely everything work well.

Gathering a team of people that is ready to rely on each other and work united will lead the company to success, that above all, regardless of what definitions say.

After all, whether maximizing the shareholder value is the dumbest idea in the world or not is hard to tell, and above all impossible to define one-sidedly.

But, do we have to, after all? For some, it WILL be the dumbest, while the others will see it as the wisest, as long as all sides are motivated and satisfied, who cares what the definitions say?

The Dumbest Idea in the World: Maximizing Shareholder Value

Share your thoughts and experience

E-mail is already registered on the site. Please use the Login form or enter another.

You entered an incorrect username or password

Sorry, you must be logged in to post a comment.