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Maximizing Shareholder Value = End of Customer Service

Maximizing Shareholder Value = End of Customer Service

In this post I’ll share my thoughts about how the modern day mantra of corporate America, “Maximizing Shareholder Value,” has ruined customer service. According to Lynn Stout, an expert in corporate law, American firms are disappearing at an alarming rate; the number of publically listed US firms has declined by about 40% in the last 15 years. Similarly, the average life span of a Fortune-500 company in the 1920’s was 75 years. Today, though, that life span has fallen to an alarming 15 years.

On a related note, we often hear the noble phrase – “creating or maximizing shareholder value,” used at the drop of a hat, by the bigwigs of giant corporations or their surrogates, when they have to defend the excessive compensation of these executives; or when they/the company is caught with their hand in the “cookie jar”; or accused of shenanigans to bolster their balance sheet. Except that, according to the expert mentioned above, “there is a mistaken argument that has gained credence in the last couple of decades that the purpose of corporations is to maximize shareholder value. The legal fact is: there is no legal duty either for the board of directors or the CEO and his top lieutenants to maximize shareholder value. It’s an ideological overlay that’s been taught to the business leaders and you won’t find it in the law itself”.

Additionally, as per this expert, “the shareholder itself is not a legal entity, it is a made up term. There is an artificial notion about the hypothetical entity we call the “shareholder” who singularly cares about the price of the equity of a single firm, that being doesn’t exit. Real shareholders are human beings, and they have lots of other interests above and beyond what happens to the share price of a single corporation.” 

“Shareholders are not homogeneous Platonic entities but diverse people who hold stock directly or through pension or mutual funds. Some plan to own their stock for short periods, and care only about today’s stock price. Others expect to hold their shares for decades, and worry about the company’s long-term future. Investors buying shares in new ventures want their companies to make ex ante commitments that attract the loyalty of customers and employees, but after those specific investments have been made, may hope to profit from exploiting those commitments ex post.”

“Some investors are highly diversified, and worry how the company’s actions will affect the value of their other investments and interests. Others are undiversified and unconcerned. Finally, many people are “pro-social,” meaning they are willing to sacrifice at least some profits to allow the company to act in an ethical and socially responsible fashion. Others care only about their own material returns.”

“Rather than recognize and account for differences in shareholders’ interests and values, shareholder value dogma simply privileges the interests of the most myopic, opportunistic, self-destructive, and psychopathically asocial subset of shareholders, the most notable of this group, of course, being the hedge funds, which take positions in companies and profit enormously by bumping up the stock price of that position over a two or three year period, and in the process harm it in the long run.”

Corporations of the past worked just fine following the ebb and flow of the financial markets, but when artificial instability is created by these profit takers, not only does it wreck havoc on individual corporations, it spreads chaos across various corporations in the market because of the deep interlinks the modern day corporations foster between each other. This phenomenon keeps public companies from doing well for either their investors or society as a whole.

Additionally, when the custodians of these publically listed corporations run their day-to-day business with a relentless focus on raising the stock price in order to “unlock shareholder value,” they set in motion a chain reaction that will not only lead them to lose their customers, but ultimately, their company, too. Here’s how.

 In addition to selling key assets, the fastest way corporations can bolster their balance sheet is to get rid of loyal, experienced but expensive employees, and squeeze the remaining workforce. This of course leads to a toxic work environment, and the innocent customers of the corporation end up at the receiving end of the wrath of the disgruntled employees when they seek product support or customer service.

Next, corporations keep their stock price high by cutting the R&D and capital improvement budgets. The result of cutting funds for the R&D will dry up the pipeline of existing product innovations or extensions or any new breakthrough products. This, of course, leads to customers bolting to other companies that offer the cutting-edge features they crave. The action to cut capital expenditure will result in delaying or replacing worn out and unsafe equipment. In addition to creating an unsafe work environment, outdated machinery will result in negative efficiencies, which in turn will lead to longer lead times and lesser output of the products. Nothing drives the customer faster into the arms of another business than not having access to buy a product when they want.

And finally, in a misguided attempt to “create shareholder value” by attracting the “best minds” to run the business, the boards of these corporations shower the CEO’s and their team of top management with stock options and expensive pay packages to “incentivize” them to deliver. The CEO and his team, of course, in short order, will drain the cash reserves to pay large dividends and repurchase company shares – there by increasing the value of the stock in the short run, but straddling the corporation with crushing debt which, ultimately, in the long run will lead the corporation down the path of bankruptcy and finally its demise. While they buy time to keep the corporation barely afloat, with the maneuver just mentioned, they lobby the regulators and congress to change the law so they can chase short-term profits speculating in high-risk derivatives.

So imagine then, if you are the customer and an individual shareholder of a company. Not only do you have to pay more for a product or service because the CEO of the company and his cronies need to be “incentivized” to perform, to top it off, you’ll lose money when your investment in that company will be worth almost nothing because the “Dynamic CEO”, who was brought in to “harness the shareholder value” ran the company into the ground.  Surprise!

Shifting the convresation to our space, both the big players in the online home referral space – Home Advisor and Angie’s List – are publically listed companies. The other bigger players in this space like Thumbtack and Porch are headed down the path to be publically listed.

Then you have us, housspros.com. We offer almost all the same services and significantly better tools for our customers than our bigger counterparts. And we still believe in offering a platform where small businesses that operate in the online home repair space can connect with home owners who seek those services in a transparent setting based on honesty and integrity. Oh, I forgot to mention, this company has a workforce of… drum roll, please, 1 employee, me. I’m the founder and operator of this site, so I don’t have to deal with the problem of “unlocking shareholder value,” because I’m not beholden to anyone, which frees me up to provide personalized customer service.

Image Source: politico.com; logok.org ; logos.wikia.com; wit.edu



Last Updated: 2017-10-26 19:59:19

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