Myth 1. The corporation exists for its stakeholders
When one examines the mission statement of many of the world's leading corporations, one will inevitably find references to the satisfaction of stakeholder objectives. These references acknowledge the owners of the corporation, but more often than not, also identify other stakeholders such as employees, the community, the government, suppliers, and of course, the ubiquitous customer, among a range of stakeholder communities.
When one then examines the operating strategies employed by these corporations, one regularly finds that investment and operational decisions are made which attempt to maximise stakeholder satisfaction: ie. they attempt to maximise the 'benefits' provided to each of the corporation's stakeholder constituents.
Philosophically, it is hard to argue against maximising value to stakeholders. The reality however, is that decisions to maximise stakeholder value never occur in an implications vacuum. There are always implications and most often costs, associated with keeping stakeholders happy. And most frequently, one finds that to keep one set of stakeholders happy is inevitably at the expense of other stakeholders. Who then gets primacy over the organisation's efforts in satisfying its stakeholders? If one is both honest and rigorous, one must recognise that no organisation exists to satisfy its non-owner stakeholders, per se. Rather, organisations must satisfy their non-owner stakeholders in order that the owners' objectives can be satisfied.
Business is all about delivering the best possible outcome to the owners of the organisation, whatever those desired owner outcomes may be. A rational owner will not invest in a corporation because of the stakeholders or in order to satisfy them. However, owners know that in order for their objectives to be fulfilled, stakeholders must be 'appeased'. Generally speaking, and from an owner's perspective, non-owner stakeholder satisfaction is about delivering the 'lowest level of satisfaction' that the organisation, management and owners can 'get away with' while still delivering the over-riding owner objectives. That does not imply that owners 'abuse' non-owner stakeholders, but rather that any effort and resource applied to non-owner stakeholder satisfaction over the 'minimum' needed to deliver owner objectives may detract from their own objectives.
Although this may appear apocryphal, business is not about delighting stakeholders (customers or others) per se, but about satisfying owners. Certainly, it is sometimes necessary to delight the stakeholders in order to satisfy those owners. Owners generally recognise however, that 'unbridled' owner satisfaction is not possible in developed Western societies, and as such, it is widely accepted that owners must 'invest' in non-owner stakeholder satisfaction in order for their own objectives to be satisfied.
Organisations which 'elevate' non-owner stakeholders to primacy in their raison d'etre, risk making operational, management, strategic and investment decisions which maximise stakeholder objectives at the expense of owner objectives. Non-owner stakeholders are, from an organisational perspective, enablers. Maximising (rather than optimising) enablers risks significant organisational misalignment.
Responsible management is all about 'optimising' non-owner stakeholder objectives in the context of, and in order to fulfil (and maximise where possible), owner objectives. It is not about treating owners and other stakeholders as equal (as is being mooted by certain vocal community interest groups). No owner will remain an owner if non-owner stakeholders secure their own objectives in the longer term at the expense of owners.
The relationship between a rational organisation and its stakeholders, (proposed by the writer), can be shown as a three tier hierarchy as follows:
Level 3: Deliver to owners their minimum objectives
Level 2: Deliver to non-owner stakeholders the minimum level of their desired objectives which will enable Level 3 to occur.
Level 1: Maximise owner objectives.
Chart 1: Three Tier Hierarchy
Any attempt to deliver non-owner stakeholder objectives before owners have achieved their objectives on a long-term basis, will result in owner dissatisfaction and sell-down or sell-off of equities. Such a situation is unstable and is caused by the lack of congruence between the risk and investment incurred by owners for their desired outcomes and their inability to achieve those outcomes.
As discussed before, non-owner stakeholders are a means by which the organisation, and its owners, achieve their objectives. For each stakeholder, there is a level of 'satisfaction' which will be sufficiently enticing for that non-owner stakeholder to accept, and which will allow the organisation to continue its corporate striving. This level of 'satisfaction' is the minimum level acceptable to that stakeholder/s. This is what negotiation is all about irrespective of whether the negotiating party is the Government, the unions, suppliers, the community or any other of a myriad of potential stakeholders. The corporation offers the least that it can get away with, while the other party asks for what it would like to receive. Most commonly, both compromise but the stakeholder allows continuance to the organisation while the organisation has secured continuance.
Once the non-owner stakeholders have been appeased, then the organisation should strive to maximise owner objectives. The concept of 'maximisation' is an interesting one since it is limitless and infinite. By virtue of its limitless nature, it can never be fully satisfied. When is there enough profit, or growth, or dividend, etc? When is there no risk?
The limitless nature of the third tier means that nothing meaningful can exist after it. In other words, inserting a fourth tier of, say, 'maximise non-owner stakeholder objectives' becomes meaningless and redundant since the third tier can never be satisfied.
For organisations to chase the maximisation of stakeholder 'satisfaction' is certainly a worthwhile activity from the non-shareholders' perspectives. From the corporation's perspective, it is a warrant to invest time and resources when there is no or little possibility of payoff to that organisation and its owners.
Myth 2. All corporations exist to produce the same outcome
From interviews with Top-100 corporation chairmen, CEOs and managers, it is surprising how many boards and management believe that owners are an homogeneous group who all share common objectives. And it is the belief in such common objectives that causes organisations to chase the mythical 'maximisation of shareholder value or wealth' often at the expense of what shareholders actually want.
The fallacy of this belief in a unitary and generic objective can be illustrated on two levels. Firstly, if 'shareholder value' or 'wealth' is represented by, say, a corporation's net assets or dividend, and if all shareholders only sought to maximise either or both of these criteria, then even in an imperfect market, all shareholders would eventually accumulate and gravitate to those few corporations which had the highest dividend and/or net assets. Even a cursory examination of listed stock performances will confirm that this does not occur. Clearly other factors and issues impact upon shareholders which affect their investment/ownership decisions.
Secondly, the research undertaken here supports the view that, based on the way shareholders behave, it is clearly erroneous to believe that all shareholders have the same generic objectives, and it is furthermore erroneous to believe that any one shareholder will have the same set of objectives across all of his/her investments.
Myth 3. A corporation's mission statement is the principal reason for its existence.
In the corporate context, most observers of, and participants in, business would agree that the raison d'etre of corporations (i.e. where a corporation 'starts' and from where it gets its legitimacy) is identified within its mission statement. And it is from this mission statement that organisations develop an enabling vision and extract from it a set of enabling objectives and strategies that will deliver this vision and fulfil its mission.
Unfortunately this process is flawed since in most organisations the process of developing its mission is undertaken entirely by management. And it is management who, without the necessary metrics to define their owners' objectives, make subjective assessments as to those objectives, and incorporate them into the organisation's strategies and plans. In other words, managers decide what it is that their organisation will do and what their organisation will deliver.
Since shareholder objectives vary significantly, management's subjective assessments are therefore often wrong, inexact or inappropriate. The corporation's mission then, is a statement of organisational deliverables which, because it has been subjectively derived, often diminishes the probability for owner satisfaction.
The question therefore is whether an organisation's mission statement is the fundamental reason why an organisation exists. Strictly speaking, the mission statement does provide the rationale for an organisation's existence and the context for its operational and investment strategies.
However, the issue for those organisations where management subjectively develops the mission statement, is that as long as a mission statement fails to address the satisfaction of owner objectives in tangible, quantifiable and measurable ways, then the mission statement is not accurately defining the corporation's purpose. The mission statement will provide the necessary direction for the corporation as long as it is not a statement of subjective or uninformed management, but is an accurate representation of the outcomes desired by owners.
Myth 4. The corporation should be in charge of its own destiny.
Modern business is at the crossroads. On one hand, boards and management argue that shareholders have generic objectives, are not fully informed, have conflicting interests and suffer from a range of other attributes all of which contribute to their 'inappropriateness' for determining the destiny of the organisation in which they hold ownership. This philosophy holds that the board and management are better placed to determine the destiny of the organisation and determine the outcomes that the corporation will deliver. Shareholders who don't like the way the company is run (so this philosophy goes) can quit the registry and take up ownership elsewhere.
The contrary view held by shareholders, regulators, and certain key associations, maintains that the organisation exists solely to deliver shareholder satisfaction. As such, the organisation is the servant of the owners, and all that the organisation does must in one way or another, enable those shareholder objectives to be fulfilled or enhanced.
The problem with boards and management who are beholden to no one except themselves is that they have no reference point against which decisions and strategies can be assessed and determined. An organisation whose principal accountability is to itself is not compelled to maximise owner benefit or even to avoid owner harm if it believes that such a course 'is not in the best interests of the corporation'.
The reality of course is, that in some instances, the best interests of the owners are served by the organisation ceasing to exist (sell, merge, divest, etc). Some of the defensive corporate plays recently seen in the US, and largely engineered by boards and management, were no more than attempts to keep the organisation intact, demonstrably for board and management purposes rather than in the best interest of the owners.
Corporations which act in other than the best interests of owners represent diminished probability of satisfaction and imply higher risk to their owners. Investors denied access and input will feel vulnerable to the character and machinations of management. They will tend toward other forms of investment where probability of outcome is stronger and where the investor is offered greater accountability from the chosen investment vehicle and less susceptibility to the foibles of individuals.
Myth 5. Each investor has a fixed objective for all his/her investments
The research here tests the hypothesis that not only do different shareholders have different objectives, but the same shareholder's objectives vary among different investment targets.
It is possible, but not particularly useful, to talk of a set of generic objectives shared by the community of shareholders. Such objectives will necessarily be in general and generic terms such as 'maximisation of wealth' or 'benefit'. The difficulty comes from an attempt to define such concepts as wealth and benefit. It means different things to different investors. Some may interpret wealth enhancement as asset growth, while others may interpret it as risk minimisation. 'Benefit' may mean dividend to one investor while it may mean share price growth to another.
The error of many boards and management is that they argue from the general to the particular. If they believe that all shareholders want, say, dividend maximisation, then they argue that their shareholders want dividend maximisation. The issue is that corporate strategies to minimise risk or grow assets are different and have fundamental impacts on what a corporation does and how it does it.
Compounded upon this error is the assumption that each shareholder will have consistent objectives across all investments. Institutional investors weight certain attributes such as growth, industry sector, risk, etc. and choose their investment targets on the basis of those weightings (among other criteria). They may invest in a certain industry sector in order to minimise risk or to secure the benefits from fast growth. Their expectations (and therefore objectives) from such investment decisions will vary according to the character and attributes of each target and what that target represents for the investor in the investor's context. A typical investor will therefore have a range of objectives within his/her investment portfolio.
How then, can a corporation claim to be pursuing shareholder wealth or benefit if it does not know in real and quantifiable terms what it is that its shareholders regard as 'wealth' and 'benefit' as it relates to the shareholder's objectives in that particular corporation?
Without clear and quantified owner objectives, management will continue to fire its strategies at shadows rather than at substance and continue to wonder why owners are unhappy. Corporate investments and resources will continue to be applied in directions that are presumed to be appropriate without ratification in measured terms of the correctness of those actions. And those actions will continue to detract from the maximisation of owner satisfaction as long as 'owner satisfaction' remains undefined and unquantified.
Myth 6. Organisations know what their shareholders and owners want
Intuitively one would expect that small organisations with few shareholders are more 'in-touch' with their owners' objectives. One would further expect that the larger the organisation and the greater the number of shareholders, then the less able the organisation is to keep 'in-touch' with all shareholder objectives. The writer's experience and reality show that companies, irrespective of size, are not immune from the lack of congruence between owner objectives and corporate actions.
The majority of companies are small businesses who have one or a small number of people carrying out the roles of managers, directors and owners simultaneously. One would expect that since one person carries out all three roles then 'knowledge' would be 'perfect' and congruence would be maximised. Many small businesses have difficulty in ensuring congruence because they are too involved in operational management. It is easier to change the objective than to change the operational, marketing or business realities that threaten congruence. In other words, it is easier to 'settle for less' than it is to make the 'dream happen'.
Generally boards and management of large corporations maintain that since they have many shareholders with varying objectives and they can't effectively ask shareholders what they want; the board has the responsibility to define the core deliverables of the organisation. These deliverables are intended to keep shareholders satisfied. For reasons identified earlier, such presumptions by boards are often misplaced because they are subjectively derived. Examination of corporate practice overwhelmingly supports the contention that corporations do not know what all their owners want in any measurable way apart from indications gleaned from 'churn' on their share registries and selective discussions with institutional investors.
In the case of medium to large companies where management may be divorced from directorship and/or ownership, it is common to find organisations intent on striving to maximise generic outcomes (such as EVA, ROI, RONA, etc.) rather than to satisfy specific owner objectives other than those shareholder objectives that they have subjectively determined. Certainly, a large part of this lack of congruence is caused by management failing to ask owners what they want; but equally at fault, are owners who have not made the effort of telling management in realistic and measurable terms what it is that they desire from their involvement in the company.
The author's experience supports the view that very few companies, irrespective of size, really know what their owners want. In the case of small business, the owner/manager has rarely defined what it is that is wanted so that it becomes the principal driver of business performance.
Myth 7. Owners and managers of corporations share common objectives and perspectives
Until recently, it has been a generality in business that owners and managers look at the corporation 'through the same eyes' and that the same 'appropriate action' would be chosen by either group. Evidence of research has identified the lack of congruence between owners and managers.
Management may elect, say, a Total Quality Management (TQM) strategy because based on their knowledge of their market, quality is the differentiator between the customer opting or not opting to purchase the company's product.
From a corporate perspective this seems like a reasonable decision path. However, TQM is expensive to implement and takes time for its benefits to come to fruition. An investment in TQM is necessarily borne by shareholders, at least until its benefits 'kick-in'. If all shareholders of that company have longer-term objectives, then a TQM strategy may enhance those objectives. But what if those shareholders have a short term cash dividend objective? Clearly, a TQM strategy would be directly to the disadvantage of their objectives, irrespective of what management determine is 'good for the company'.
Different perspectives of owners and management as to what is an appropriate strategy or policy (let alone outcome) cause tension between the two groups. This tension is also fuelled by differing motivations of the two which, when applied to the formulation of corporate destiny, has the potential to create great disharmony or dissatisfaction between them.
It can be reasonably conjectured that the principal reason that owners invest in a corporation is to fulfil their own specific objectives, which most generally relate to wealth creation and maintenance. Similarly, it can be reasonably conjectured that the principal reason that managers are involved in a corporation (where they have little or no equity) is because management is the manager's profession. The issues and outcomes that enhance or detract from a manager's professional standing and well-being are not the same issues or outcomes that create or maintain wealth.
As an example, the way that managers are perceived as effective or 'good' is generally in comparison with their peers. Therefore, managers will understandably strive to perform well on measures that help that assessment, such as industry or sector ratios. A manager may be considered as the most effective in the industry or sector if, say, his/her ROI is the highest in the sector. But what if in the search for 'excellence' the high ROI is achieved through high gearing and high risk? And what if shareholders are risk-averse and require low gearing? Certainly, this manager may be rated as a superior manager by virtue of his/her ability to deliver a high ROI; but the manager would be rated poorly against his/her ability to deliver owner objectives.
The evidence examined earlier supports the contention that managers and owners do not share common objectives and perspectives. That their objectives and perspectives differ, is normal and to be expected. However, not understanding that they differ is both naive and potentially dangerous for shareholders and their expectation for certain outcomes.
Myth 8. There are 'Strategic Principles' that apply to all corporations
We frequently see companies adopt one or more of a range of strategic 'principles' which guide much of what they do. 'Principles' such as Focus, Differentiation, Time is of the Essence, Concentration of Forces, Building on Strengths, Matching Aims with Resources, Limiting Risk, Shareholders wanting Earnings, Customer Service, Best Practice, Sustained Competitive Advantage, Total Quality Management, and the list goes on.
The use of these 'principles' are not however applicable in every instance or in every context despite what many popular authors who promote their own 'hobby horse' would like us to believe.
All of these 'principles' are only enablers which assist a corporation to achieve a specific outcome defined by its owners' objectives. The choice of an enabler should only be assessed against its ability to enhance those objectives, and not because it is used by other companies (competitors or not) or because it is the 'flavour of the moment'.
Each of these 'principles' have serious implications and impacts on core objectives, and wrongly chosen, will impede an organisation's ability to satisfy them. The following are examples of legitimate alternatives to some commonly used strategic 'principles'. Each is appropriate in its own context and inappropriate out of that context.
Focus |
versus |
Diversification |
Differentiation |
versus |
A 'me-too' strategy |
Time is of the essence |
versus |
At the right time |
Concentrate your forces |
versus |
Spread your risk |
Build on your strengths |
versus |
Build the strengths needed to fulfil your aims |
Match aims with resources |
versus |
Create the resources to satisfy aims |
Limit risk |
versus |
Accept higher risk for higher reward |
Create a unified corporate culture |
versus |
Internal competition and intrapreneurship |
Shareholders want earnings |
versus |
Asset growth and security |
Quality organisation |
versus |
Give the market what it wants |
Best Practice |
versus |
Be as good as you need to be, to satisfy aims |
Sustained competitive advantage |
versus |
Commercial opportunism |
Chart 2: Strategic Alternatives
Choosing the appropriate strategy is dependent on the context, and what it is that the strategy is required to accomplish. The accomplishment in turn is dependent on the corporate objectives which are themselves dependent on owner objectives. In assessing strategies therefore, one must necessarily assess the contribution that the strategy makes toward the organisation's fundamental objectives. It is not possible to determine the appropriateness of a strategy on a generic level and outside of its organisational and owner context.
Myth 9. Maximising customer service is the path to success
Many organisations claim that they exist 'to satisfy their customers', or to 'maximise customer satisfaction', or some other variation on this theme. When one examines their operations, one often finds both an ethos and an operational environment which is trying to do just that - maximise customer satisfaction or value.
If we take this concept to its logical conclusion - what would an organisation which is providing 'maximum customer satisfaction' actually be doing? Even if it is providing good service at a good price and thereby satisfying customers, it is inevitable that competitor reaction will find a way to provide slightly better service or product at a slightly better price. When we extend this logic to its extreme, then 'maximum' customer service must, by definition, be the provision of exceptional service at zero price to the customer - an obvious inanity.
The provision of customer service (and other management concepts and techniques) must be applied in the context of owner-defined objectives. It is only against such a yard-stick that management can determine how much investment into customer satisfaction 'is enough' to generate the outcomes desired. Customer service, as noble and important as it may be, is no more than an enabler through which the organisation achieves its ends. Thomas (1998) noted that 'what investors valued least is, surprisingly, the strength of customer service units and the rate of customer complaints'.
Customer service is however, the enabler or channel that will deliver the benefit or outcome sought by owners. Doing it well may be important and doing it better than the competitor may also be important, but only when it serves owner objectives and is used as an enabler and not as the reason for existence.
Owners are therefore primarily concerned with outcomes, while boards and management are understandably pre-occupied with means. It is not surprising then that management 'elevates' the enabler to primal importance because that is the way management sees the world and it is the element that is largely controllable by them.
The writer's experience suggests that in the majority of corporations, management defines the outcomes that will be delivered by the corporation, and management's definition of these outcomes is, more often than not, a product of what is achievable in the marketplace rather than of what owners want. Since a key determinant of what is achievable in the marketplace is dependent on customer service (among other criteria) it is not at all surprising to observe corporations who pursue it with almost religious zeal and often at the expense of higher-level objectives.
Elevating enablers to primacy is dangerous because most organisations attempt to maximise core objectives. For example, companies try to maximise profit rather than ever say 'this is enough profit'. But since customer service has a cost and is to some extent 'limitless' all efforts to enhance customer service will carry significant financial implications for most corporations. Often corporations strive for continual enhancement of it, even when the marginal benefit has long turned negative - a milestone of which most companies are oblivious.
It is important for corporations to recognise that customer service is 'only' an enabler, and they must limit endless enhancements to the point of Just Noticeable Difference (JND). That is, the point where additional customer service is exceeded by benefits created by the provision of customer service. Chronic enhancement of customer service is a common ailment of corporations who see their reason for existence as the provision of service, rather than the benefit that the service provides to the owners of the corporation.
Myth 10. Structural change is the key to improvement
It is alarmingly to observe the frequency with which organisations reach for the 'structure button' whenever they need to wring some improvement from their organisations. It is reasonably understandable why this occurs. This is because structure is arguably the most pervasive, visible and responsive element of the organisation and when required to 'do something', a CEO will often change the structure so that he/she is seen as having done something - irrespective of whether the change brought about will create the impact desired.
Certainly structure can aid or hinder certain outcomes. In fact, the wrong structure can have disastrous ramifications on people, process and outcomes. However, structure is 'no more' than an enabler and should be treated as such. It should never be the first point of call when seeking improvement, as structure is a necessary outcome of 'higher level' decisions made for the organisation. The relationship between these higher level decisions has been discussed earlier.
Myth 11. All companies should strive for sustained competitive advantage
This, like other strategies, tools and techniques is dangerous if adopted unquestioningly. Objectives such as the following appear in the mission statements of many of the world's major corporations: 'We will become the biggest', or the 'best', or have the 'largest market share', or 'we adopt TQM principles', or 'we are here to maximise customer satisfaction', or 'we are here to create sustained competitive advantage', and so on.
These are all admirable pursuits, but only when they are in context, and then only when they are seen as enablers to achievement rather than the purpose for striving. It is a truism that not all organisations are alike; they have different needs and aspirations and similarly, and as the research below identifies, the expectations of their owners are different. Therefore the adoption of a particular management theme or tool-set, may not be equally appropriate for all organisations.
Sustained competitive advantage in most contexts implies on-going investment in product design and modification, a quality orientation, new channel development, research and development, and other strategies and techniques which continuously review and revitalise products, services and delivery mechanisms in order to maintain a competitive advantage. Most of these techniques have a 'longer-term' benefit rather than 'shorter-term'. Commencing a sustained competitive advantage strategy is often appropriate when shareholders are content with longer term pay-back of expected benefit. It is, however, often in conflict with shareholders who have a short-term expectation of benefit.
As an example, a manufacturing company may have a flexible ability to tool-up quickly to manufacture a certain range and quality of product. A new product hits the market which is well within the capability of the company to produce. In the short-term, and in the early stages of the product's life-cycle, demand is well in excess of supply so quality and efficient channels are not critical. The company is not very liquid and therefore has little capital resource to draw on for upgrades and investment in plant and machinery. Historically, the company has provided good short-term dividend return to a loyal group of shareholders with little to no long-term debt.
As the product becomes accepted in the marketplace and becomes more mature, new suppliers enter the market. In order to stay in the market, all suppliers must start differentiating their product, must concentrate on quality and must invest in efficient distribution channels. Due to the cost of such investment, one would only contemplate such a strategy if one were prepared to remain in the market long enough to enjoy the benefits from this strategy.
It is inappropriate for the company in question to even contemplate 'sustaining advantage' as they don't have the capital, it isn't what their shareholders want, and they would risk losing the flexible opportunistic character that has served them well. Alternatively, a strategy of opportunistic manufacture to satisfy short term market demand appears more appropriate than one of sustained competitive advantage.
Sustained competitive advantage, like most strategies, needs to be moulded to suit the context and objectives. It should never be regarded as a 'given'. Embedding sustained competitive advantage within a corporation's mission statement is therefore a commitment to certain long term strategies, investments and shareholder outcomes. It is never a panacea for shareholder satisfaction.
Myth 12. All organisations should strive to become 'quality' organisations
Three important issues surface when considering the use of 'quality' strategies for organisations.
Firstly, much has already been discussed here about the pursuit of the enabler, rather than using the enabler to achieve a specific desired outcome. Many, if not most, corporations have the concept of a 'quality organisation' identified somewhere in either their mission or vision statements. This implies that they will 'chase' quality as a desirable outcome. Quality is expensive of time and resources and has a longer-term payback. It also frequently compromises in the short-term, other outcomes such as profit, investment, etc.
Secondly, organisations should not chase quality because 'it makes management and staff feel good about themselves'. This is not a sufficient justification to adopt any strategy. The principal legitimate reason for a corporation to embark on a quality path is when quality is (proven to be) the differentiator in the mind of the customer between choosing or not choosing to buy; and quality assists the organisation to satisfy specific shareholder objectives, such as the minimisation of risk (caused by poor processes).
Because of the financial and other implications of 'quality programs' or 'quality accreditation', such decisions should not be taken lightly nor should it be assumed that the pursuit of quality is a 'given' in all situations.
It is not suggested however, that companies should be content with shoddy products or processes, but that quality programs have implications and those implications may impact significantly on the organisation's ability to deliver what it is really there to do i.e. satisfy shareholder objectives.
Thirdly, having or adhering to a quality program is not a guarantee of success. TQM and other quality programs generally concentrate on the processes within a corporation, and on the premise that if all the processes are effective, efficient and of quality; then the outcomes that those processes produce will be of quality.
The unfortunate reality is that an organisation may have superlative quality processes, but still produce a poor product that no-one wants. Quality is not a substitute for thinking. Many corporations who have been quality accredited are still not performing in terms of satisfying their shareholders. Often the cause of this incongruence is that too much faith is placed in the 'quality process' as a cure-all, while the basics of running a business are down-played or over-looked.
Although it is never the intention to promote mediocrity over excellence, it must be said that many corporations satisfy their shareholders by providing the market with what it wants; and what it wants may be 'less' than what can be achieved in quality terms.
From a product perspective, enough 'quality' should be build into a product or service to create the necessary sales that will create the necessary and desired benefits to satisfy its owners. From an organisational perspective, only sufficient investment in 'quality' is needed that will create the necessary processes, environment and outcomes to enable the organisation to satisfy its owners. Over this level, any investment in the pursuit of quality is at the expense of shareholders.
Myth 13. World's best practice is a legitimate aspiration for all organisations
As with many enabling strategies adopted by organisations, World's Best Practice (WBP) is often elevated to the corporation's mission and vision statements. The corporation then inevitably chases this objective because the mission statement implies that being 'best' is why (or one of the reasons that) the organisation exists.
The writer's experience supports the contention that few if any shareholders make their investment on the basis of the best practice position of their intended investment. They may however, make their investment on the basis that best practice brings an outcome that the investor seeks. But it is not the best practice per se, that is the attraction but rather the outcomes from best practice to which the shareholder is attracted.
It is when management 'likes the concept of being at WBP' and chases such a standard for reasons other than enhancement of shareholder objectives, that dysfunction occurs between organisation and owners.
Many organisations chase WBP because they see that WBP is a status they would like to aspire to and have for their own organisation. Yet the WBP standard is often far in excess of the standard required in the corporation's own market place to satisfy its current or potential customers. Where a company operates or intends to operate in a global market then WBP may be a relevant differentiator in the company's market place. But then again it may not.
If WBP in say, the order-to-deliver process in a certain industry, is half a day, and the industry best in a company's market place is 5 days, then there is no justification in chasing WBP unless at half a day, the company will be able to secure additional advantages (such as increased sales or economies of scale) that will lead to enhanced shareholder objectives.
If such 'elasticity' does not exist in this particular market, then the investment (and other costs such as organisational change) required to achieve a half day standard will detract from that which shareholders desire.
Myth 14. Corporate efficiency is achievable from a detailed knowledge of current performance
Many CEOs and senior managers make fundamental changes to their organisations based solely on existing performance. They may divest or cease operations of a product or division which has not achieved, for example, the corporate ROI expected. Other measures may be chosen as the criteria which dictate whether an activity is continued or ceased.
The issue is not that such deliberations are made, because that is exactly what management is paid to do - to ensure the viability of operations. However, the reality is that management often makes these decisions in an inappropriate context. The following observation by Hamel and Prahalad helps illustrate this point:
ROI (or return on net assets or return on capital employed) has two components: a numerator - net income - and a denominator - investment, net assets or capital employed. Managers know that raising net income is likely to be harder than cutting assets and head count. To increase the numerator, top management must have a sense of where new opportunities lie, must be able to anticipate changing customer needs, must have invested in building new competencies, and so on. So under intense pressure for a quick ROI improvement, executives reach for the lever that will bring the fastest, surest result: the denominator (1994).
One of the key issues about such decisions are managers who chase the wrong performance measures. More often than not, these performance measures have been internally determined (i.e. by management) and do not necessarily directly address shareholder objectives. This is because most organisations have no verifiable and quantified view of their own shareholder objectives and therefore need to make a subjective assessment of what will please shareholders. Such subjectivity inevitably leads to management comparing themselves to peers and setting generic ratios and performance measures as their own performance criteria. The chase for performance based on inappropriate performance measures will negatively impact on real shareholder satisfaction.
The second issue is that in chasing the wrong measure, often core assets are cut or jeopardised. If ROI is determined by management as the key measure, then they may cut products and/or activities that the company has been seeding for some time and at considerable cost, that haven't as yet achieved the desired ROI. Management action may certainly enhance ROI, but it may also destroy shareholder funds invested in new product development over many years.
Thirdly, undertaking efficiency reviews and actions solely on the basis of current operational performance is not sufficient or adequate. One must also know where the organisation is 'travelling' (or more specifically, where it would like to 'travel') in order to determine whether the intended cuts or changes will aid or hinder the company's future aspirations. All too often, corporations with no vision of the future, or a vision that is largely undefined, undertake significant organisational change only to find that which has been eradicated or changed is that which is needed for future operations and success.
Corporate improvement must be determined by the context within which the corporation operates: i.e., what outcomes are needed to satisfy shareholders and what attributes of the current operations are required to satisfy the vision for the future. Looking at current performance without the guideline provided by the future vision and an understanding of shareholder objectives makes tampering with the current state a highly risky activity.
Myth 15. Churn in a corporation's share registry is an indicator of poor performance
Much movement on the share registry of a corporation is commonly interpreted as representing instability and is therefore seen as negative. Boards and CEOs therefore attempt to 'quieten' their registries, using a range of techniques including promotion, advertising, communication to shareholders, communication to analysts, promise of bigger benefits to existing shareholders, etc..
Although volatile movement on a registry may be unfavourable, it should not automatically suggest that all movement on a registry is negative and that stability of the registry, per se, should be pursued.
Except in a market in free-fall, every stock exchange transaction has a buyer and a seller. Where an existing shareholder is selling because of the corporation's inability to provide a high probability of satisfaction for the stock owner, then it is likely that the stock owner may discount the sale price asked in order to cut 'losses' and reposition in another registry which offers greater probability of satisfaction. If many of the company's shareholders feel the same way, then prices will fall.
Conversely, an investor wishing to gain entry into a registry or wishing to buy a greater holding will see additional value in that stock over the purchase price. If there is no such perception of 'extra' value, then there is not much point in the purchase. When there is 'extra' value perceived by the intending investor, and when many investors perceive such 'extra' value, then there is a likelihood that prices will be pushed up to a level that equates to the value perception.
Therefore, when existing shareholders wish to sell their holdings due to a negative perception of the future, then prices will tend to be depressed. When external shareholders want to enter the registry, then they tend to push prices up. Depressed share price causes market capitalisation of that company to be depressed while rising prices enhances market capitalisation.
Companies therefore should attempt to minimise churn on their registry caused by disenfranchised shareholders because this will maintain share price and market capitalisation. The methods used by companies to achieve this might vary, but can be summarised as methods which enhance shareholder satisfaction and positive perceptions of future performance.
On the other hand, companies should 'chase' positive churn, ie. registry churn caused by investors wishing to enter the registry. Particularly when fewer existing shareholders are prepared to exit the registry. This forces share price up which is to the advantage of all existing shareholders.
One is not able therefore, to deduce merely from the existence of churn, whether the instability is 'positive' or 'negative'. One conclusion is clear however, positive churn is very much to the advantage of existing shareholders.
Myth 16. Corporate and CEO performance is best measured by industry ratios and competitor performance
Since, as the research below indicates, shareholder objectives vary within the same company, and between companies within the same industry, an industry-based generic ratio will disadvantage those corporations who, based on their own shareholder objectives, do not pursue that ratio as their principal outcome, or who rank that ratio in importance below other outcomes.
The preferred and more effective method for assessing CEO and corporate performance is by assessing their ability to deliver those outcomes that are specific to it, its shareholders and its context. It is considerably easier to assess a company against its specific performance objectives, even though it might then be more difficult to establish cross-corporation relativities.
In a competitive environment, it is easy to state that company 'A' is superior to company 'B' based on sales, market share, number of customers, etc. Biggest, highest or most normally wins. However, when one factors in shareholder objectives, or what the company is trying to achieve within known constraints, then comparisons become more tenuous. Is a company that deliberately pursues and excels in dividend generation superior to a company that deliberately seeks long-term positioning? Is a company which pursues dividend maximisation with a gearing constraint of 25% superior to a company that pursues dividend maximisation with a gearing constraint of 75%?
Based on the model proposed below, cross-corporation comparisons are only valid when the corporations involved in the comparison are trying to achieve the same outcomes based on the same constraints.
Myth 17. Organisational culture is a given
Organisations are often heard to say 'we can't do that because it runs counter to our culture', or similar comments which reinforce the organisation's existing culture. Because culture is so hard to change management tends to regard it as a given and something that shouldn't be tampered with.
And yet, culture is as much of a construct as any other part of the organisation and it is required to contribute to the delivery of corporate and shareholder objectives in the same way as is expected of other parts of the organisation.
Shareholders are not too interested in the preservation or enhancement of the organisational culture of their investment if that culture impedes or hinders the satisfaction of their objectives. That doesn't have to mean 'open slather' on immoral and unethical practices, but it may have implications on style and method related to decision-making, communication, involvement and empowerment issues, among others.
Culture is an enabler and can be (should be) moulded to provide the optimal outcome for both the organisation and the shareholder. Corporations which are internally focused and consider that they have an existence independent of their owners, find it easier to justify the stability of the organisational culture, since culture helps to define for staff who they are and where they belong. When one is focused on shareholders, then culture becomes an enabler and can be prudently changed when necessary.
Myth 18. Organisations must, as part of the fundamental reason they exist, 'fulfil' their staff
Contemporary management has embraced the contemporary attitude that it is the employers' responsibility to enable staff to fulfil themselves in the workplace. This is quite legitimate when the fulfilment of staff is a necessary condition for the satisfaction of corporate and shareholder objectives. However, many organisations pursue the fulfilment of staff as a primary objective of the organisation, ranking equally with other stakeholders and with shareholders.
Although sounding somewhat apocryphal in this 'new age' environment, staff are enablers to help the organisation fulfil its objectives much like other organisational elements. The organisation does not exist for the benefit of staff but for the organisational outcomes that are intended to be delivered by it. In order to deliver these outcomes, the organisation needs to employ and maintain staff. In order to maintain staff, it needs to satisfy them. This logical argument is intuitively recognised by most organisations. Yet some of them choose to elevate the importance of staff to a point where staff satisfaction is divorced from the roles they are there to fulfil, and rank such satisfaction ahead of shareholder (and sometimes even corporate) satisfaction.
The cost for satisfying staff is borne by shareholders. A position where a corporation incurs costs borne by shareholders for the satisfaction or gratification of staff that do not deliver benefits to shareholders that exceed those costs is not sustainable in the long term.