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I opened my newspaper one late August morning and nearly dropped my coffee. On two full pages was an ad from the Business Roundtable signed by 181 prominent CEOs, which said, in essence, that their statements over the past two decades that “the mission of the corporation was to maximize shareholder gain” were out of date, irrelevant, not true, or all of the above.
The mission of business, they now declared, was to provide something of real value to customers, employees, suppliers, local communities, and stockholders.
As one who has been studying leadership and business excellence for decades now from my seat at the Harvard Business School, I knew this might — underline “might” — be quite important.
The blowback came quickly. Some of the business and financial press said this was a public relations ploy. Or that, if anyone seriously believed this manifesto would be an effective equivalent of garlic and holy water against socialist vampires like senators Elizabeth Warren or Bernie Sanders, they were not thinking clearly. Indeed, most of the negative (and positive) commentary looked at the situation in terms of the immediate political or economic context with little, if any, historical perspective.
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When I started my career in the early 1970s, the maximize-shareholder-return mantra was nearly absent.
You see, when I started my career in the early 1970s, the maximize-shareholder-return mantra was nearly absent. A few economists and finance people preached that gospel, most notably Milton Friedman at the University of Chicago. But they were the less-influential voices. Then, all that changed.
First came the emerging dominance of Japan, initially in consumer electronics, then in automobiles; then the dramatic increase in energy costs after the formation of OPEC; and innovative technologies that enabled newer firms to compete against industry giants — these all intensified the competitive landscape for U.S. companies.
Soaring stock values, often more a function of dominant market share than a passionate desire to serve any mission, began to erode. With more stock going to big institutions managing new mutual funds and pension plans, pressure was put on firms to pay more attention to these shareholders’ interests.
The cry went out to tie CEO salary to stock value. Well-funded private-equity firms emerged to scoop up the stock laggards, and individually rich “raiders” poked at firms with less than stellar stock values. As a result, many firms started not only citing the stockholder mission but behaving that way. So did MBA programs, as a few key finance and economic researchers provided theories and research to support these ideas.
Yet most of the best CEOs I have known believed financial markets had developed too much power and that their quarterly demand to hit earnings-per-share estimates on the penny was absurd. And there was plenty of research — social science that many consider rather soft — that raised serious questions about the shareholder paradigm.
My Harvard Business School colleague Jim Heskett and I looked at the 11-year economic performance of 172 firms with a light touch, and a more detailed investigation of a carefully selected group of 22 winners and losers in 10 industries. Our Corporate Culture and Performance research was done in 1987-1991 and first reported in a book with that title in 1992. The result: There was zero evidence that the shareholder primacy mission was the pattern among the winners. Repeat: zero.
What did relate to winning, we found — especially in a fast-changing world — was a culture that valued all constituencies, as well as initiative and leadership up-and-down the corporate hierarchy. This sort of culture gave leaders an engine — one that fueled smart changes to help the organization stay ahead of slower moving competition. How much ahead depended on how much change was occurring in their industry.
Since we did that study, the rate of change has been increasing more and more, leaving U.S. business with a huge choice: either stay on the path we have been on for decades or switch to one that makes much more sense in a rapidly changing world.
My guess is that this has been building up for some time. In an increasingly fast-moving, changing, and competitive world, an obsessive prioritization of stockholders is an increasingly risky proposition. You end up with corporate cultures that don’t encourage people to be aggressive enough in watching changes in the marketplace and technology, don’t incentivize people to do what is needed to win “the war on talent,” and don’t guide people to pay broader attention to what is going on, thus risking ending up on the front page for what others think is unethical or at least a tin ear.
What do we do? Most importantly, we must recognize that the battle is just beginning. What we know about large-scale change tells us that we need to develop as much urgency as possible toward capitalizing on the opportunity that the Business Roundtable proposition offers. We need to get as many communities as possible working together to drive change — picking strategic initiatives that make sense and getting those around them to understand and buy in.
All this takes time, but it is possible. In two years, my sense is that we will look back at the Business Roundtable’s declaration as the mark of the beginning of a transformation — or it will have been forgotten. The lives of billions of people will be affected, for better or worse, depending upon which outcome becomes reality.
John Kotter is the Konosuke Matsushita Professor of Leadership, Emeritus, at Harvard Business School and chairman of the management consulting firm Kotter .
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