Business Focus: Shareholder Value versus Employee Satisfaction

I was recently challenged with the following question, “Do you believe that shareholder value is coming to and end?” To which I answered:

Properly viewed, shareholder value is a measurement of performance rather than a driver of performance. Regrettably, we are suffering from a business environment that has been conditioned to believe otherwise. One of the books I am writing deals with this phenomenon.

Most companies are run by managers; only a few are run by leaders. Yet, there is a significant difference between the two. Managers push employees to achieve corporate objectives. Hence, we live in a world of quotas, budget cuts and “street expectations” … all based upon the fictional estimates of what a handful of generally under-informed individuals believe might happen (or needs to happen for them to maximize their incomes).

Conversely, leaders recognize that the true drivers of value are the people who actually do the work. They take the time to learn what’s important to their employees whose personal goals, if achieved, almost certainly will exceed the wildest expectations of the corporation. Then, they create and maintain an environment that is focused upon helping those employees achieve their goals.

Making a concerted effort to help employees achieve their goals within the context of their values can have an astonishing impact. It parallels what we used to see in the former Soviet Union, where farmers would be given 200 acres to farm for the State and one acre to farm for their personal consumption. Their one personal acre would routinely out produce the other 200 acres. Ah, the free market at work.

Leaders inspire while managers tend to threaten. Under which environment do you think your performance would thrive? Since “change” seems to be the contemporary word of the day, managers need to learn to become leaders. They need to “change” their focus to what is truly important: the employee.

Shareholders lend money; essentially placing a bet on the performance of the companies in which they invest. Their investments represent one of the two forms of capital financing (i.e., equity versus debt), which together should be used to finance the capital expansion of the organization rather than to fund operations.

Interestingly enough, shareholders are often advised to make their investments on a long-term basis, but senior executives often make business decisions that are designed to inflate short-term performance; thus jeopardizing long-term returns. This is because executive compensation has been so closely tied to short-term shareholder value (due to stock option bonuses, etc.) that attention is diverted away from strategic decisions that would have a greater return over a longer period of time. Another fear of senior executives is that if they fail to satiate short-term expectations, they may not be around to reap the rewards of executing superior long-term plans.

It reminds me of Peter Drucker’s observation that “Management is doing things right. Leadership is doing the right things.” Until leadership is established as a priority, our economy will continue to suffer. We will have executives announcing the layoff of 53,000 employees and petitioning for a $300 billion government bailout who then turn around and spend $400 million to have their company’s name emblazoned on a baseball stadium. We will have manufacturers announcing layoffs and plant closings while petitioning for a second infusion of $26 billion in subsidizations (with no strings attached) that then sponsor two professional golf tournaments over the ensuing weeks. Other companies cut services and jobs and cancel raises except for those that are required under contract (i.e., read as “except for top executives”), so that they can remain Wall Street “darlings” in the short-term while sacrificing morale and employee loyalty and commitment in the long-term.

When leaders once again rise to the top and “do the right things,” employees will become the predominant focus, and economic order will be restored.

In closing, I offer O’Hara’s Theory of the Little Big Horn, which I have shared somewhat tongue-in-cheek over the years during some of my public appearances. During the Battle of the Little Big Horn, if 2,000 chiefs had surrounded the rim of the canyon and only a handful of braves had ridden down the hill, Custer’s 7th Cavalry would have easily defeated them. Custer’s problem was that only a handful of chiefs sat up on the ridge while 2,000 braves charged down the hill to attack him and his troops. The morale of the story is, “Make sure you have enough braves to fight your wars.” Well, that’s my theory, and I’m sticking to it. I think investors are best served by companies that provide the outstanding products and service their customers need and deserve, and that to do so requires a loyal and completely satisfied workforce that is totally committed to the core vision, mission and values of their company.

What do you think?


2008 (c) Dr. Terry O'Hara. All Rights Reserved.