Is "Shareholder Value" Real?

The concept of shareholder value was first articulated fully in a 13 September 1970 New York Times article by the late University of Chicago economist Milton Friedman, who asserted that the "social responsibility" of a corporation was "to increase its profits." (Full article available in PDF format here) Friedman wrote,

In a free-enterprise private-property system a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

There's a lot of latitude in "conforming to the basic rules of the society", isn't there?

But there's apparently another problem: According to Cornell Law professor Lynn A. Stout, shareholders aren't really the owners of the corporation.

As explained by ProPublica reporter Jesse Eisinger in an article published in yesterday's New York Times, Prof. Stout believes that "shareholders are more like contractors, similar to debtholders, employees and suppliers." (Prof. Stout's ideas are fully explored in her new book, The Shareholder Value Myth.)

Prof. Stout explains that, legally, "shareholders [get] special consideration only during takeovers and in bankruptcy." And what you as a manager or board member should focus on when a company is in bankruptcy (or sufficiently weak to be the promising target of a takeover) is very different from what you should focus on when a company is doing well, she says.

By focusing on "shareholder value," she argues, and especially by aligning executive pay with stock-market share performance, companies have become more and more concerned with short-term solutions. Worse yet, thanks to the corporate governance movement which has been pushing for the pay-for-performance alignment, "Investors are actually causing corporations to do things that are eroding investor returns."

Prof. Stout would prefer that corporations return to "managerialism", "where executives and directors run companies without being preoccupied with shareholder value."

Really? Shareholders have that much power? Boards are that preoccupied with shareholders' concerns? Given the number of non-binding shareholder resolutions that corporate boards claim to "consider seriously" (and then ignore), I'd have said that shareholders still have a long way to go before they can be accused of undue influence. (Click here for a recent blogpost on shareholder "revolts")

As Eisinger writes, Prof. Stout does "share some goals with the corporate governance movement." She agrees that executive pay scales are "out-of-whack", and she believes in the need for a "Robin Hood tax" (a tax on securities trading, that would thereby discourage "zero-sum, socially useless trading").

I'm not a lawyer, so I can't argue the merits of Prof. Stout's argument about whether or not, by law, shareholders are indeed the company's owners.

But I'm glad to see another voice raised against the simplistic "shareholder value" argument. Even in Friedman's original article, we can see a bigger picture. The real problem with Prof. Friedman's argument is that his gaze is so narrowly focused on the corporation that even as he mentions the broader society in which the corporation exists, he doesn't see it.

Because of course corporations don't exist in a vacuum. They are run by employees and serve customers, all of whom are not only consumers (in economic terms) but citizens (in broader political terms). They have social networks. They have ethical concerns and values. And, generally speaking, they want to live lives that reflect those concerns and values. Which means that the corporations for which they work should reflect those values and concerns, too.

The End of Workplace Hooky?!?

Raise your hand if you've ever played workplace hooky.

Wow -- that's a lot of hands up out there (mine included).

Well, the news for all of us is that the game's about to get a lot harder to play.

According to numerous reports published in the last few days (Caleb Garling at Wired Enterprise here, John Ribiero at PC Advisor here, Thomas Clayburn at InformationWeek here, and Quentin Hardy at the New York Times' Bits Blog here, among many others), Google Maps can now be used to find out exactly where you are.

For a fee of $15 per employee per month, administrators can use Google's Maps Coordinate (with software downloaded onto employee smartphones running Android 2.0 or higher) to determine where any employee is at any given time.

The positive side of this -- which is of course what Google emphasizes -- is that, in the event of an emergency, a telephone company (for example) could immediately locate its nearest technician and send them on. (Click here for a blogpost by Google senior product manager Daniel Chu explaining Maps Coordinate's features in detail.)

This isn't the first mobile employee-tracking service, but it appears to be the simplest and smartest, offering real-time updates. It can even track employees within a building (so stopping by your favorite boutique that's in the same building as your client's office just became trickier....).

We can all probably think of times where Maps Coordinate's capabilities would be extremely valuable (like the "find me a technician close by now" example).

Oh, but then there are the negatives.

Google claims that Maps Coordinate can be turned off by an employee (when he or she is leaving the office for home, for example). But what if you work for someone who doesn't believe in work-home boundaries?

What if you want to stop in the park to write up your notes from a client meeting? That's not really hooky -- you're still doing company work -- but all the administrator watching you knows is that you've been sitting in the park for the last 15 minutes. Highly suspicious behavior, wouldn't you say?

Doesn't this feel a little too "1984"-ish? Can you say, "Creepy"? I thought so.

The Times' Hardy quotes the chief executive of a game developing company: "How perfectly horrible! ...You can track who is stopping by whose cubicle? That's HR gone made. You should worry about what people are producing, not where they are producing it."

Easy for him to say, with assets that go home every night. If your company relies on the creative and/or intellectual skills of its employees to produce its product or service, you probably want to err on the side of giving them some leeway. But if you rely more on technical skills -- for example, the driving ability of your delivery team -- your profits may be much more, shall we say, geographically dependent. If I were RAPS (Rose-Anne's Pizza Supreme), with ten people out racing all over Fairfield County CT delivering my fabulous pies, knowing where they were at all times would matter to me. A lot.

But would the negative vibes I'd get back from my drivers be worth the extra dollars RAPS would earn? I'm not so sure.

One of the first lessons I learned as an employee is that when companies start nickel-and-diming their employees, employees nickel-and-dime right back. And the employees are usually better at the game, so it turns into dime-and-quartering. After all, employees can be just as "absent" at their desks as they are on the road....

The Shareholders Are Revolting! (I hope)

Another day, another (non-binding) shareholder revolt.

According to Julia Werdigier's article in today's New York Times, 59% of advertising giant WPP Group shareholders rejected chief Martin Sorrell's $10.5 million pay package.

After the vote, WPP chairman Philip Lader said that the vote would be taken seriously, but added, "Our board exercised its best judgment in the context of the company’s record year, international competitors and the executives’ performance."

As I've written before (re Citigroup shareholders' objections to chief executive officer Vikram Pandit's pay package), to consider a vote "seriously" is not the same as to abide by it.

Werdigier noted that "Mr. Sorrell’s total pay, including base salary and bonus, rose 60 percent in 2011 from £4.2 million in 2010, according to the WPP annual report. WPP’s share price fell 15 percent last year."

Since the shareholder votes are non-binding, it could be argued that they are simply an exercise in futility. But it could also be argued -- and this is what I will choose to believe for now -- that they are a harbinger of things to come.

In my inbox today, I found a new "Talkback" from CSR Wire, with an interview with Laura Berry, executive director of ICCR (Interfaith Council on Corporate Relations; organization website here).

ICCR has 40 years' experience in "corporate engagement". Sometimes it's been successful, sometimes it's been frustrated (and, no doubt, frustrating).

Berry thinks that things are beginning to move: "...Change has really started to accelerate in the last couple of years, but I think this year is really a watershed year. We're seeing an inflexion point for so much of our work. The shareholders are learning that they can demonstrate their outrage and the attention they are paying to value creation—and the lack thereof—through their votes on nonbinding shareholder proposals."

"Value creation" is what it's supposed to be all about. And that means for the whole company, not just the top brass.

The Sun Shines on Rich and Poor Alike

But only the rich can take economic advantage of it.

At least, that's the interesting conclusion raised by Diane Cardwell's article in today's New York Times on "solar fairness."

Here's the situation: in most communities, utility customers who have installed solar panels on their roofs can sell back excess energy to the local power company, thereby further lowering their own bills and reducing the power company's reliance on electricity generated by less-clean fuels like coal or gas. Sounds like a win-win, right?

But -- and it's a big "but" -- generated electricity itself is not the sole cost for an electrical utility: there's the whole cost of maintaining the grid, of moving the electricity from where it's generated (your roof) to where it's needed (my business, tens or even hundreds of miles away). That maintenance cost is pretty much fixed, but with more people becoming "generators", and being paid for it, there are fewer people among whom to share the cost of maintaining the system. Which means that each of them is going to end up paying more. (Sounds sort of like health-insurance pools, doesn't it? OK, I'm not going to go there. At least not today.)

So, as more people make the decision to switch to solar, whether for cost or for environmental friendliness, "the utilities not only lose valuable customers that help support the costs of the power grid but also have to pay them for the power they generate. Ultimately, the utilities say, the combination will lead to higher rate increases for everyone left on the traditional electric system."

Cardwell quotes one executive of the Edison Electric Institute (EEI), "Low-income customers can't put on solar panels -- let's be blunt. So why should a low-income customer have their rates go up for the benefit of someone who puts on a solar panel and wants to be credited the retail rate?"

The right to sell power back to the utility at near-retail rates dates from the time when solar installations were a lot more expensive than they are now, and consumer advocates, renewable energy proponents, and others were looking for ways to reduce the long payback period.

I generally look for the fine print in anything that the utility companies tell me. I certainly don't want to see us rely even more heavily on non-renewable energy sources. And I don't think that solar generators shouldn't be reimbursed for the energy they provide to the utility. But this is another of those interesting "unintended consequences" dilemmas.

We can all agree that access to electricity is an essential public good. We can generally agree that those who use the most should pay the most. But what happens when some of those big users essentially opt out? Is there some way to guarantee that we don't create another regressive burden on those least able to afford it?

I don't have good answers to my questions. But we need to come up with some, and soon.