A recent article in the Harvard Business Review by Roger Martin, lent us some fascinating insights into the rapidly changing world of capitalism.
His main idea is that the harder a CEO is pushed to increase shareholder value, the more the CEO will be tempted to make moves that hurt shareholder value.
These words jumped off the page!
The author was fundamentally challenging the longstanding corporate aim of maximising shareholder value. He argued that it was impossible to continually increase the return to shareholders.
“Most executives figure out that Shareholder value creation and destruction are cyclical. They can push it up in short bursts, but in due course share prices will fall again”.
He also was able to show the numbers behind his argument, taking several typical large corporations and highlighting these trends over the longer term.
Incidentally, one of the central aims of the iSite strategy is to maximise shareholder value(!!), mainly by measuring CFROI (Cash flow return on investment). We take the view that business propositions have a much shorter lifespan these days so the average life of an ‘asset’ is 3 years.
In researching this a little more, we find that long held views on this are changing. Jack Welch, the former General Electric chief who is credited with coining the phrase in 1981, said last year that the emphasis he placed on shareholder value was misplaced.
“On the face of it, shareholder value is the dumbest idea in the world,”
“Shareholder value is a result, not a strategy…your main constituencies are your employees, your customers and your products.”
Alan Greenspan has also recanted:
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms”.

So what is the alternative?
According to Roger Martin in his article:
“Companies should seek to maximise customer satisfaction while ensuring shareholders earn an acceptable risk-adjusted return on their equity”.
With this strategy the CEO can focus on building the real business.
Customers become the top priority; with the focus on improving products, services and operations. This replaces a relentless drive to increease profits above all else.
Underpinning this idea is the mathematical certainty that there can only be one goal. Linear programming is a technique for optimising a given variable subject to other constraints.
Taking the example - Roger explains that you cannot maximise both the value of outputs in a factory and the quality of products shipped. You have to pick one main objective function and treat the others as constraints.
So the recommended approach is to make Customer Value your main goal, subject to creating a minimum shareholder value.
As CEO of iSite, this has really touched a nerve. I have always believed that the “customer is king” and that by building a loyal customer base, a company would be successful in the long term. As we look at the larger multinationals, you have to question if some of the actions they take on a daily basis are on behalf of shareholders?
We will discuss these ideas in future posts, and I will share some insights as we adopt this strategy at iSite.
- Dave







