Jack Welch Renounces Increasing Shareholder Value: Pigs Fly
First it was Saul on the road to Damascus. More recently, it was Alan Greenspan. Yesterday, Jack Welch seems to have had a conversion.
Speaking with the Financial Times, Welch said:
Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was “a dumb idea” for executives to focus so heavily on quarterly profits and share price gains…
…“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products…”
…The birth of the shareholder value movement is commonly traced to a speech that Mr Welch gave at New York’s Pierre hotel in 1981, shortly after taking the helm at GE.
What they’re talking about is the commonly held belief that “the purpose of business is to increase shareholder value.” That belief is variously attributed to Milton Friedman, Adam Smith, and “obvious commonsense,” none of whom are guilty as charged (though Friedman probably came close).
But no matter: it was what people heard, and used to justify all kinds of behavior for several decades. And Welch, whether he ever said specifically those words, has a great deal of responsibility for having advanced the idea. The FT is right to headline the significance of this conversion.
In any case, the newly converted Welch, to judge by the above quote, really does now get it right.
Profitability, shareholder value, even measures like EVA profoundly miss a point that Welch now articulates. Namely, ‘shareholder value is a result, not a strategy.’
I think what Welch means is that all economic results are properly viewed as outcomes, not as end-state goals or objectives.
This would be quite right.
Imagine two companies. One is devoted to increasing shareholder value (and EVA, etc.) by carefully finding out what customers want, and giving it to them.
The other is devoted to giving customers what they want—which results, among other things, in increased shareholder value, etc.
I suggest company #2 will do better in the not-very-long run. Because the company is being run for someone other than solely the financial stakeholders and managers.
Jack Welch is obviously no dummy. So it looks to me like his conversion experience has been thorough, and well thought out. If he can contribute to articulating this new view, it will go a long way to changing a deeply entrenched, increasingly dysfunctional and destructive ideology.
Let’s hope he does.
I wonder if Jack Welch’s comment is more a ‘going public" than a ‘conversion.’ After all, I recall him saying in the 1980’s that Wall Street’s short term orientation [sharehodler value] was a huge, mostly negative, pressure on the business. I think he may have felt that he had joined a while ago, but that he was fighting the way of the world.
At last, someone of significance has called time on the ridiculous objective of shareholder value. Shareholders are largely powerless or indifferent about what companies do. The value of a share only matters when you sell or buy it, and most investors in the stock market are actually speculators, just like betting on the horses, and don’t have an interest in "value". Let’s get back to focusing on building productive, sustainable businesses and move away from worrying what the stock market thinks. Just look at the number of companies that break free by going private for evidence.