Should Shareholder Value Be the Only Measuring Stick?

A recent article in The Washington Post, “Company Town’s Decline Reflects New Mantra: Shareholders First,” got me thinking. The article begins with a look at Endicott, New York, where, during the 1980s, 10,000 IBM workers kept the upstate town thriving. Today, after years of layoffs and jobs shipped overseas, about 700 employees are left.

On the other hand, investors in IBM’s shares have seen increasing gains.

“It used to be a given that the interests of corporations and communities such as Endicott were closely aligned,” writes Jia Lynn Yang. “But no more. Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.”

She goes on to say that a few decades ago, corporate America developed a belief that a company’s primary purpose is to maximize shareholder value. “Together with new competition overseas, the pressure to respond to the short-term demands of Wall Street has paved the way for an economy in which companies are increasingly disconnected from the state of the nation.”

In contrast, in 1963, IBM’s president and CEO, Thomas J. Watson Jr., wrote that balancing profits between the well-being of employees and the nation’s interest is a necessary duty for companies. “We acknowledge our obligation as a business institution to help improve the quality of the society we are part of,” he wrote in IBM’s corporate values.

Obviously, the business world and global economy have changed since Watson’s time, and so has IBM’s stock performance, from a stock price of $17.16 in 1980 to $185.42 in 2013. So what’s the lesson here?

As I was pondering that question, I was reminded of the less-than-desirable trend of fewer manufacturers applying for the Malcolm Baldrige National Quality Award, a competition that assesses much more than shareholder value. The award is based on how an organization answers the requirements in the Criteria for Performance Excellence, which measure product and process results, customer-focused results, workforce-focused results, leadership and governance results, and, finally, financial and market performance. The Criteria address shareholders in regards to ethical interactions, their corporate stewardship responsibilities, and corporate leadership’s required accountability to them.

This article was in line with an answer I’ve heard and probably repeated regarding why more manufacturers may not be applying for the Baldrige Award: Many such companies are more focused on short-term gains for shareholders than on the long-term investment in a management system that is designed create gains in all aspects of the Criteria’s category seven. If corporations today are focused primarily on shareholder value alone (item 7.5 in the Criteria), do positive results from other items even matter anymore?

Given the recent financial crisis and the lack of a long-term focus in regards to sustainability, I strongly believe the answer is yes, and The Washington Post’s Steven Pearlstein recently agreed. In “How the Cult of Shareholder Value Wrecked American Business,” he writes, “You could argue that much of what Americans perceive to be wrong with the economy these days—the slow growth and rising inequality; the recurring scandals; the wild swings from boom to bust; the inadequate investment in R&D, worker training, and public goods—has its roots in this ideology.”

What do you think are the dangers of shareholder value being the primary measuring stick for a U.S. company?

This column first appeared Sept. 10, 2013, on Blogrige. Reprinted with permission from the Baldrige Performance Excellence Program, Gaithersburg, MD.

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