Hit your quarterly numbers, slash costs to the bone, maximise your margins, squeeze every ounce of efficiency out of your operation.
We’re all so used to hearing these management mantras that they are part of the everyday business lexicon. The popular office game ‘buzzword bingo’ has never been so easy. In fact, many of us are so used to shareholder primacy, short-termism and ‘production efficiency’ (incremental improvements to minimise production costs) that they’ve become an almost unassailable cornerstone of business logic.
Pity anyone who questions the self-evident truth of these deeply held beliefs. After all, these approaches have worked for the last seventy years. So much time, effort and resource has been invested in them, that it is crazy to abandon the systems, tools, structures and thinking that have enabled previous success. Don’t even think of risking the monthly returns or the shareholder dividend. Just stick to what we know, but do it faster and cheaper.
The unspoken message to workforces is clear. Keep your head down, don’t rock the boat, do as your told, don’t challenge the status quo. If you do that, you’ll may just stay out of the firing line when the next round of cost cutting comes.
What if this thinking is misguided?
What if it is the worst thing that a company can do?
The tarnished state of the market economy means organisations can no longer focus exclusively on short-term shareholder rewards, taking as much money as possible from society and putting as little back in. Now all stakeholders – including customers, partners, workforces and even investors – are demanding very different outcomes from the business they buy from, work with, or invest in.
Stakeholders are much more focussed on a company’s purpose, values and ethics. A growing distrust of the establishment means many now measure companies by the role they play in society, their impact on the environment and their approach to long-term value creation. They seek out companies who stand for something more than short-term profit and actively avoid businesses that don’t positively contribute back to the world around them.
Consumers expect to engage with vendors as lifetime users of products and services, not short-term buyers. They want organisations to be trustworthy and on their side throughout their association, helping them be continuously successful, rather than upselling them products they neither want or need.
Revenue is now reliant on developing long-term relationships with clients and customers while success increasingly depends on creating the compelling customer experiences that build loyalty and trust, as well as constant product innovation that drives continuous relevance and engagement.
New digital infrastructures are empowering completely new business models, where near-zero marginal costs are fundamentally reshaping the forces of production and consumption, disrupting incumbents in all industries. The sharing economy allows people to completely bypass the vertically integrated businesses and the middle-men that have dominated industry for the last 50 years. The “Expectation Economy is an economy of ever accelerating customer expectations applied ruthlessly to every purchase decision, experience and moment of attention.” (Trend Driven Innovation2015).
As a result of all these changes, major investors are calling for a rethink of corporate governance models. Baupost Group CEO and hedge fund billionaire Seth Klarman, has called for an avoidance of toxic short-termism, arguing that shareholder primacy needs to be replaced with a more balanced approach that reflects the views of all stakeholders. Larry Fink, CEO of BlackRock (an investment form with $1.7 trillion in active funds) sent a warning to CEOs across the world that to prosper over time, every company must show how they make a positive contribution to society.
The influential B Corp movement comprising nearly 3000 businesses word-wide took out an ad in the New York Times recently urging bosses of some of the US’s most powerful businesses to combat short-termism and place their impact on society and the environment on an equal footing with profits. Even Jack Welch, CEO of GE and arguably one of the most successful business leaders of the last 70 years, has called shareholder primacy “the dumbest idea in the world.”
This raises some important questions for businesses
Is it still such a good idea to prioritise quarterly profits at the expense of long-term value, potentially undermining the very customer relationships that are now the lifeblood of business?
Is it still wise to continually cut costs to maximise margins, when success is increasingly dependent on investing in continuous innovation, better customer experiences and a relevant, sustainable future?
Are inward-looking incremental improvements to existing processes next to useless when entire industries are being turned on their head by new challengers, new expectations and new ways of generating wealth?
It is time to question the short-termism, shareholder primacy and production efficiency that have come to dominate many business approaches. Your organisation’s very survival could depend upon it. #transformationtimebomb
